Get With The Plan: January 1, 2012

Aaron and Jenna are entering a brave new world.

With 1-year-old twins and one salary, the couple has retirement and college savings weighing heavily on their minds.

“We have some low-interest debt and some savings, and we would like to know if it is better to pay down debt to increase savings,” says Aaron.

They’re also looking long term, hoping for a retirement that gives them a similar lifestyle to the one they enjoy today, without need of support from their children.

The couple, whose names have been changed, have saved $4,400 in 401(k) plans, $66,900 in a brokerage account, $52,000 in money markets and $13,300 in checking. They’ve also set aside $800 in college accounts for the kids.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help the couple carve out a solid financial future for them and for their children.

“They are new parents of 1-year-old twins and currently only Aaron is working,” Duerr said. “As a result they are concerned about saving enough for retirement as well as college savings.”

Another big concern for the couple is having enough life insurance. Even though they realize they are young, they want to be sure they make some good choices now that can carry over in the years to come.

They currently have only have one year of Aaron’s salary in coverage from his employer.

“Even though their budget is tight, they are extremely concerned should something happen to either one of them that their family is adequately covered,” Duerr says. “I would suggest they look into purchasing a 20-year term policy on both of them.”

Duerr says this would be able to help cover their expenses should one of them pass away prematurely. Also, 20-year term policies will cover the bulk of their children’s lives until they are young adults, he says.

“While a whole life policy is good for many situations, given the need for coverage and the lack of additional funds it would not be a good fit for them currently,” he says.

Looking at the couple’s expenses, they are spending virtually all of their income for their normal expenses, Duerr says.

“At best they have an additional $100 to $200 per month,” he says. “While this is not a huge number, they are at least not touching their emergency accounts at the current time.”

They anticipate that Jenna will go back to work, at least part-time, once the children are older. They expect Jenna will earn about $20,000 a year at that time. Meanwhile, Aaron anticipates a promotion in the next year or two, which would increase his current salary by 10 percent.

“While it is commendable that they would like to save more for both retirement and college, their budget currently does not allow for it,” Duerr says. “I would suggest that they continue to make the same retirement contributions for Aaron at this point.”

When Jenna goes back to work and/or Aaron receives a promotion, they should allocate these additional funds to increasing their retirement contributions and college savings, Duerr says.

For retirement savings, Duerr suggests they continue saving based on what they are currently doing for Aaron. He currently contributes 6 percent of his salary with a 3 percent company match.

Duerr recommends increasing this amount as Aaron receives raises.

For Jenna, Duerr recommends an IRA.

“Funds are tight for them but they have some other savings they could use to fund this account while she is not working.” Duerr says.

Of current savings accounts, the couple has two small retirement plans they were considering rolling into Roth IRAs.

Duerr recommends they make the move, and as they do, they should contribute as much as they are comfortable taking from savings to use for the annual contribution.

Giving Jenna’s age and significant time before retirement, Duerr says a Roth IRA is a good idea.

“By opening a Roth they can contribute for her and eventually receive the distributions tax-free in retirement,” he says. “The small tax savings now that they would get by opening a traditional IRA should be offset by the future growth and tax-free distributions in retirement.”

As for college savings, the couple has opened two 529 Plans.

Duerr says while college savings is extremely important, this couple’s budget doesn’t allow for regular contributions. He says while Jenna isn’t working, there are simply no extra funds.

The couple could allocate a certain percentage of Aaron’s annual bonus to be used to fund these accounts each year, Duerr says.

“As they earn more in the years to come they can always increase their contributions but currently they lack the funds,” Duerr says. “While it is great that they want to save for their children’s educations, they can always get loans for school or possibly financial aid or scholarships. They cannot do the same for retirement.”

The couple have nearly $67,000 in stock from Aaron’s employer. This is a significant portion of their assets.

“His firm is a relatively young company that has seen and should continue to see significant growth,” Duerr says. “However, the risks for them having so much of their assets in this one entity are significant.”

Duerr recommends they consider selling some of this stock and using it to invest in a more diversified and prudent way.