Get With The Plan: April 26, 2009

Ally and Bart still have jobs, but the overall economic climate is starting to scare them.

They have three children, an 11-year-old and twin 9-year-olds, and lots of goals. They know a job loss could derail their plans.

“Our immediate goal is to position ourselves financially in case of a layoff, then college, then retirement,” said Ally, 45.

Ally and Bart, 56, whose names have been changed, have set aside $291,810 in 401(k) plans, $112,075 in IRAs, $5,970 in a brokerage account, $4,748 in college accounts, $3,100 in checking and $900 in savings. They have mortgages on their home and two income-producing rental properties, plus a $12,700 credit card bill that was built up during home renovations last year.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with Duerr Wealth Management in Montville, to help the couple prioritize their goals and create a plan.

“They list their priorities as: establish an emergency fund, college and then retirement,” Duerr said. “I agree that they need to focus on the emergency fund first but I do not think I would leave retirement for last.”

The couple has 15 years before they stop work, but they need to make saving for their golden years a main focus so they can live comfortably in retirement. Loans can be taken for college, but not for retirement.

Ally and Bart need to set aside three to six months’ worth of expenses in an emergency fund. This is the money that will help them pay their bills if they do experience a job loss. At the same time, they are trying to pay down their more than $12,000 in credit card debt with monthly payments of $1,000.

“I would suggest that they take the additional funds they are using each month to pay down the credit card and apply half to the outstanding balance and save the other half in the new emergency fund account,” Duerr said.

The couple own two rental properties that are profitable when fully rented. Both properties have 15-year mortgages with interest rates of 6.875 percent, with seven and eight years of payments remaining.

Duerr said it would be smart to investigate refinancing both mortgages to 10-year loans.

“They will be paying a few years more but interest rates on 10-year mortgages are currently around 5 percent,” he said. “By doing this, they will decrease their monthly expenses for the properties.”

That would give them an increased cash flow, and they could use the extra funds to pay the credit card debt and build their emergency fund.

Their three children, ages 11, 9 and 9, have college accounts with relatively small balances. After Ally and Bart establish their emergency fund and pay off their credit card, they can start funding the college accounts. The couple needs to decide how much of the college bills they’d like to pay so they can plan accordingly.

“As much as they might want to pay the entire tuition, they need to ensure that it does not hamper them from saving for retirement,” Duerr said. “Their children can take out loans for school but they can only forgo retiring for so long.”

The rental properties can play into both retirement and/or paying for college. Duerr said. Ally said the couple isn’t opposed to selling the properties to help pay for college costs, but Duerr said they may also need proceeds from the properties to help fund their retirement.

For retirement, neither Ally nor Bart will receive a pension, so they have to depend on their savings. Once the emergency fund and college debt is taken care of, they should concentrate on a steady savings plan.

“They have to think about how long Bart really wants to or can work, and what type of retirement lifestyle they would like,” Duerr said. “None of these items can be decided or achieved overnight, but once they start thinking about these items they will be able to prioritize their goals and focus on them.”

Do It Yourself:

To see how much you should have in your emergency fund, try the emergency fund worksheets found as part of the Budgeting Toolkit at