Get With The Plan: December 4, 2011

As public employees, Paul, 45, and Yanna, 36, can expect healthy pensions when they retire. It’s their finances today — along with college costs for their three children, 14, 9 and 6 — that they’re most worried about.

“I have two incomes and my wife has one income,” Paul says. “We are trying to get rid of our $7,500 credit card debt. My ex-wife is also trying to get more money out of me. I don’t know if we can afford it all.”

The couple is also facing increased expenses for their pension contributions and health care costs.

The couple has saved $15,700 in a 457 plan, $9,300 in a 401(k), $1,000 in an IRA, $6,900 in a brokerage account, $1,000 in mutual funds, $550 in savings and $200 in checking. They’ve also set aside $12,800 for college expenses.

Paul could retire today and receive a $5,529 per month pension, which could increase if he continues working. Yanna will also receive a pension, worth about $2,000 a month at age 60.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management, to help the couple get on more solid financial footing.

“They are focused on determining what needs to be accomplished to ensure financial success,” Marchesi says.

Things can happen, and they usually do, Marchesi says, such as $1,400 dental bill the family just got slapped with. For moments like these, families to have a “just in case” buffer built into their normalized expense patterns, he says. That way, if an unexpected cost comes in, they’re not selling long-term investments at an inopportune time to cover the bill.

The couple is on the right track to improve their monthly outflows. They’re paying down their credit card at a good clip, and the debt — as long as they don’t add to it — would be eliminated in about three years.

Additionally, in eight months, they will have paid off one of their cars.

Together, these payments total over $500 a month.

“Once this cash is freed up, a portion of the car payment should get redirected to a reserve fund to be used for car repairs, and the rest should be redirected towards college and retirement accounts,” Marchesi says.

Another area in which they can save is their mortgage. If they plan to stay in their home, they should look into refinancing their 5.25 percent 30-year loan. Marchesi says they can probably get a rate in the 4 percent range, which would reduce their mortgage payment by a few hundred dollars. Those dollars could also be earmarked to accelerate debt repayment and increase long-term savings.

Looking ahead to retirement, both Paul and Yanna will receive significant pensions when they retire. Paul will max out his required years of service in five years — maxing out his pension — and he will have employment options in the not-too-distant future.

Paul can expect a pension of $72,000 a year at age 50, and Yanna will receive a projected amount of $24,000 a year when she turns 60.

The reality of the times, though, significantly reduces the chances for any cost of living adjustments to their projected pension payouts, Marchesi says, and that means their pensions will be less valuable in retirement.

For example, a $72,000 pension in 2011 will have purchasing power of about $44,000 in 2031, using historical inflation data. With that, the couple must continue building their other retirement assets.

Marchesi says if they can double their supplemental retirement contributions to $1,200 a month, they’d have a retirement asset base of around $500,000 to supplement their pensions in 20 years.

To achieve the expected rate of return over that time, Marchesi says they’ll need a two-pronged approach. Their assets need to be managed for a target rate of return — to earn 3 percent to 4 percent over inflation — as well as managing the assets for the given market environment.

Aside from retirement, the couple is saving toward college educations for their three children — $100 a month into 529 plans for each.

With the national range of college costs at $13,000 for public schools or $30,000 or more for private, Marchesi says they’d have to save more to cover 100 percent of costs. Paul and Yanna say they realize the children will need some loans, and they hope to help in the repayment.

While retirement is years away, Paul and Yanna need to spend some time thinking about what they want their retirement to look like. Their home, if they stay with the same mortgage, would be paid off in 2039.

Their projected pensions, potential Social Security benefits and retirement accounts would provide for a lower expense level than they are currently running for the household, Marchesi says.

While household costs will reduce when the kids are out of college, travel, health and family-related costs will most likely increase, Marchesi says.

“As some of their fixed costs are reduced over the next couple of years, it will be important to rededicate those cash flows towards identified goals, and not toward increased discretionary spending,” he says.