Get With The Plan: February 15, 2009

Aggie and Zach are struggling to keep their bills steady while the needs of their three children, 10, 7 and 4, keep growing, and growing, and growing. The couple don’t want to neglect retirement savings, but they want to make sure to stash away funds for future college educations for their kids.

‘‘We want to make sure we’re saving enough for both goals, but retirement has to come first,’’ says Aggie, 38, who owns her own consulting firm. ‘‘We want to pay as much for college as we can afford to.’’

The couple also want to own a Shore home someday, and they don’t want to wait until they’re too old to enjoy it.

Aggie and Zach, 40, whose names have been changed, have set aside $137,933 in 401(k) plans, $78,774 in IRAs, $104,946 in college savings plans, $2,500 in a money market account and $1,000 in checking. Zach expects a pension from his job. It’s worth $851 today, or $4,159 per month at age 65.

The Star-Ledger asked Doug Buchan, a certified financial planner with Tilson Financial Group in Watchung, to help the couple see if their goals are on track.

Before addressing the couple’s stated goals, Buchan wants to add a fourth goal to their list: building their emergency fund.

‘‘Their emergency fund is significantly underfunded, which is a critical component in any successful plan, especially in this environment,’’ Buchan says.

Buchan says a cash stash of two to three months of expenses saved in an emergency fund could be adequate. That’s $15,000 to $20,000, and right now they have only $2,500. Because all of their investments are in tax-deferred accounts, they’re not accessible in the event of a job loss without a stiff penalty, and he doesn’t want them to rely on credit cards.

If they can’t find extra savings, he recommends they stop current contributions of $400 per month to their 529 plan and redirect the proceeds into an emergency fund, until they reach at least $15,000. They could always use some or all of this money for college if need be, and it would give the couple a much-needed cushion and flexibility.

The key for this couple’s future goals is retirement age, Buchan says. The bad news is that retiring at ages 55 and 53 while funding the other two goals appears to be unrealistic. But the good news is that if they work until ages 65 and 63, they could afford to fully fund all kids’ college, a $400,000 (in today’s dollars) Shore house at retirement as well as their retirement, Buchan says.

Another option, retiring at ages 60 and 58 and buying a less-expensive Shore house is possible, but they’d have to sacrifice some from the college goal. In this case, they could save enough to pay approximately $25,000 (in to- day’s dollars) per year for each child for college.

‘‘Of course, given the cost of today’s four-year private college’s tuition, $25,000 is a bit light,’’ he says. ‘‘Two potential options for funding the additional need would be Stafford loans that the kids would be responsible to pay and gifting strategies from Aggie’s dad.’’

Aggie says her retired father has significant savings and is very generous, and she thinks he may offer to help pay for college, but the couple aren’t counting on that. Buchan says although it may be an awkward conversation, it may be something to consider further and can be an excellent estate planning strategy for Aggie’s dad.

He can gift unlimited dollars directly to college institutions for the grandchildren and avoid paying any gift tax, Buchan says. Also, he could gift up to $60,000 per child into their respective 529 plans without any negative tax consequences.

Buchan says Zach must continue maxing out his 401(k) and Aggie should continue funding her SEP IRA as aggressively as possible in order for these projections to stay realistic. Also, Buchan commends them for finding a zero percent interest rate on their credit card, but he warns they should work to pay that down sooner rather than later, calling credit card debt ‘‘a slippery slope.’’