Brian, 36, and Kelly, 34, are new parents who are frozen when it comes to long-term money decisions.
“We have all of our savings just sitting in savings and checking accounts earning basically zero percent, but we are overwhelmed with choices as to what to do with that money instead,” Kelly says.
The first-time parents of a 6-month old, with plans for a second child in a few years, have many money goals: Upgrading to a bigger home, new cars, college planning, life insurance, retirement savings and estate planning for their child.
So far, the couple, whose names have been changed, has saved $295,700 in 401(k) plans, $200,000 in money markets, $79,000 in savings and $22,000 in checking. Their only debt is their mortgage.
The Star-Ledger asked Anthony Vignier, a Kearny-based certified financial planner and attorney, to get this growing family on the right path to reach all their money goals.
“The first thing to consider is to lay a foundation with protection strategies,” Vigner says.
That means they need a will so they can name a guardian for their child.
Vignier also recommends powers of attorney and healthcare directives to protect them in the event one of them becomes incapacitated.
Life insurance is another important protection component, Vignier says, because it will help the survivor with the costs associated with keeping their standard of living by meeting their living expenses.
Brian and Kelly have some life insurance through their employers, and they recently each added a $750,000 term policy for a 30-year period.
“This is a step in the right direction, but they need more insurance to cover anticipated spending needs, education expenses and other costs,” Vignier says. “At minimum they should supplement their current policies with another $750,000 policy each. As their family grows, they should consider reviewing their life insurance needs.”
They should also look into disability insurance to protect their income. Vignier says a good disability policy will pay a percentage of your income in the event of disability, often on a tax-free basis.
“The other advantage to having your own policy is that while some employers offer disability insurance, the coverage can be limited and you cannot take it with you when you leave your job,” he says. “Your own private disability policy can stay in effect regardless of a job change.”
Once those building blocks are in place, Kelly and Brian can turn their attention to longer-term savings goals.
Starting a college savings plan is a priority. Assuming that their child will attend college for four years, and assuming the cost of a state school, rising at 6 percent per year, the cost could be about $330,000, Vigner says.
“This means they have to begin making annual deposits of about $9,762 assuming a 6 percent return on their investment,” he says. “They can invest this in a 529 plan.”
Vignier says the earnings in a 529 plan are tax-free as long as the money is used for “qualified education expenses.” If not, income taxes and a 10 percent penalty on the account’s growth is levied when the money is withdrawn.
But a 529 plan could have an impact on financial aid, so another possibility is funding a whole life insurance policy with a cash growth rate of return of 4 to 5 percent, he said.
“While the policy should be held for 10 to 15 years to see a reasonable return, the advantages are that the cash value in the policy will not typically reduce financial aid, policies typically provide guaranteed returns and the cash value, accessed by taking a loan, can be used for whatever you need,” he says.
Now to the couple’s nest egg.
Vignier says that while they need an emergency fund, they have too much in cash.
“An emergency fund should be based on a family’s average monthly living expenses with an additional 2 to 5 percent to address events such as home repairs, auto repairs, medical problems or even an extended unemployment period,” he says.
With expenses of about $72,000 per year, they should keep $80,000 in an emergency fund and consider investing the balance of their cash — or setting some aside for future new car or home purchases.
Kelly and Brian say they’re conservative and risk averse.
Vignier says considering current stock market highs, they should consider parking their money in short-term Certificates of Deposit or short duration money market funds to get a little more yield than from a checking account — but only until they come to a decision on buying a new house and car.
“After these decisions are made, they can more carefully consider their investment options with some of the excess money that they have which can include a balanced mutual fund that incorporates stocks, bonds and cash instruments in line with their risk profile,” he says.
Vignier recommends they both boost their 401(k) savings to the max, which is $17,500 each in 2014. The move would both help with their retirement goals and lower their tax burden today.
They have each invested their 401(k)s in target funds, which offer an asset mix of stocks and bonds based on a person’s age.
“This couple is risk averse and conservative, which means their asset allocation should be primarily in funds that hold cash and short-term and high-quality bonds,” he says.
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