Get With The Plan: April 11, 2010

41110Braden, 42, and Faith, 35, are like many young couples, and they say saving money consistently is their biggest challenge. They’d like to save for their three-year-old child’s college education and for their own retirement.

“We envision our retirement lifestyle to be similar to our current lifestyle,” Braden said. “We would like to do many of the same things we do now without being burdened by constant worry about money.”

The couple, whose names have been changed, have set aside $19,782 in 401(k) plans, $63,832 in IRAs, $52,973 in a brokerage account, $32,170 in savings and $22,680 in checking. They’ve also set aside $1,728 for future college expenses.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, to help the couple come up with a plan for their family.

Garutti said that, during a conference call with the couple, Braden said the magic words.

“He said they are good at following instructions if they are told what to do,” Garutti said. “At times they have been told what to do and at times they have made decisions without guidance and the end result may have been a diversion from their intentions.”

A perfect example: The couple describe themselves as conservative with low risk tolerance, yet they have their entire brokerage account — nearly $53,000 — in PSE&G stock.

Garutti said Braden doesn’t think of himself as a gambler and he thinks “slow and steady wins the race,” so that’s far too much of their net worth in one stock.

While PSE&G is not highly volatile, Garutti said it’s still just one stock.

“Bad things can happen when a significant amount of your net worth is tied to one individual company. Ask the employees of Lehman Brothers, Enron, Worldcom,” he said.

That opened Braden’s and Faith’s eyes, Garutti said, and they plan to consider other options.

The couple’s income varies because Faith’s works as an independent contractor and her income isn’t always steady. This can affect the monthly savings goals, Garutti said.

Braden is contributing a small 1 percent of his salary to a 401(k) plan, but his employer offers a match up to the first 6 percent. By contributing only 1 percent, he’s leaving money on the table, said Garutti.

“He said he is very concerned about retirement. Obviously increasing his 401(k) to get company dollars put in the plan is a first step,” Garutti said.

Braden has a Roth IRA and a traditional IRA. The traditional IRA account could be a candidate for a Roth conversion, and if they convert in 2010, they can spread the tax burden over two years of tax returns. Garutti said based on age, current income level and potential investment performance over the many years ahead, conversion would be a benefit.

Braden and Faith have a three-year-old child and they’d like to be able to pay for his college education using a 529 Plan. They have nearly $2,000 put away so far, and the couple knows they’d need to save significantly more over the next 15 years to build a substantial college funding account.

One of their biggest problems, Garutti said, is that they’re underinsured. If Braden was to die prematurely, Faith would receive insurance worth one year’s salary. Braden also has a $10,000 whole life policy and a $500,000 term policy. But Faith has no life insurance at all.

“If she were to die, the family would suffer significant financial setbacks,” Garutti said. “At a minimum, a similar term policy that covers Faith is highly recommended.”

Garutti also suggested they increase Braden’s coverage because he is the primary breadwinner.

“I think it is very short-sighted to only insure the husband, especially with how affordable term insurance is today. Commentary: This is not 1952,” Garutti said. “Term insurance is so cheap compared to the problems it solves if something horrible were to happen.”

He also took a look at the couple’s mortgage, and said their interest rate of 6.375 percent is high, compared to current rates. They should look into refinancing, but they may find they’re stuck because the values of home assessments are dropping.

On their credit card debt, Garutti recommended they get rid of it immediately, especially because they have the savings to pay it off.

“Fourteen and 18 percent interest is crazy if the option is to leave the money in the checking account and earn nothing,” he said.