Get With The Plan: August 17, 2008

Adam and Karen are in the throes of big financial payouts. Both 49, the Union County couple have one child halfway through college and another starting higher education in a few short weeks. That means a lot of money is heading out.

‘‘Our biggest challenge is the current outflow of cash being paid for college for two kids and saving for retirement in a soft investment market,’’ Adam says. ‘‘There is a lot of outflow of our savings for college, yet the soft market has slowed the growth return for our retirement investments.’’

Adam and Karen, whose names have been changed, have so far set aside $25,270 in 401(k) plans, $17,000 in IRAs, $105,372 in a brokerage account of individual stocks, $75,590 in mutual funds, $35,000 in Certificates of Deposit, $29,885 in a money market and $5,000 in checking.

The Star-Ledger asked Mike Maye, a certified financial planner and certified public accountant/personal financial specialist with MJM Financial Advisors in Berkeley Heights, to help Adam and Karen balance their college funding and retirement needs.

‘‘The couple, based on current savings and projected savings, would not meet their retirement living goal of $82,480 per year,’’ Maye says.

The couple’s ability to save for retirement — which they’d like at age 62 — will be reduced while their children are in college, he says. The combined tuition bill for both children is $58,000 per year. They’re trying to pay that while maintaining current retirement savings of $12,000 per year into Adam’s 401(k) (plus a $6,600 per year employer match.) The couple also contribute $4,000 each per year to Roth IRA accounts, and Adam will receive a $25,000-a-year pension.

The couple’s current cash flow, prior to their child entering college in September, was positive, at $39,000 a year, and allowed them to save a total of $20,000 a year for retirement. But their second child’s added tuition expense will lower their positive cash flow to $8,000 a year.

To continue saving $12,000 in the 401(k) and $8,000 in IRAs each year, they’d have to generate additional cash flow of $20,000 per year during their kids’ college years, Maye says.

Maye says the couple could accomplish this by having Karen earn more by switching jobs or working more hours, or having the children pay for part of their college education.

Maye suggests they do both.

‘‘It will allow Adam and Karen to save more for retirement while teaching their children some financial responsibility,’’ he says. ‘‘The other alternative is to ramp up savings when their children are done with school in four years.’’

Maye says he generally doesn’t recommend planning to contribute more after college is over because there are no guarantees in life — be it job security or health or other unknowns. Another possibility could be to work longer before retiring or to work part-time later in life.

To increase their chances of reaching their goals, they should make some asset allocation changes. They describe themselves as having a moderate risk tolerance, but Maye says their asset allocation indicates they are very conservative. The couple have only 36 percent of their investments in equities, which Maye says is a low allocation, given their current ages. A moderate portfolio for a couple their age would have a 60 percent allocation to equities.

To reach that allocation, he suggests Adam and Karen reallocate some of their cash positions into equities, starting with the 401(k), where they hold a cash position.

Based on their current savings and the anticipated savings changes because of the tuition bills, the couple’s retirement outlook shows they’d only be able to fund $68,000 out of their $82,480 retirement living expense — an 18 percent shortfall. (This assumes savings of $58,000 a year after the children graduate and until they retire at age 62.)

But if they change their asset allocation and either have the kids pitch in financially or have Karen bring in some more income, their outlook improves significantly, Maye says.