“There are a few standard things to look for in your statement, I explained, starting with the account summary on the first page. Here you can see the total account value, and in Robin’s case, there were two account statements in the packet. You can see the current value of the account, and compare it to the beginning value on January 1st. If your account has grown, you can see how many more dollars it is worth than before. If you have lost money, it is most likely because the stock market values have dropped in the last month, and vice versa.

“Try not to judge the performance of the account on how many dollars it has gained or lost,” I advised. “The percentage growth or loss is more important than the dollar change. and you can calculate that by dividing the change in value by the beginning value and multiply that number by 100. Some statements tell you the rate of return, but if not, that simple division will do it.” Her non-IRA account had grown $4,500 and the beginning value was $280,000, so the percentage growth was 1.6%.

“Next, there will be a summary of holdings”, I continued. It is important to look at this to see how much you are holding in cash. Is it enough to cover your emergency cash needs along with your cash in the bank? Or is it too much?” Often people leave too much sitting in cash because they don’t know what to do with it. They are probably missing out on potential investment growth.

The holding detail follows the summary, listing the names of the mutual funds, bonds, exchange-traded funds, and stocks. There is usually a header which tells you which is which. Bonds you can recognize because they give the amount of interest they pay (or yield). The rest of the statement is detail on the transactions, and unless there are big numbers in the transaction amount column, most of the transactions are payouts of dividends from each income paying investment. It’s not important to review those transactions carefully, except if you want to see what investments have been bought or sold.

It was starting to make a little more sense to Robin now, when she turned a page and saw a new header, Robin S___ Inherited IRA. She reacted at first with the usual sense of trepidation, but then she moved on. “Why did my mother have $30,000 in cash in this account?” she asked. And I knew she was on the right path.

“We managed to convince our daughter to go to Clark, Brian told me. “It felt like a good compromise.  We just couldn’t see how we were going to pay for Yale and have anything left to save for our retirement.  But Danielle was interested in Clark too, partially because she has a friend there, so she’s not too disappointed.  She’s still proud that she got into Yale.”  Paying the $30,000 tuition there (after a $10,000 scholarship) won’t be easy for the parents, but it’s a lot better than $46,000 for Yale.

I was relieved too, knowing that they had made a wise decision.  I have seen many parents sacrifice an awful lot, sometimes too much, for their children, by paying for attendance at a private school or paying for very expensive colleges when they can’t afford it without risking their financial security.  If they do take that risk, I can see that the result will be that they’ll have to delay retirement for many years in order to build up their nest egg to a sustainable level.  For some people that is their choice, and it can work out fine, but if their health is not good at that age, it could be a very difficult period for them.

I asked them if they had taken any action to pull together the $15,000 that they will need for the first semester payment.  They hadn’t, but they were considering going to their bank for a loan.

“First,” I told them, “Danielle needs to apply for a federally subsidized student loan or Stafford loan.  A subsidized loan is one that does not require payments until six months after graduation and there is no interest charged while the borrower is still in school.  The problem is that Stafford loans only go up to a maximum of $3,500 in a subsidized loan and an additional $2,000 unsubsidized loan. The maximum loan amount increases each year of college.” (See http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp for current rates). Applications for federal loans are online. After applying for federal loans, we should look into your borrowing on your home equity. You don’t want to borrow so much that you put your home in jeopardy, but home loan interest is all tax deductible, and student loan interest deductions are limited.”

Beth and Brian were happy to be starting on a plan. They knew that by the time they would have to write the first check, they would be ready.

The next basic bit of planning to take care of was to create an emergency cash account. She only had $1,500 in cash, in her savings account.   There is a widely accepted rule-of-thumb that people hold between three and six months worth of expenses in cash.  Robin was spending around $4,000 per month, as we could easily see from her bank statements.  As a single person, it is important to hold the larger amount, six times one’s monthly expenses, if that is possible.  And for Robin at this moment in time, it was.

“Where should I keep all that cash,” Robin asked, “and where should I get take the money from?”

I acknowledged that it is difficult to know what to do with cash in this time of historically low interest rates.  Online savings banks pay a little more than most banks, but currently they’re offering just a little over 1% on savings accounts.  Money market accounts at financial institutions are paying less than .5%, so they are not the place to look for interest on your savings right now.

“Should I put the money in a CD then?”  she wanted to know? I don’t recommend CDs at this point in time  because you end up locking in a very low interest rate.  “It is likely that rates will go up in the next 12 months and so it’s better to hold your money in an account with a variable rate that will increase after the Federal Reserve raises their borrowing rates.” I told her.

The more difficult question to answer was what investments she should sell to create the emergency cash account.  She should not take it from her inherited IRA as it is preferable to keep tax-deferred savings in those accounts for as long as possible.  In her taxable savings from the inheritance she had $350,000.  This is the account where it should come from.

I asked Robin if there was cash in the account already and she did not know.  She had a difficult time reading the statements, never having had much in investments previously.  Robin was clearly very anxious when it came to trying to understand financial statements and generally had preferred to ignore them.  So we opened up the most recent statement together to take a look.

We started our meeting with a little brainstorming to gather ideas for other options for Ramona.  We came up with the following:  she could work fewer hours at her current job which might require that she work more years, she could find another full time job in her current occupation, she could decrease her current work time while building her consulting business, or she could change occupations entirely, either through some education program or simply starting a field that does not require a lot of education.

“I think I’m too old to start a whole new career,” Ramona said, rejecting that drastic of a change.  “But working fewer hours and doing more consulting appeals to me if I could build up that business.  “How much do I need to earn?, do you think?”

“From the retirement projection we made, I can see that you need to earn enough to cover your expenses and to save $15,000 annually.  So in order to answer that question we need to see how low you can reduce your expenses.”  I replied.

Alex had brought actual expense reports from quicken.com that they had started to use to track their expenses.  Finding places to cut expenses is difficult for all clients, and this couple expressed the same struggle.

“We are not big spenders,” Alex commented, adding that they don’t go out very much or buy a lot of expensive items.  I agreed that it didn’t look like they were extravagant, but if they could cut back their spending and save more each year, they could increase their saving by every dollar cut out of their budget.

By the end of the meeting we had come up with some ways to save more monthly by budgeting in the following ways:

1.  They’re going to reduce their travel to one major trip every two years instead of every year, resulting in saving around $5,000 in the non-travel years.

2.  They’re going to cut their spending on food, reducing their take-home purchases to once a week, and eating out to twice a month.  They expect to save $200 per month, $2,400 annually.

3.  They’re going to reduce their gym expenses by switching to a cheaper gym.  Annual savings of $1,200.

4.  They’re going to reduce their pet expenses by doing the grooming themselves, savings of $500 annually.

Some changes in their spending will reduce their spending greatly, others not as much.  But getting in the frame of mind of savings and as a couple being willing to change their life style a little bit to make a future that they both want, will enable them to boost their annual savings significantly.  In this way, Alex can work with Ramona to achieve a well-earned retirement.

Brian’s 401(k) and IRAs were worth$120,000 at this point.  Beth had saved just over $50,000 for combined retirement savings of $170,000.  Currently, he was saving $15,000 per year, or 15% of his income and she was saving $10,000, 17% of her salary.  They were trying hard to save for retirement, but their accounts had lost value in 2008 and had not come back from the $250,000 that they used to have.

“Shouldn’t we have more than that at our age?” asked Brian.

I created a retirement projection, which showed that they were right.  They didn’t have enough money saved to afford to spend $46,000 on tuition for four years and still be able to retire at age 67, their expected retirement age.  (A person’s full retirement age with Social Security is set based on when each person was born.)  They were able to save a lot each year currently, but they couldn’t pay so much tuition and continue to save at all.

Aside from their retirement savings, Beth and Brian’s greatest asset was the equity in their home.  They owned a home in Arlington, Massachusetts that was currently worth $650,000.  They had bought it back in 1987 at a cost of $250,000.  The remaining balance was only $92,000 and their interest rate was 6%.

“We’ve both been wondering if we should borrow the money from our home equity to pay tuition and then work as long as we need to to pay it off.”

I agreed that this was possible, but I wanted them to consider other possibilities.  For the difference between the cost of Yale and the cost of Clark, they could spend $15,000 less each year.  If they chose the University of Massachusetts, they could continue to save at their current rate and greatly improve their retirement picture.

I told them that I had seen couples convince their children to try out U.Mass. when offered some incentives, such as a car or a regular paid vacations over spring break.  If she were willing to go to U.Mass for at least one year and then to transfer if she was unhappy, they would saved one year’s tuition and maybe more.

Beth and Brian decided that they needed to go home and discuss the matter, given that this was a very difficult decision.  But at least now they knew how much a decision to send their daughter to Yale could cost them.

I assured her that there is no tax on inheritance for the receiver of the money.  If the size of the estate of the deceased is over one million dollars, there would have been state taxes in Massachusetts, and over 3.5 million, there is federal estate tax.  But that all would have been paid already before she received her money.

Not forgetting that this money came to her due to a death of a relative, I expressed my sympathies for the loss of her grandmother.  It is often very confusing emotionally for people to grieve the loss of a family member while at the same time receiving a life-changing very welcome inheritance. It also comes with a lot of responsibility to manage it wisely.

I started out looking over her questionnaire.   Ignoring her big money for the time being, I wanted to have a good idea how she dealt with money previous to the inheritance.  She was 36 and was working in publishing as a graphic designer making $55,000.  She’d been there for 5 years and didn’t expect her income to go much higher.  There was no higher position that she might be promoted to and the annual cost of living increases rarely even kept up with inflation.  Still, she didn’t know what else to do, so she rolled along with her work as it was.

Robin didn’t contribute to her employer’s retirement plan, a 401(k), partly because she didn’t understand it and partly because she didn’t much extra money after covering her monthly expenses.  She did contribute to a Roth IRA most years, often with money that her parents gave her, but she usually added in a couple thousand of her own money.  She had been very worried about not having much saved at her age, but at this point she was mostly worried that she might lose her inheritance through careless spending and poor investing.

She didn’t own the apartment she lived in in Brighton, but she did have a 2005 Honda Civic with a loan balance of $2,000.  She had $3,000 of credit card debt that she hadn’t been able to pay off in full.  Other than the inheritance, she only had $1,500 in cash savings, $22,000 in a Roth IRA, and$10,000 in a 401(k) from an old employer.

“I never look at the Roth IRA or the old 401(k), she told me with embarrassment. ” I don’t know what I’m looking at, anyway.  I picked the investments pretty randomly, choosing a few to get some diversification, but I didn’t know what I was doing and I still don’t.  I lost a lot in the recent crash, in fact.  If I can’t handle that little amount of money, how can I manage my inheritance?”

After talking a little about Robin’s month to month cash flow, we then moved on to looking at the inheritance.  It had come to her in the form of two accounts, an IRA and a taxable account.  There was $800,000 in the IRA and $350,000 in the taxable account for a total of $1,150,000.   This would be enough for Robin to make some real life changes, possibly including her dream of adopting a child.  Would it be enough to fund her retirement without additional savings if she continued to spend all her income?  Could she buy her own home at this point?   There was plenty of planning to do to help her answer these questions.

After telling me the basic story about wanting to stop working as a nurse practitioner, a very tiring job, as she described it, she gave me a list of their current investment accounts.  Would this be enough, she wanted to know, to retire in the next year or two?

Ramona told me she had a 403(b) at her current employer, Harvard Pilgrim Health Care.  (That’s a similar type of tax-deferred account as a 401(k), but for non-profit organizations.) She had lost a lot of money in it in the 2008 crash, but the current value was still $315,000.  She was sure it was invested badly.

She also had a Roth IRA with 35,000 in it as well as a couple of old 403(b)s from previous employers years ago with combined savings of 40,000.  At age 62, Ramona had had many years to build up her retirement savings, and she had been making regular contributions through automatic withholdings from her pay.  She believed that she had saved responsibly, but that the volatile markets may have ruined her chances to retire when she had hoped.

Alex was not quite 52, and still was working steadily as an editor for a publishing company.  He had been saving in his employer’s 401(k), but hadn’t been able to save as much annually as Ramona had.  His current 401(k) was worth $85,000, and he also had a Traditional IRA at Domini that he had contributed to in the 80’s and never looked at again.   It had $20,000 in it now.

Combined they had $495,000 in retirement savings.  This is a significant amount of money, but I calculated that it was not enough to maintain their current standard of living if Ramona were to retire in 2010 or 2011.  Ramona was very discouraged at first, but I assured her that we can still brainstorm ways to make things work other than just continuing as is.

When they come back, we would look at how to increase their savings rate, to decrease their spending, and to consider options of part time work or taking a different job.  I was sorry to end the meeting at this point, but it could also be a good time for them to go home and discuss options that they might consider.  At least when they left they seemed more on the same page.  Ramona was not going to quit impulsively until we had a workable plan, and Alex wanted to help Ramona find a way to make her working life more tolerable so that they could both continue saving towards a secure retirement.

As I read over their goals for our work together, Beth verbally added their sense of urgency to decide about college for their daughter, Danielle.  “We always told her that we couldn’t afford a school like Yale.  But she wanted to see if she could get in.  Now that she did get in we feel very torn.  We haven’t been able to save for college, and the problem is that now that we have good incomes, we aren’t eligible for much financial aid.  We feel like terrible parents if we say no to a school of such prestige.”  I told her that we would try to work out a plan around making a decision about college, but first I needed to understand their employment situations and their cash flow.

Beth, age 58, has been teaching at Boston University for the last couple of years as an associate professor.  She earns $60,000.  Brian, at age 56, has not been employed steadily for the past five years.  Though he’s now working at Boston Scientific as a mechanical engineer, earning a comfortable $100,000, his leaner years left them with $15,000 of credit card debt and Roth IRAs that had been drained to make ends meet.  They had not been able to save for retirement during those five years.

“We had to withdraw money from our Roth IRAs to cover our costs.  We knew that that money was supposed to be for retirement, but it was the only cushion that we had.”  I agreed that it was smart to use those accounts.  The contributions can be withdrawn at any time without tax or penalty because taxes have already been paid on that income.  Although you can’t borrow from a Roth IRA, you can withdraw up to the total amount of contributions.  So they were smart to use that money rather than going into more debt.

To get a better understanding of their daughter’s college options, they filled me in on the schools that accepted her and the tuition for each of them.

At Yale the tuition, room and board total $46,000 with no assistance offered.  At the other schools she was accepted at, the costs are as follows:  Roger Williams, $39,550 minus a $5,000 grant with their cost at $34,550, Clark University, $40,850 minus a $10,000 grant.  Their remaining cost would be $30,850.  Finally, at U. Mass she would have a free ride in the honor’s program because of her high grades and test scores.

Danielle was pleased to have so many options, excited and flattered to be accepted at Yale, and also somewhat interested in Clark because a friend of hers is there. But she really would like to go to Yale if they can afford it.  Can they?

” I’m a little overwhelmed at this point because my grandmother died six months ago and left me some money.  It’s such a blessing, a real gift, but I know nothing about how to manage money.  I am getting excited that I may be able to do some of the things I’ve always dreamed of, owning my own home, maybe starting my own business, going on a real vacation or even adopting a child.  I’m single and think that if I don’t adopt soon, I won’t ever have children.  But I know I don’t have enough to do all these things and maybe I should just tuck it all away for retirement.  I don’t know what to prioritize or how to start and I don’t want to mess this up.  I don’t even know where I should put the money right now.”

I assured Robin it would be a pleasure to help her plan out how she will use her inheritance and to help her work towards achieving those goals in her life.  I told her that it would be fine to keep her money in her bank, in a savings account if she has one, until we meet.  She said that she had seen the questionnaire on my website and that she would print it out and bring it with her to our first meeting.  We set a morning appointment in a couple of weeks as her workday is flexible.  Robin thanked me, sounding somewhat relieved already.

I told her that we would be able to create retirement projections together that would either reassure her that she can retire in 2010 or that will clarify how much longer she needs to keep working.  I didn’t know how much they had saved or how much her husband will continue to earn, so I didn’t want to give her false hope until we’ve run the numbers.

“One thing that you should bring to our first meeting, along with your investment statements, is six months to a year’s worth of bank statements.  From these we can clarify how much you have been living on recently. “  A retirement projection is dependent on the accuracy of the amount of annual expenses.  So I try to get actual expense figures, not just estimates.  I also need to get a clear understanding of each individual or couple’s lifestyle before retirement as well as their vision of what retirement means to them.  Some people don’t mind doing some consulting or part-time work after they retire from their long term job.   Others are dying for the free time to spend on their hobbies and to travel extensively, thus needing to spend more than before.

“If you use Quicken or some type of expense tracker, such as mint.com, bring along the expense detail as well.  A social security statement is important, and a list of your ongoing debts. ”

We agreed to meet two weeks from Wednesday at 4:00.   Ramona told me that she felt a little more peace of mind already knowing that she didn’t have to figure it all out herself.