Get With The Plan: January 27, 2008

With the incomes Neil, 58, and Sally, 47, have, some may wonder how they could have money challenges. But, like most families, they’re juggling the future costs of college for their three kids with their own retirement. Their oldest child started college this fall, and their second, age 16, will follow soon. They have a little more time to plan for their 9-year-old.

‘‘Neil wonders how many years he’ll have to work full-time before he can retire,’’ Sally says. ‘‘Our plan for paying for college includes using our savings and paying out of pocket from our salaries. We were not eligible for any FAFSA loans.’’

The Essex County couple, whose names have been changed, have so far saved $803,660 in IRAs, $13,468 in 401(k)s, $136,153 in mutual funds, $71,134 in annuities, $66,603 in a brokerage account, $33,612 in liquid accounts and $60,549 in college savings, to which they’re adding $350 a month.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Summit Asset Management in Florham Park, to help the couple direct their income and savings sources in the most advantageous way possible.

‘‘Sally and Neil have done a great job of saving and investing, yet they are entering crunch time and need to develop a more detailed planning framework,’’ Marchesi says.

The couple have three educations to finance, and possibly a fourth, as Sally is contemplating going after a master’s degree. If she does return to school, she’ll have lower income for a few years, and it will increase their college bills.

Marchesi says to afford college educations at a cost of $30,000 per year for all three children, the cumulative remaining cost would be approximately $437,000, including inflation. If Sally and Neil continue their monthly savings and investment into 529 accounts, and if the account grows 7 percent a year, they would still have a shortfall of more than $350,000. That cost would need to be met with current cash flow or some of their other investments.

‘‘The couple needs to endorse the ‘bucket’ approach in relation to their finances. Time-segregating their needs and wants would help clarify their financial picture,’’ he says.

To use the ‘‘bucket’’ approach, the couple need to identify antici- pated annual cash outlays. Each cost would fall into a bucket for a certain time period. For example, the bucket for expenses to be met in the next one to three years should be invested 70 percent to 100 percent safe, while the bucket for expenses eight to 11 years in the future could be much more heavily invested for growth.

Next, the couple need to give their asset allocation a complete physical. They have a heavy weighting in equities, some of which are very risky. Marchesi says they need to migrate some of their long-term investments into shorter-term investments to fortify their shorter- term ‘‘buckets.’’

Having one child in college and another going in two years, plus Sally’s possible college costs, will be a challenge. They need to keep retirement plans growing at the same time.

Marchesi says the question, ‘‘When can we retire?’’ is a loaded one. Given the longevity of today’s retirees, coupled with unplanned expenses retirees face, such as helping children with a down payment on a house, Marchesi says it’s important to separate expenses into basic, everyday expenses and lifestyle expenses. They need to examine exactly what their future spending plan will be so they can determine their retirement readiness.

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