Starting over after divorce puts some dreams on hold
Cheryl McKernan , soon-to-be-divorced mother of three, was facing a tough deadline.
``I'd always promised my girls that they could go to college," McKernan said . But in her new role as sole bread winner of the family, McKernan had no idea how she was going to pay her youngest daughter's freshman tuition at Roger Williams University , where financial aid would cover less than a third of the bill.
The first payment was due the day McKernan showed up for her Boston Globe Money Makeover with fee-only financial planner Cheryl Costa . She knew if she missed the first tuition payment she'd trigger late fees.
But if she co signed the $26,000 school loan her debt would begin mushrooming, potentially obliterating the resources she needed to start over. All attempts to discuss alternatives with her daughter had ended in tears.
McKernan, who lives in Westwood, initially applied for a makeover hoping to find a way to buy a home, which would provide a much-needed fresh start after the dissolution of her marriage. McKernan, whose job is distributing winnings for the Massachusetts Lottery, had applied for pre-approval for a $245,000 mortgage. When her credit union approved the loan, she felt things were looking up.
But Costa's review of the numbers made it clear that McKernan, who turns 50 in August, could afford neither the mortgage nor the college loan. The pending divorce left McKernan with a car, a $10,000 individual retirement account, and $19,000 in credit card debt. Now that her husband is no longer paying the rent, her budget has a monthly deficit of about $1,700.
``That's a deficit that you need to close before you can even think about buying that new house," explained Costa, principal adviser with Family Financial Architects Inc. in Natick.
According to Costa's calculations, budget trimming could save only about $400 a month, making it clear that McKernan needed to supplement her current $55,000 annual salary with a second job.
``I have no problem working," said McKernan, who is also a trained cosmetologist. She noted her current work schedule -- three 13-hour days -- gives her a lot of flexibility.
Yet even with a second job, it will take time for McKernan to build up the financial resources she needs to handle either the mortgage or the school loan. And, as Costa explained, the $26,000 annual loan, multiplied over four years of college, would leave McKernan more than $100,000 in debt.
``If you sign this paper, you say goodbye to the chance of owning a home, perhaps forever," Costa told her.
Instead, Costa suggested that McKernan's 19-year-old daughter either defer her freshman year or consider a less expensive state school. ``What's more heartbreaking than getting her there for one year and not being able to continue?" she asked.
McKernan's picture would be grimmer were it not for her pension, which could provide as much as 50 percent of salary at retirement. Once McKernan's cash situation stabilizes, Costa recommended that she begin making contributions to her IRA. In the meantime, McKernan's retirement portfolio needed a major overhaul.
McKernan had told Costa that her retirement money was aggressively invested. But when Costa actually looked at plan statements she found roughly half was in cash. ``That's not aggressive," Costa told her. She recommended a diversified portfolio that put half McKernan's retirement funds into Fidelity's Disciplined Equity Fund, and 25 percent each in Fidelity's Small Cap Value and International Discovery funds.
Faced with a strong recommendation that she put her family's dreams on hold, McKernan wasn't discouraged. In fact, she found the process empowering. ``This is my lottery ticket," she said of her makeover. ``I'm thrilled to know what I can do and what I can't."
The next step, she said, is taking Costa's analysis home and having a long conversation about it with her daughter. ``It isn't bad news. It's just postponement."
