Get With The Plan: April 24, 2011

42411Anthony and Giselle have gone from the top one percent of income earners to the very bottom. Anthony, 44, lost his $500,000 a year job, and he hasn’t found new work yet. He’s thinking of buying a franchise business, and Giselle is going back to school. Despite the changes, these parents of three still have supersized dreams.

“We’d like a new, bigger house in three years maximum and college for three children, ages 9, 7 and one month,” Anthony says. “And retirement at age 55.”

The couple, whose names have been changed, saved well while Anthony was working. They have $239,700 in 401(k) plans, $40,200 in IRAs, $8,000 in a brokerage account, $288,000 in mutual funds, $780,900 in money markets and $500 in checking. They also have $62,000 set aside for college.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to help Anthony and Giselle create a plan that’s right now filled with unknowns.

“Anthony and Giselle do not make for a routine financial planning case,” Marchesi says. “With no current income, yet a good asset base, they need to plan accordingly to manage cash flows and investments through their next phase.”

The majority of their investments are positioned in money markets. Marchesi says that won’t cut it, as the fixed rates of such conservative investments remain very low on an absolute and real (after inflation) basis.

But before they can look for higher returns, they need to identify the upcoming expenses and outlays for the next few years to make sure the money will be available when needed. At the same time, Anthony and Giselle need to have a discipline that will allow for some of the assets to be positioned for total returns that are projected to be higher than the low rates of fixed interest.

Marchesi said the couple did a good job of keeping their money flexible after the job loss, but the majority of their portfolio is paying a rate of interest close to zero percent.

The first need to create a “safety of principle” bucket of cash to pay for the costs of the next two years, or $363,000. That would include $175,000 for the franchise, $15,000 for Giselle’s anticipated college costs, and $173,000 for two years of projected household operating costs.

“The $363,000 could be laddered in CDs and high interest-bearing accounts (FDIC insured),” Marchesi says. “That would leave over $417,000 in their checking/savings accounts, along with $296,000 in taxable accounts currently invested in stock mutual funds and individual stocks.”

None of this money should be needed for the next two years, so the $417,000 should be extended from money markets into higher interest-paying investments. For example, if the money was invested in a two-year CD at 1.5 percent, that would mean an additional $6,200 of annual interest, he says.

The $296,000 in stocks and stock mutual funds needs to be reviewed. Given the unclear direction of the couple’s income trajectories and capital needs, those funds may currently be too long-term.

Anthony and Giselle also have to consider money for a new house, if they decide to upgrade in the next three years. Marchesi says they’d need to set aside $150,000 to $200,000 for a down payment if they do not want to increase their mortgage amount. “Obviously, along with a move comes outgoing and ingoing home expenses, which always seem to be more than expected,” Marchesi says. “So much of their financial planning hinges upon what their income assumptions are going forward. When the picture becomes clearer, it will allow for a more cohesive investment strategy for the couple’s taxable assets.”

College savings is in a mix of Uniform Transfer to Minors (UTMA) accounts and 529 plans. Marchesi recommends they convert the UTMA money to the 529 Plans, which have a more advantageous tax status. The national average cost for a private four-year school is about $29,000 a year. To reach that number, Marchesi says they’d have to save an additional $2,400 per month. They also don’t have enough life insurance, with only $500,000 on each of their lives. Marchesi says with a $338,000 mortgage and three children, their current asset base (assuming no earned income) would be strained to cover household expenses for a long period of time. And with the birth of their youngest child, the couple should review their wills and estate planning documents.

On their retirement assets, over 50 percent is in cash. Given their young ages, Marchesi says it’s important Anthony and Giselle develop a constructive investment policy for these long-term assets. They need to create a plan to manage this money in order to get the desired target rate of long-term return to help them reach their goals.

But Marchesi says it’s premature to do any retirement projections because there are too many variables in the short-term.

“Once they elect employment paths and can start making contributions towards retirement plans, it will be useful to run a detailed projection,” he says.