Milwaukie couple undergo a budget makeover after a sudden layoff
How would you deal with a sudden financial reversal?
It may be instructive to observe how a two-paycheck Milwaukie couple is handling the sudden loss of one of those paychecks. The case was provided to the Tribune by the Oregon and Southwest Washington chapter of the Financial Planning Association, a professional group of certified financial planners.
Almost overnight, the couple's concerns abruptly switched from how to plan for a comfortable retirement to financial survival.
Here is their story.
The timing couldn't have been worse for Larry and Cathy Behm of Milwaukie.
On Labor Day, Larry, 46, received a phone call from Consolidated Freightways announcing that the company had declared bankruptcy and that he no longer had a job as a claims analyst.
'I worked for them for 14 1/2 years,' he said. He had accumulated three weeks in combined vacation and sick pay, plus health insurance, life insurance and disability coverage, all of which he lost when the trucking company closed its doors.
Nine days after the bombshell from the trucking company, his wife's car was rear-ended while she was driving home from work. The damage totaled the car.
'It was on Sept. 11, the anniversary of the World Trade Center attacks, and I was stunned,' Cathy, 53, recalled.
Overnight, the couple's gross monthly income dropped by almost 20 percent, to $8,381 (a little more than $100,000 a year). When Larry's unemployment benefits run out after 30 weeks, it will shrink by about 40 percent of what they were earning originally, to a gross income of about $6,267 a month (about $75,000 a year). Most of what's left is from Cathy's job as a family and consumer studies teacher at Reynolds High School in Troutdale, plus her evening work as a presenter for Weight Watchers.
After the Consolidated Freightways announcement, the Behms (pronounced beemz) knew they would have to tighten their belts to survive. Luckily, before the bad news hit, they had already started to review their finances with the help of Cathy's brother, Wayne von Borstel, a certified financial planner. He's with the firm of von Borstel & Associates, which has offices in Portland.
It helped that Cathy's daughter, Shanti, had just graduated from the University of Oregon and had found a job in Japan teaching English. The couple no longer had to pay for tuition, books and housing, which had siphoned an estimated $40,000 from their income during the previous four years.
'She received her first paycheck two weeks before Larry got his layoff notice,' Cathy recalled.
The current situation
The Behms were in a better position than most to weather unexpected turbulence.
One reason is that Cathy Ñ raised on a wheat and cattle farm in north central Oregon along with von Borstel and three other siblings Ñ has faced lean times before. Even when both spouses were working, the Behms lived below their means and were comfortable with it.
The Behms' net worth is almost $494,000. They live in a 3-bedroom, 1 1/2-bath ranch home in Milwaukie valued at about $190,000. Cathy and her first husband bought the house almost 30 years ago.
The Behms do their own cleaning and yard maintenance. They had flirted with the idea of moving to a grander house during the summer, but Larry's job loss has put that out of reach now.
Their major assets, in addition to the house, include: about $230,000 in Cathy's PERS retirement account, about $100,000 in her other retirement account, about $6,500 in Larry's IRA, $5,200 in his 401(k) plan, Larry's $20,000 pickup truck and a 15-year-old pickup valued at $3,000 that Cathy is driving while she decides what to do about a replacement car.
The first thing that Cathy did after her husband's layoff was take on some extra work with Weight Watchers. In addition to her full-time job at Reynolds, running a popular day-care program staffed by students learning preschool teaching skills, she also had been working two nights a week for the weight loss group. Now she's added a third class.
'I had lost 42 pounds with Weight Watchers almost 30 years ago, didn't go back and eventually gained 50 pounds,' she recalled. 'After I returned, I lost it again but realized that I need to go every week, so why not get paid for it?'
The planner's suggestions
The challenge for von Borstel was to redirect the couple, whose focus had been on retirement planning when they initially consulted him.
When both partners were working, their combined monthly take-home pay was about $6,800 and their monthly expenses about $6,050. While Larry is receiving unemployment, their combined monthly net income is about $6,130, which on the surface doesn't seem too bad.
But Cathy now has to pay an extra $282 a month for health insurance for Larry, which puts them in the minus column. The real crunch will come when Larry's benefits expire and the couple's monthly net income plummets to $4,223.
To help them close this looming fiscal gap, von Borstel has prescribed a variety of strategies. First, he recommended that the Behms take advantage of the drop in interest rates and refinance their house. They have done this, rolling an existing second mortgage as well as a loan on Larry's pickup truck into the new home loan.
Even though this means the new mortgage is larger than the old one, the Behms will save $711 a month by refinancing. Furthermore, they now can claim all of their borrowing costs as a tax deduction, while in the past they couldn't deduct the interest on Larry's truck loan.
Next, von Borstel suggested that they cut back in every part of their budget, from clothes and entertainment to food and travel. So they went through their expenses with a fine-toothed comb and slashed spending on both food and clothes by $100 a month each. 'I'm more aware of sale items and where I shop,' Cathy said .
They have tabled plans to visit Cathy's daughter in Japan, saving $200 a month on vacation spending. They have eliminated dental insurance, saving $65 a month. And by cutting back on other expenses such as gifts, entertainment, eating out and personal allowances, they will save almost $970 a month. This will bring their total monthly savings, including refinancing, to almost $1,700.
That's good but not good enough if Larry doesn't find another job next year.
So, von Borstel urged them to make the spending cuts right away, so they will have something in the bank should no work materialize.
Von Borstel also suggested that the couple start building a rainy day fund for times just like these by having Cathy automatically invest $50 a pay period in U.S. Savings Bonds. 'Nobody ever spends them, so it's a painless way to save,' he said.
His other advice: The Behms should each write wills (they don't have any), and Larry should increase his life insurance by almost $50,000 to help pay for final expenses as well as to make up for lost income should he die.
Finally, Cathy should rebalance the holdings in her two retirement accounts so that each account reflects her overall asset allocation model of 75 percent stocks, 25 percent bonds.
'The good news is that they have been conservative enough so that when disaster strikes, they can survive,' von Borstel said. 'They've been in the same house for decades, and they don't have $20,000, $30,000, $40,000 in credit card debt the way some folks do. But I think this has been enough of a reality call so that they will make most of the cuts we've talked about.'
The Behms' response
The couple have decided to go immediately on the financial diet prescribed by von Borstel, although they won't really be in a hole until Larry's unemployment runs out.
'Even if we cut everything as planned, we're still not going to have enough coming in when that happens,' Cathy said. 'We're pushed to make all these savings now so that we'll have something to see us through.'
Meanwhile, there's a little wiggle room in the budget for each partner to have a few indulgences. Her passion is clothes and gardening, his is his truck and watching movies.
'You need to understand what makes the other person happy,' Cathy said. 'You don't want to be nit-picking about everything.'
So while they are cutting back a bit (a smaller clothes allowance for her and fewer video rentals for him), they haven't eliminated these items altogether.
Still unresolved is the issue of a replacement car for Cathy.
She would like to buy a recent-model used car, while Larry, who is concerned about her long commute to work, would rather spend a few thousand dollars more and buy a brand new one. The two are still working this out.
But they are planning to follow the rest of von Borstel's advice, including the suggestion that Larry start job hunting immediately instead of waiting until his benefits run out.
So, Larry has been interviewing, willing to consider anything that might come up and doing lots of long-delayed maintenance chores around the house in the meantime.
'This has been very motivating,' Cathy said. 'Now we want to save more money than when we were both working. It is bizarre.'