Get With The Plan: February 17, 2008

Don and Olivia may be facing a big change in their budget. They would like to make a lifestyle change for themselves and their two kids, ages 9 and 5.

‘‘We want to move into a different house in a better school district and sell the current one,’’ says Don, 42. ‘‘We’d also like to fund the children’s college and retirement.’’

The couple, whose names have been changed, have so far set aside $70,000 in Don’s 401(k) plans — Olivia stays home to care for the kids — and Don has $35,000 in a cash balance pension plan. They also have $20,000 in a brokerage account and $43,000 in liquid accounts. They also have $11,000 in college savings.

The Star-Ledger asked Michael Maye, a certified financial planner with MJM Financial Advisors in Berkeley Heights, to help the couple make some decisions about the sale of their home and their long-term financial goals. A move to another home would have a big effect on the couple’s finances, which aren’t perfect to begin with, Maye says. If Don and Olivia move to a neighborhood with a better school district, they’re probably going to have to purchase a more expensive home.

Their current 15-year mortgage has only 11 years remaining, and they would like to keep their monthly housing costs at their current level of $2,300. They’re thinking of getting a 30-year mortgage to keep payments the same.

‘‘The first priority for Joe and his wife should be to address their negative monthly cash flow situation,’’ Maye says. ‘‘They have a negative cash flow of roughly $1,000 per month.’’

Don and Olivia have been drawing down on their cash savings to cover the shortfall. Maye says the couple have to stop the negative cash flow by either cutting back their spending or finding a way to earn more. Perhaps Olivia could consider a part- or full-time job when their youngest child goes to school full-time. Until then, if Olivia can’t work, Don could consider a part-time job to bridge the gap.

For immediate cash flow help, the couple can turn to their taxes. ‘‘The couple receives a large tax refund each year of approximately $6,000, so Don should adjust his tax withholding so the money is available throughout the year,’’ Maye says.

Their brokerage account is half in a money market and half in one stock. Instead, Maye says they should reallocate and invest it in several broad index funds: 40 percent broad domestic U.S. Equity, 20 percent broad international equity and 40 percent in a diversified domestic bond index fund.

For retirement, Don currently con- tributes 6 percent of his salary to his current employer’s 401(k) to get the full employer match. The account is invested 100 percent in employer stock — a bad move.

‘‘Don should review his plan’s choices and dump the employer stock for a more diversified mix of mutual funds in his plan,’’ Maye says, suggesting a diverse allocation of 80 percent in equities.

Also, Don’s 401(k) from his old job is far too conservative, with nearly 100 percent in fixed-income investments. He should consolidate this with his old pension plan, rolling them into an IRA.

‘‘Don could then select a retirement date fund targeted for 2035, which automatically becomes more conservative as he ages,’’ Maye says.

As it stands, the couple fall short of providing 80 percent of current income when they retire, and even with Maye’s suggestions, there’s only a 50 percent chance of not running out of money at age 90. If they improve their cash flow, maxing out Don’s 401(k) would increase their chance for success to 80 percent, Maye says.

College savings is another matter. Don and Olivia have set aside $11,000 in UGMA accounts at a bank, earning a minimum interest rate. They should use a 529 plan instead.

‘‘Given the couple’s negative cash flow and current retirement shortfall, they should not direct any more toward college savings at this point,’’ Maye says.

In the meantime, they should move the college accounts to a 529 plan where they will be able to generate a better rate of return.

21708

Advertisements