Get With The Plan: February 3, 2013

2313Maria and Joe have been fighting to stay in a good financial position. Joe, 40, a contractor, has been without full-time work for the past three years. While he’s had small jobs here and there, it hasn’t been steady, and the income can’t be relied upon.

“We want to know how to continue to live on one income with the chance my income could get reduced.” says Maria, 39. “Also college planning and retirement. And kitchen remodeling, which is approximately $40,000, however, that will not begin until Joe is working and I know what my future income will be.”

Maria and Joe, whose names have changed, have saved $114,000 in 401(k) plans, $100,000 in an annuity, $74,600 in IRAs, $27,200 in mutual funds, $98,000 in non-vested stock options, $66,000 in savings and $27,000 in checking.

They’d like to do some renovations in their home, and as parents of a young child, they’d like to start a regular college savings plan.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, to help the couple see what they can accomplish financially as Joe continues to look for work.

While Joe’s work life has been tough — he used to earn about $90,000 a year — Maria’s has been positive.

“She has steady employment and significant potential,” Garutti says. “She could be due a significant retention bonus and also has been contacted by other employers that may offer a new job that would be of interest to her but the income would be lower.”

One of the first items Garutti noticed was their mortgage, which was an interest rate of 5.1 percent. He recommended they refinance immediately.

“I used a calculator on that anyone can use, and made an estimate that it cost them $3,000 in one-time refi costs,” he said. “The difference was very much in their favor and it would take them less than 10 months to be even.”

Before this financial plan was complete, Maria and Joe lowered their interest rate to 3.875 percent, saving approximately $4,000 a year.

Also on the home front, the couple plans to spend about $40,000 on a kitchen remodel, which is why the couple has so much money in cash accounts.

“This is a need, not a want,” Garutti says. “If the gas stove was leaking into the house then obviously cost is probably thrown out the window. However if the person is considering `keeping up with the Joneses’ then when income is low, and possibly heading lower in the near future, we would recommend banking the money until the tide turns for the better.”

Maria and Joe plan to wait it out.

While they do, they’re continuing to keep high cash reserves. Garutti says this is smart, at least until they have two reliable incomes.

“Since his income is not consistent, they should strive for a higher emergency fund account then someone with a consistent income and steady employment,” he says. “We recommend a minimum of three months of fixed expenses plus food and entertainment expenses.”

He recommends they stick to a 12-month emergency fund even after Joe starts working, just as a safety measure.

Joe and Maria are conservative when it comes to investing, and Garutti says that could potentially hurt future growth of their savings over the long term..

Maria saves 11 percent of her salary to her 401(k), and she gets a 6 percent match. Garutti says if their income changes and she can afford to save more, she should.

“Increasing her contributions increases retirement savings in the long run but it also decreases state and New Jersey taxes,” he says.

One option the couple should consider is switching some or all of Maria’s current 401(k) contributions to the Roth 401(k) option offered by her employer.

The traditional 401(k) gives tax savings today because contributions are made pre-tax, but when they’re withdrawn at retirement, the funds are taxed as regular income. The Roth, in comparison, receives after-tax funds, so the money is tax-free with it’s withdrawn at retirement.

“Generally, the younger the person and the lower the tax bracket now, the better the Roth option is in the long run, especially if the powering of investment compounding is working in their favor,” Garutti says. “Additionally if the owner expects U.S. taxes to rise, in general, or their specific taxes to rise, due to increased income, then a Roth may prove the better long-term option.”

Garutti looked at their life insurance, and he says they’re significantly underinsured if they want be sure the surviving spouse can live the same lifestyle should one of them die unexpectedly. They each have a $500,000 term insurance policy, and Maria has 1.5 times her salary of coverage through her job.

“The mortgage alone would decrease a very large portion of the death benefit proceeds,” Garutti says. “A properly designed strategy would consider the mortgage, the lifestyle left behind, income replacement, child care costs, and more.”

The couple want to invest in a 529 plan for their child’s future college costs, and Garutti agrees that’s the way to go. He suggests an age-based investment plan that starts out aggressively and becomes more conservative as college bills near.

“I would save a little each month — most companies accept as little as $50 — automatically from the checking account, to get in the habit of it and then increase when income allows,” Garutti says. “Also when income allows I would divert a chunk from the savings account.”