Way to realize dreams


JUGGLING a new baby, a startup pet-services company and a full-time job is starting to take a toll on Christina and Kurt Fenstermacher.

Almost four years ago, the Allentown, Pa., couple started a pooper-scooper service as a way to stay ahead of rising property taxes and to generate extra income as they planned for a family. After experiencing a couple of layoffs, Christina, now 33, hoped to quit the full-time work force once they started having children.

At first glance, it looks like their dreams are coming true. They have a 6-month-old son, William, and their pet business grew so fast they had to hire an independent contractor to help out.

They also offer pet food and sitting services, and the business, In the Bag Pet Services, generates about $3,000 in annual income, which allows Christina to continue to stay home with William. Altogether, they expect to earn about $71,000 this year from 34-year-old Kurt's salary and the business.

But there are a few significant bumps along this path. Though their retirement accounts are flush - mostly because of Kurt's day job as a manager for Lehigh County's solid waste and recycling center - day-to-day cash flow is tight. They owe $17,500 on a student loan they earlier consolidated at an interest rate of more than 8 percent. And their side business has grown enough to consume a big chunk of their time but is still generating modest profits because of large startup costs.

The Fenstermachers recently refinanced their home loan and equity debt into a five-year adjustable-rate mortgage. They also took out $15,000 for home improvement projects and a cushion for short-term savings.

"We know something needs to change," they wrote in a letter requesting a Money Makeover. "We are frustrated. [We are] two highly educated people [but] we don't seem to be able to pull together a financial plan that puts us ahead."

Specifically, they want to learn whether they are living above their means in their home (appraised at $220,000), whether they're saving enough for retirement, how to start saving for William's education and how to manage the growth of their side business so that it helps their income without taking up all their leisure time.

They also need help sorting through the complex choices in their retirement investment plan.

For help with all that, Money Makeover turned to two experts. One is a certified financial planner with expertise in retirement planning. The other is a longtime entrepreneur who advises others through the Service Corps of Retired Executives (www.score.org), a nationwide free service that links prospective and experienced entrepreneurs.

Kelli Send, the planner, is a senior vice president with Francis Investment Counsel, a Hartland, Wis., firm that manages retirement plans for employers and offers financial-planning services to employees.

First, Send calculated the couple's debt-to-income ratio. Their mortgage and student loan debt equals 30 percent of their income from Kurt's day job. That is substantial but is below the 36 percent limit that lenders often use as a guideline, Send said. "Therefore, selling your home doesn't appear necessary," she said.

Next, she found that the couple is saving more than they have to for retirement. To fund a 30-year retirement at their current spending level, the couple will need $648,000 at retirement, assuming an annual investment return of 6 percent. They are on track now to have $889,200, Send figured. The projections assume that Kurt retires at 62.

At the same time, shorter-term goals are being sacrificed. Send thinks the couple can stop funding one of Kurt's two retirement plans for a few years while they work toward building a $10,800 emergency fund (three months' core expenses) and a separate fund for one-time expenses.

His pension plan has a mandatory contribution, but he can stop putting $433 a month into his 457 retirement savings plan, the state and local government version of a 401(k), and use the money to pursue shorter-term goals.

"The goal is to not use credit cards when expenses like new tires or vacations come up," Send said.

She also suggested reallocating the investments in Kurt's 457 plan and in the couple's small individual retirement accounts.

In the government retirement plan, they have 46 percent invested in small-cap stocks and 7 percent in industry-specific funds, among their other selections. Send recommended rebalancing to put 15 percent each in small-cap growth funds, small-cap value funds, developed international funds and emerging markets funds; and 10 percent each in large-cap growth, large-cap value, bond and hard-asset, or commodity, funds.

As for college savings, the couple have an out-of-state relative who is about to open a 529 college savings plan for their son. Investment gains within 529 plans are not subject to federal taxes if the money is used for college expenses.

Send recommended that the couple start contributing to that plan as soon as their shorter-term savings accounts are funded. Because Pennsylvania doesn't offer a state tax break on contributions to in-state 529 plans, the Fenstermachers need not start a separate plan, but residents of other states should check their options.

Finally, Send suggested adding about $250,000 in term life insurance to the couple's current $750,000. At their ages, they should be able to get good but inexpensive coverage, Send said.

Lehigh Valley-area SCORE counselor James Baer looked over In The Bag's Web site and discussed the business-growth plan with the Fenstermachers.

He suggested adding more independent contractors, even if they crimp profitability temporarily, and adding product offerings to boost sales at each stop.

The bigger issue is deciding how aggressive to be in building the business, he said. If fear and hunger were the motivators, the couple could easily make a case for plowing their savings into the business to maximize growth.

Janet Kidd Stewart is a Your Money columnist.

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