Jim, 42, and Veda, 40, are trying to accommodate their growing family. They’ve had their home on the market because they want to buy a larger one, but the only offer they’ve received is smaller than what they owe on their mortgage.
They chalk up that low offer to overdue repairs on their septic system.
They also have longer-term goals.
“The largest challenge will be saving for college for our two boys and our retirements,” Veda says. “Jim would like to own an RV and tour the country and Canada.”
The couple, whose names have been changed, have saved $67,700 in retirement plans, $13,200 in savings accounts and $4,000 in checking. If they both continue in their current careers — and if future public pension benefits aren’t slashed too significantly — they can both expect healthy pensions when they retire from their state jobs.
The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to give this couple guidance with their money goals.
“Fortunately for Jim and Veda, they are both state employees and participate in the state’s pension benefit program,” Pallitto says. “Therefore when you combine their defined pension benefits with their projected Social Security benefits, their projected retirement income appears to be more than their projected living expenses.”
And they can add their retirement account balances to the mix, making their immediate money concerns more weighty than their future financial concerns.
Jim and Veda have a combined gross income of $148,000, which means after an effective tax rate of 30 percent, they are taking home about $104,000 per year or $8,600 per month, Pallitto says.
Their current living expenses are about $8,400 per month, which includes $1,500 per month for the cost of day care.
“Because their monthly spending is just about equal to their monthly after-tax income, I can understand their difficulty is saving for college or setting other money aside for short-term needs,” Pallitto says.
That means they need to look within their current budget for ways to save.
Jim and Veda are currently paying 5.5 percent on their mortgage, but Pallitto says it appears that they cannot refinance to today’s lower rates because the value of the property has declined to a point where their mortgage represents more than 80 percent of the property’s loan-to-value ratio. But there are other places they can save.
They are currently paying 3.99 percent on outstanding credit card balances.
“I would suggest paying off those balances since they are not earning 3.99 percent on the checking and savings accounts,” Pallitto says. “This would drop their emergency savings to dangerously low levels but it is something that they could get back via cash advances if an emergency should arise.”
In the meantime, Pallitto recommends they work to re-establish an emergency fund in the short term — before saving for college.
“I do not normally suggest this, but in their case, since their retirement will be funded by defined benefit plans and there is no company match on their tax-deferred savings, I would recommend temporarily scaling back their retirement savings in the short term to re-establish an emergency fund and to make the necessary repairs to their septic system,” he says.
Saving for an adequate emergency fund should be the main goal over the next 12 months, he says. Once the emergency fund is re-established, it will be time to think about college savings.
Their older son should be starting kindergarten by then, and that means their day care costs should be cut in half. Pallitto recommends reallocating the day care money to a 529 Plan to save for college. And once their younger child starts school, Jim and Veda should take those day care savings and stash them away in a second 529 Plan.
Pallitto says the couple need to remember that there are many ways to pay for college, including loans. But no one will give the couple a loan for retirement, so they need to revisit this plan should their pension situation change.
The couple also wondered if they had enough life insurance for their family.
They each have $300,000 of term coverage, plus some additional insurance through their employers.
“They may be a bit underinsured but it is adequate at this time,” Pallitto says.
He says although he’d like to see them each increase their short-term insurance with a 10- or 15-year $250,000 term policy on each spouse, it would depend on cost. Staying within their budget is the most important step at this time.