Get With The Plan: December 15, 2013

121513Fred, 44, and Gabby, 53, say they do well with two salaries, but college planning hasn’t gotten the attention it deserves. The couple has 14-year-old twins, and the bulk of the funds saved for college came from a grandparent.

They’re also not sure about retirement because Gabby is nine years older than Fred. She’d like to stop working at 62, when the kids have finished college, and she’ll have a pension and retiree health benefits.

“Fred’s pension is minimal and he was not able to start saving regularly in a 401(k) until somewhat recently,” Gabby says. “Fred will not be able to retire especially early, but would like to enjoy retirement with me while we’re both still young enough to do so.”

The couple, whose names have changed, have saved $210,300 in 401(k) plans, $34,500 in IRAs, $8,300 in a brokerage account, $30,000 in a money market and $1,000 in checking. They also have $223,000 earmarked for college, and just $23,000 of that was of their own savings.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple plan for their two big-ticket goals.

“If it wasn’t for their pensions, I would agree with Fred and Gabby that they have a lot of catching up to do for their retirement savings,” Power said.

By the time they both retire, their pensions, together, will be worth $78,000 a year. Based on their budget report, Power assumed they would need, in today’s dollars, $95,000 after-tax each year for retirement expenses to keep their lifestyles consistent with their lifestyles today.

This all adds up to good news on the savings front.

“With their pensions funding approximately half of their lifestyle by the time they’re both eligible for their full benefit, and Social Security covering the rest, Fred won’t have to be pressured to save more than the 6 percent of his salary into his 401(k) that he is currently doing,” Power said.

There also should be an opportunity once the kids are finished with college for the couple to pay down the principal on their mortgage more aggressively, which will also help with an age 60 retirement goal for Fred. If he is willing to work two to three more years, they can really build a buffer in their investment accounts that can help avoid potentially lowering their lifestyle down the road.

The couple says their risk tolerance is moderate, but they have 75 percent of their portfolio in equities. This mix is more in line with a moderate aggressive risk tolerance investor, Power said. He’d rather see moderate investors have only 50 percent in equities.

“Getting this mix right helps when markets pull back by making sure a portfolio only drops an amount that the investor can psychologically handle so they won’t have a knee-jerk reaction and get out of their strategy at the wrong time,” he said.

In addition to getting their asset allocation in line with their risk tolerance, they are too heavily weighted in U.S. large-cap equities, Power said, adding up to 80 percent of their stock holdings.

“Although it’s been one of the best performing asset classes for three years in a row, it’s best to have other stock types to help diversify the portfolio and lower the volatility,” he said. “They could spread those heavily weighted assets more evenly across other asset classes such as mid-cap, small-cap, international equity and emerging markets on the stock side, and international bonds and short-term bonds on the bonds side.”

Power said their intermediate term bond exposure may surprise them on the downside if interest rates continue to rise. Having more of those bonds reallocated toward short-term bonds could help protect their principal against rising rates, he says.

Power recommends the couple closely consider their pension benefits before locking in any decisions. He says Gabby should look at what type of impact taking her pension with a 50 percent survivor benefit would have on achieving their retirement goals.

“Because of the nine-year age difference and Fred’s pension being the lower of the two, this could be smart survivorship planning,” Power says.

Turning to college, to fund 100 percent of a four-year college education using the cost of the national average for private universities — $40,000 a year — Power says the couple needs to save more. They could add a lump sum of $50,000 per child now, or $12,000 per year per child for the next four years.

“Assuming that it continues to be a team effort with Fred, Gabby and the grandparent saving for college, they should be able to achieve this goal based on what they’ve already been able to put away and their future savings potential,” he says.

But if the twins want to go to an in-state school, no additional savings would be needed.

Power suggests they make some changes in their 529 Plan’s asset allocations. They’re currently invested 75 percent in stocks and 25 percent in bonds, but Power said at this time they’d be better served with a target date investment option.

“With college only 3½ years away, that is too aggressive,” he says. “Plus, with the five-year run-up in the stock market, this would be a great time to secure their profits.”

He says a target date fund for a child starting college in 2017 would only have approximately 25 percent in the stock market, and the stock market exposure would continue to ratchet lower as the child approaches the college start date.

Power also recommends the couple consider long-term care insurance.

“I’m particularly concerned about protecting assets in case Gabby needed long-term care since couples that have age differences like Fred and Gabby need to be extra careful to plan for the younger spouse to make sure he or she has enough assets to bring them to the end of their lives.”