Get With The Plan: January 17, 2010

11710Sam and Jamie entered new territory in 2009. Sam started his own business — something he’s been thinking about for years — so the family income is only half of what it used to be, at least until the business grows. While they have concerns about the future of the business, they’re also thinking long-term for their family.

“Our biggest concern is whether we will have enough for retirement — are we on track with savings thus far, will we be able to maintain our current lifestyle and whether we should try to save more for a college fund,” said Jamie, 41, a stay-at-home mom.

Sam, 47, and Jamie, whose names have been changed, have so far saved $408,113 in IRAs, $175,966 in a brokerage account, $175,000 in liquid savings accounts and $500 in checking. They also have $93,647 in college savings for their two children, ages 9 and 8.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Langdon Ford Financial in Clinton, to help the couple look at their new money life and see how they should proceed going forward.

“Overall, I would say that they are doing very well,” Garutti said. “If the business grows as anticipated, they will be in very good shape.”

This new business means big changes for the couple’s financial planning.

First, retirement. The couple would like to retire at age 65 with a similar lifestyle to what they enjoy today. They don’t plan to downsize or cut current spending. So they need a retirement plan.

Right now, with no employees, Sam can start an SEP-IRA or a Solo 401(k), which has higher contribution limits than SEPs. For a Solo 401(k), though, Sam and Jamie would have to be the company’s sole employees.

“This may be a way to contribute more for retirement,” Garutti said. “Solo 401(k) costs are very low, so he could have it until he adds employees.”

At that time, he could consider a SIMPLE IRA or traditional 401(k).

While Jamie isn’t working now, she may do some consulting work for her former employer. If she does, Garutti said, she should consider funding a retirement plan to offset the income she earns, and it will also give her another tax deduction.

A comprehensive review of the couple’s asset allocation found that many of their investments are sound, but others could use tweaking to increase the portfolio’s overall productivity.

“They currently have too much money in cash, but that is a combination of the market and the new business,” Garutti said. “As the business comes into more focus, they will probably look for investment options for some of their cash.”

Right now, they have cash in CDs, their joint brokerage account and some even sitting idle in their IRAs. Of their non-cash investments, Garutti said they should probably look to reduce their exposure to individual stocks. They also need more diversification.

“They have a fair amount of duplication in many of their holdings and should do an overlap analysis to see which of their funds hold the same stocks,” Garutti said. “The result would probably surprise them.”

The couple also need to start making plans for health insurance for the business. They’re currently on COBRA from Sam’s previous job, but they’ll need to start researching other plans.

Life insurance is another area. The couple said they haven’t reviewed their policies in a while. They have a couple of whole life policies, and the dividends from the policies pay the premiums.

“The policies may be able to sustain the payments from dividends today, but they should review this annually,” Garutti said. “If premium payments are higher than received dividends, then cash value could suffer, loans could be created or other problems could occur, such as lapses.”

The couple need to look at the overall insurance coverage they desire, such as policies that would be able to pay off debt, offer income replacement should Sam pass away, pay future obligations such as college and the like.

“It is important to not be underfunded, but also important to not be overfunding these obligations,” Garutti said.

The couple should also look at disability coverage, he said.

“Because the business is new, this might be a multi-step or multi-year process,” Garutti said. “He may have to implement a small amount of coverage to start and then increase his coverage over the years as the insurance company sees more history behind his business.”

Turning to college, the couple’s children are in the fifth and third grades. Sam and Jamie would like to fund a Rutgers education, or the equivalent. Garutti suggested they save an additional $400 to $600 a month, or consider dumping an annual lump sum of $40,000 for each child, into their existing 529 Plans.

One essential move is to meet with an estate planning attorney. Sam and Jamie do not have wills, medical powers of attorney or financial powers of attorney. Should they die without these documents, the state will decide who cares for their minor children, and they may not be able to make medical or financial decisions for each other in the case of an emergency.