Personal Finance Case #15

John Berka, 49, a widower for a little over a year, has two major financial problems: a low credit score and his rapidly diminishing IRA and 403(b) plan balances. A teacher for 25 years, Berka had planned to retire at age 55. "Now, I'll be lucky to retire at 80," he says.

Actually, things aren't really quite that bad. As a NJ school employee, Berka participates in the Public Employees Retirement System (PERS), which is a defined benefit pension plan. This means that his future benefits will be determined by the following formula: years of service divided by 60 multiplied by the average of his highest three-year's salary. He'll also be eligible for employer-paid health insurance, which will save him the cost of having to buy an individual policy. All in all, he has two very valuable benefits that many workers in the private sector don't receive.

Berka's net worth is $353,760, $200,000 of which was received from life insurance benefits following his wife's death. He freely admits to living beyond his means for many years, as well as charging over $40,000 of uninsured medical bills, from a total of over $350,000, for his wife, who died of ovarian cancer. "I miss my wife terribly," he notes. "However, the life insurance money gave me the ability to repay over $100,000 of consumer debts and invest the remainder." He plans to close a lot of his old credit card accounts.

On the asset side, Berka has $1,200 in checking; $4,050 in savings; $5,000 in CDs currently paying 4.9%; $89,000 in his 403(b) plan; $26,482 in an IRA; $15,028 in three growth mutual funds; an $18,000 car; a $190,000 house; and personal property worth $50,000. His only debt currently is $45,000 remaining on his mortgage.

Unfortunately, years of overspending and late credit card payments have damaged Berka's credit history. He recently checked his credit score on www.myfico.com and received a mediocre rating of 580 (scores range from the 300s through the 800s, with those over 720 considered excellent). He also learned that it will take seven years from the date that his late bills were originally due for negative information to drop off his record.

Berka earns $62,000 annually, plus $12,000 from a part-time business that he plans to expand after retirement. He thinks his monthly expenses average $4,000 but he is not really sure. The largest are a $1,228 mortgage payment, a $529 car payment, and $420 in child support for a 17-year old child from a previous marriage. He also deposits $650 monthly into his 403(b), which is invested equally in the three stock funds and two bond funds offered by the provider.

Berka has no will and a $250,000 term life policy that still names his deceased wife as sole beneficiary. "I know I need to do something about this," he explains. His homeowner's and auto policies both carry $300,000 liability limits and his employer provides comprehensive major medical coverage. He lacks disability coverage except for short-term state benefits.

Like most investors today, Berka is coping with portfolio losses. At one point, he had 100% of his 403(b) plan deposits going into stock funds. He has since scaled the percentage back to 60% and recently took an adult education course to learn more about investing.

Instructor: Dr. Barbara O'Neill, CFP®, Extension Specialist in Financial Resource Management and Professor II
Office: Room 107, Cook Office Building, 55 Dudley Road, New Brunswick, NJ 08901
Phone: 732-932-9155 x250
E-Mail: oneill@aesop.rutgers.edu
Web Page: njaes.rutgers.edu/money | investing.rutgers.edu