Get With The Plan: December 28, 2008

Kris, 50, and Joy, 48, feel two big expenses creeping up quickly: retirement and college for their two children, ages 15 and 12.

‘‘Out goals are setting us up for a comfortable retirement that includes the ability to travel, and college funding for our two girls,’’ Kris says. ‘‘We also want to make sure we are using the best tax strategy for our situation.’’

Kris and Joy, whose names have been changed, have so far saved $182,000 in 401(k) plans, $17,800 in 529 Plans for college, $37,400 in savings and $6,500 in checking. Joy will receive a pension when she retires, which will gain in value the more years she works. The big question mark for the couple’s assets is Kris’ business, which is part of the couple’s long-term plan.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help the couple streamline their savings plans.

‘‘They are very detail oriented and accurately account for the family income, expenditures and savings,’’ Pallitto says. ‘‘They spend liberally on the family and vacations to enjoy quality time with their children.’’

For the most part, the couple plans to fund the cost of college with Kris’ bonuses over the seven years that the kids will be in school. During that time, there will be one year with overlap, when Kris and Joy will be paying two tuitions. Pallitto suggests they increase the college savings amount to their 529 Plans to $1,000, from $500 a month. Although that will not pay for college in full, Pallitto says it will help ease the burden, especially in the year both children are in college.

Because Kris is age 50, he can increase his 401(k) con- tribution to $22,000 a year. Pallitto says if he continues to contribute the maximum to the 401(k), plus his employ- er’s match, the account could be worth more than $1.1 million when Kris is 62, assuming an 8.5 percent return.

Joy hasn’t been saving to her employer-sponsored plan, but Pallitto says she should save at least $500 a month.

‘‘These changes would put them on track to retirement, but there are too many variables to project what their retirement income would be in 12 years,’’ Pallitto says.

The most significant variable is Kris’ business, which they may sell upon retirement, or sooner. The business could be worth between $300,000 to $900,000. Given this unknown, Pallitto says it would be prudent to design their financial plan based on the current assets rather than speculate what they may get upon the sale of the business.

The couple’s current cash savings isn’t earning much of a return, so Pallitto recommends a different strategy. Pallitto says because the couple have a great handle on cash flow, they can afford to use a strategy of laddering Certificates of Deposit. They should start with three $8,000 CDs and investing the remaining $9,000 of cash in a balanced mutual fund.

‘‘I would suggest purchasing a 1-month, 2-month and 3-month CD so that one is maturing every month, and upon its maturity rolling it into another 3-month CD,’’ he says. ‘‘By laddering CDs, they will achieve a better yield than keeping the funds in a money market.’’

For the mutual fund, he says they should dollar-cost- average a portion of their monthly surplus into the fund. Upon receipt of this year’s bonus in February of 2009, they should add $5,000 to each CD, so that $15,000 would be maturing every month, and then they could increase the monthly deposits to the mutual fund.

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