By Gene Meyer

May 11, 2008 (McClatchy-Tribune Regional News delivered by Newstex) --
Three decades ago, Gilbert and Michelle Lowe never imagined it would be hard to get by on as much money as they are making now.

The Kansas City couple struggled in those days to stretch beginning teachers' salaries to raise their young family. But over time, their careers flourished as they worked hard and rose through the ranks. Now, as a high school counselor and a school librarian, respectively, their combined annual income stream after taxes runs just shy of $97,000.

Other lines on their payroll stubs have changed, too.

What once seemed a few dabs of money deducted for state-mandated pension contributions now tops $23,500 when factoring in life insurance, medical-dental coverage and other work place benefits.

That still leaves the Lowes with a seemingly comfortable $73,000 or more. But a combination of student loans borrowed both for their own professional advancement and their now-grown children, unexpected costs incurred with a family home that Gilbert Lowe inherited in Florida, plus credit card debt they've accumulated, is making it difficult to stretch even that $73,000 as far as they would like.

They've been plunking money each month into credit union savings accounts and Roth IRAs, but even that is getting more difficult, they say.

The Lowes also have some atypical expenses to deal with. After Michelle Lowe was diagnosed with multiple sclerosis, they began some remodeling projects to make their home easier to get around. And as part of her therapy, she will begin driving again, but only after they hire someone to retrofit their five-year-old minivan with appropriate driving controls.

"We've been in worse situations before and always gotten out," Michelle Lowe told financial planners recently.

"But we really want to find a way to organize our finances in order to pay down our debts and save for retirement," she said.

One recommendation made by Larissa Grantham and Kathy Stepp, the Overland Park financial planners who analyzed the Lowes' situation for the Money Makeover series, surprised the couple.

Stop putting money into voluntary retirement plans such as IRAs, Roth IRAs or the 403(b) retirement plan the Lowes' school district offers. Instead, use that money to pay off expensive credit cards faster.

That is not advice that couples such as the Lowes, in their early to mid-50s and with relatively little money in those retirement plans, often hear. But given their special circumstances, it makes sense now, Grantham said.

First, the Lowes are covered by a relatively generous defined benefit plan that will provide traditional pension benefits when they retire. Second, their school district pays those pension benefits on top of Social Security benefits they also earn, which is unusual for teachers' pensions.

"And third, it's only a temporary move, because you really need to get rid of some debt," Grantham said.

"You have some challenges, but the good news is you also have good enough incomes to get you through them if you are willing," Stepp added.

The Lowes also have one large unresolved question to plan around -- what to do with the modest Port. St. Lucie, Fla., home that Gilbert Lowe inherited from his mother. That property translates into more than $970 a month in mortgage payments.

One choice is to keep the property and rent it out, which the Lowes have been doing. That is not an especially lucrative option, given the costs of hiring a real estate manager to stand in as an on-site landlord, along with the mortgage, taxes, insurance and other costs that property owners normally bear.

Another choice is to sell the property. The Lowes considered this move and found it daunting because of the big price declines and unusually long selling times required in Florida, where home prices have fallen about 22 percent in the last year.

Meantime, there are steps the Lowes can take now to start improving their situation regardless of what they do with the Florida house, Grantham said.

"First, do not increase your spending," she recommended. "In fact, you should be looking at your spending and reduce or eliminate anything that seems nonessential until your situation becomes more stable."

Equally important, start developing a formal written budget, the planner said. "Monitoring your expenses will help you determine where it will be easiest to cut expenses and to make sure you stay within your budget," she said.

It also will provide reminders of when future payments are due and help reduce late-payment penalties that have added to the couple's borrowing costs.

After those basic steps are completed, there are some specific things that can be done to start paring debt quickly, Grantham continued.

First, move as quickly as possible to catch up on some late payments and an outstanding property tax bill on the Florida home, Grantham recommended.

"Use your 2007 tax refunds, your 2008 stimulus payment and part of your credit union savings, if necessary, to bring those up to date," Grantham said.

Next, she recommended that the Lowes launch a three-pronged attack on their more than $21,000 in credit card debts.

Step one is to pull $1,000 out of savings to pay off their balance on a home improvement center charge card they opened to buy new living room flooring. Introductory 12-month, zero-interest financing on the card runs out this month, "and if you owe even a dollar when that happens, you're going to pay all the finance charges that have built up from the beginning," Grantham warned.

Step two is pay down the remaining balances on their six bank credit cards, starting with the highest rate card, a Discover card with a 21.6 percent interest rate.

The process for paying off multiple cards as quickly as possible is pretty basic, Grantham said. You pay as much as possible on the first card you aim at and make minimum payments on the others. After the first card is paid, you add the big payments to the minimum payments on the second card in line and keep going until it, too, is paid. Then you roll the payment onto the third and keep going until the last one is paid off.

For many people, the hardest part of paying off credit cards this way is coming up with the money to start. The Lowes have two sources to which they can turn, Grantham calculated.

One is the $100 a month they have been putting into Roth IRAs.

"That's still surprising," Michelle Lowe said. "Everything you read and hear says that at our age, you need to save, save, save."

Countered Grantham, "You can afford to just let the balances grow while you pay off your credit cards."

A second source of extra money is the excess federal income taxes being withheld from the Lowes' paychecks.

The money provides a $2,000 refund each spring, but they earn zero interest on the money.

Asking their school district's payroll department to add another exemption to their IRS Form W-4 withholding certificate would reduce their refund next spring, but provide about $89 a month more in their paychecks to help pay off credit cards, Grantham said.

"Student loans and your house payments in Florida are still your biggest problems," Stepp said. "But if you wipe out your credit card debts, you'll have money to deal with those faster."

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THE SUBJECTS
Gilbert Lowe, 56; Michelle Lowe, 53

Occupations: High school counselor; high school librarian, respectively.

Assets: Cash and cash equivalents, $3,450; receivables, $4,480; retirement savings, $33,445; home, $171,000; Florida home, $85,000; vehicle, $7,000; other personal property, $40,000.

Liabilities: Credit cards, $21,240; auto loan; $7,130; Florida real estate assessment, $1,110; student loans, $169,170; home equity credit line, $24,000; Florida home mortgage, $32,000; Kansas City home mortgage, $133,790.

Net worth: ( -- $44,065)

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THE QUESTION
"How can we organize our finances to pay down debts and save enough for retirement?"

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THE ANSWER
"First, develop a budget that will assure you make your payments on time to avoid late fees. We also recommend that you stop making voluntary contributions to your retirement plans and use that money to pay off your most expensive credit card debt faster."

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THE PLANNERS
Kathy Stepp is a co-founder of Stepp & Rothwell Inc., an independent, fee-only financial planning practice in Overland Park. She has been a certified financial planner since 1985 and is ranked among the nation's top 250 financial planners by Worth magazine.

Larissa Grantham is a certified financial planner. She joined Stepp & Rothwell Inc. in 2001 as an office manager and later served as director of operations before being named to her current position as a financial planner at the firm.

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WANT A FREE MAKEOVER?
Nearly 300 families have received free financial help through the Money Makeover series since 1994. If you're interested in a makeover, send e-mail to MoneyWise editor Steve Rosen at srosen@kcstar.com or call him at 816-234-4879.

For more financial resources, as selected by the Johnson County Library, go to KansasCity.com and click on Business.

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THE REPORTER
The Star's Gene Meyer has been writing Money Makeovers since 1994. To reach him, write the business desk at 1729 Grand Blvd., Kansas City, MO 64108, call 816-234-4883, or send e-mail to gmeyer@ kcstar.com.

Newstex ID: KRTB-0102-25178277