Get With The Plan: April 5, 2009

Clark and Heather may have a hefty income, but they have some hefty goals, too.

“We want to fund retirement and have college funds established to pay for education for three children,” Clark says. “We’d like Heather to stop working in five to 10 years ideally, if possible, and pay off our home-equity loan in five to 10 years.”

The Somerset County couple, whose names have been changed, have a 2½-year-old child, and they’re expecting twins this summer.

They’ve set aside $143,707 in 401(k) plans, $133,406 in IRAs, $43,800 in annuities, $179,825 in mutual funds, $23,439 in a brokerage account, $2,555 in CDs, $1,700 in a money market, $2,740 in savings and $4,000 in checking. They also have $18,608 saved for their child’s college education.

The Star-Ledger tapped Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale, to help Clark and Heather analyze if they’re on track.

“Clark and Heather are in very good shape overall,” Gibney says, noting the couple’s low debt and savings acumen.

Still, there’s room for improvement. The couple’s biggest problem is their lack of cash savings or an emergency fund. Gibney recommends they have three to six months of expenses set aside in liquid accounts.

The couple may be able to find more available cash in their budget by refinancing their mortgage or combining their home-equity line with their first mortgage. They pay extra each month on the first mortgage but they’re paying interest-only on the home-equity line. Combining the loans would allow them to pay principal on both and possibly lower their interest rates.

Heather, 39, would like to stop working by age 50. Given the couple’s salaries, Gibney says that could happen. If they refinance their mortgage to a 10-year loan, they could get rid of their biggest expense, which would enable them to live their rather modest lifestyle on just one salary.

If the couple have any concerns about employment, this may not be the way to go because they will need to keep the income coming to succeed.

“This is a big decision, because with the shorter term on the mortgage, the monthly payment is much higher,” Gibney says.

Another consideration may be to take some of their non-retirement investments to lower the principal on the combined loan, which would make the monthly payment more manageable.

The couple’s investments need more diversification. They have no fixed income (bonds) in their 401(k)s, and only one fixed-income investment in their IRAs. Additionally, many of their investments have high expenses.

“This is one aspect that investors and advisers have control over,” Gibney says. “If expenses can be lowered by .5 or 1.0 percent, the resulting bottom line will be much more favorable. Over time, this adds up.”

They also should take advantage of asset location, Gibney says. If all of their investments are viewed as one entire portfolio, they should place funds that inherently pay high capital gains at year-end (international funds, for example) in their retirement accounts, leaving the more passive investments in their taxable account.

Heather and Clark say funding retirement is their primary goal. Gibney says the most difficult number to determine is what amount they will need to live on per month in retirement.

The younger you are, the more difficult that number is to determine. While the couple should revisit their long-term plan periodically, Gibney recommends they save at least the maximum to their 401(k) plans.

For college savings, the couple could earmark some of their taxable accounts to start 529 plans for the twins. They’d like to fund college educations for all three children, so Gibney says 529s are the way to go.

“With the three children being very young — the twins aren’t born yet — time is on their side,” he says.