Get With The Plan: December 11, 2011

Life has taken an interesting turn for Morris, 39, and Lila, 47. The couple recently had a baby, Lila has become a stay-at-home mom and the couple is coping with changes to their budget.

“We’re concerned about the loss of income due to my wife staying home after the baby, and how we can save for future needs, including college and retirement,” says Morris. “I would like to retire with my wife, who is eight years older than I, and would like to travel and be able to support our child, who will be in her late teens.”

The couple, whose names have been changed, have saved $246,150 in 401(k) plans, $132,250 in IRAs, $104,200 in a brokerage account, $2,000 in savings and $111,000 in checking.

The Star-Ledger asked Douglas Buchan, a certified financial planner with Main Street Financial Solutions in Pennington, to help this growing family make some plans for the future.

“Morris and Lila have done a great job in saving for their future to date, but, as the years move along and with the addition of a baby, it is time to rethink asset allocation and insurance needs,” Buchan says.

The couple says they have concerns about life insurance. They don’t have any, and they know they need some. But they’re not sure how much, or what kind, to buy.

Buchan’s suggestion?

“Do not get your insurance advice from an insurance salesman or, more specifically, from someone who only sells insurance,” he says. “If you’re looking for the best SUV on the market and you go to a Ford dealership, guess what kind of SUV is going to be recommended? Everyone knows it’ll be a Ford.”

For unbiased advice on the best SUVs, Buchan says, buyers will pay for a service such as Consumer Reports. But with financial products, many folks get confused and don’t realize the differences between those who are selling products (like Fords) versus the advisers who are offering advice for a fee (like Consumer Reports), he says.

He recommends they talk to a certified financial planner who charges for advice, not for selling products.

Buchan says the couple’s greatest financial risk is if the Grim Reaper shows up today.

One option is term life, the least expensive kind of insurance. A buyer chooses a time frame for which they want coverage, such as 20 years, and when those 20 years are up, the policy is over.

Permanent life insurance policies, such as whole or universal life, are different. As long as you pay the premiums, you can keep the coverage forever. There’s also an investment component to these policies. Another big difference is the price tag. Permanent policies are way more expensive.

Different types of policies are right for different investors, and Buchan has made up his mind for this couple.

“There is absolutely no reason to buy whole life insurance in their situation and, rarely, in my opinion, does whole life ever make sense, with one exception being estate tax protection or asset protection for the very wealthy later in life,” he says.

Buchan recommends $1.5 million of term insurance for Morris. He says one way to go would be to buy two policies for $750,000 — one for a 20-year term and one for a 10-year term.

“After 20 years, there is no more need for insurance as long as they stay on their current path of saving and investing,” he says. “Each year, the need for insurance decreases, so by year 11, the need for insurance is cut by at least half, again, if they stay on plan.”

Buying two policies will be less expensive and more aligned with their insurance needs, he says.

And then there’s Lila.

“Just because she isn’t earning outside the home doesn’t mean she’s not providing financial value in the form of caregiver,” Buchan says.

Lila needs $500,000 of coverage, which, again, they can split into two policies.

Morris says he’d like to retire in about 13 years, when Lila is eligible to take her pension at age 60. Buchan says they’re so far on a good path to achieve this goal, but staying on path is critical.

Morris and Lila describe themselves as aggressive investors, and Buchan says at their ages, that’s fine. One problem, though, is that there are only three stocks in their brokerage account, to which they add $1,000 a month.

“The names of the stocks don’t matter. The number is what matters,” Buchan says. “Buying three stocks, regardless of how good/safe/strong/undervalued you think they are, is not investing — it’s gambling.”

Diversification is truly the only free lunch in town, Buchan says.

Morris asked if saving for college in a retirement account makes sense for them because Lila will be retired before their child enters college. That way, if their child doesn’t go to college or if the couple needs the money for another purpose, they’d have flexibility.

“Excellent logic,” Buchan says. “As long as their modified adjusted gross income stays under $169,000, a Roth IRA for Lila makes a ton of sense.”

Buchan recommends they max out a Roth for Lila first, and then save additionally in a 529 Plan.