Get With The Plan: July 1, 2012

Bill, 45, and Jane, 40, have some costly goals. They’d like to pay for college for their two children, 14, and 11. They’d also like to retire in 11 years.

“We’d like a modest but comfortable life,” Bill says. “We want the ability to absorb or manage health costs without any compromises, and still spend $15,000 a year for an annual trip to our home country.”

The couple, whose names have been changed, have saved $413,000 in 401(k) plans, $35,200 in a brokerage account, $14,500 in college savings and $10,000 in a checking account. They have outstanding mortgages on their primary home here, and one on the home they own overseas.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help the couple see if they can reach all their goals.

“They want to be retired when he will be 56 and she will be 51, and have their two kids’ college educations paid in full,” Lynch said. “I have serious concerns about this.”

First, college is a short four years away for their oldest child, and they’ve only set aside $14,500 in 529 Plans.

Lynch says the couple is assuming four years of private school for each child, and for this, the college accounts are severely underfunded.

“This expense will wipe out two-thirds of their total wealth if they fund it,” he says.

An in-state school may cost $25,000 a year, while a private school would cost double that or more. While many parents want a big-name education, Lynch says in most cases, it’s not worth the extra cost.

“I definitely do not think it is worth it unless you can get into a Princeton, Harvard or Hopkins, etc. Then mortgage the house,” he said. “Other than that, I think it is not at all worth the additional cost, especially when you take on debt to finance it.”

Given the family’s finances, he says the ideal situation would be for the kids to take core classes for two years at a community college and then transfer to a good state school for their specialty classes and degree.

He says he thinks it makes more of a difference to go to a big-name institution for graduate work.

“I know a lot of very successful people who did not go to very expensive private schools and are doing very well for themselves,” he says. “I am not paying $250,000 for my kids to drink beer.”

Retirement funding is lacking, too, so retirement in 11 years is not realistic, Lynch says. Financial projections must assume they’ll live to age 90, which gives them 40 years of expenses to save for.

Bill and Jane aren’t sure if they will retire in New Jersey or go back to their home country. Lynch says the cost of retiring in their home country is reasonable today, and a couple could live incredibly well for a small amount of money — for now.

“My concern is in 10 to 20 years, it is highly likely that things will get more expensive in (their home country) due to inflation,” he says.

Another worry for retirement is the need to pay for health care before Medicare kicks in at age 65.

“It can cost a low of $1,000 per month for the two of them, to over $5,000 per month, just for insurance coverage with high co-pays and deductibles,” he says.

Lynch says they should plan to work to at least age 65 or 70 because today’s numbers “make absolutely no sense.”

“Going back to work at 80 because you ran out of money is really hard,” he says.

He also recommends they each wait as long as possible to eventually take Social Security benefits so they can get a larger monthly payout.

While the couple has steadily saved for retirement, they need to reassess their investment choices. They say they consider themselves to be high-risk investors, however, their long-term money is in stable value funds.

“The key to investing is developing a strategy that you feel comfortable with at a risk level that is in line with your tolerance and then staying with it,” he says. “Being in a stable value fund or cash guarantees you a loss after inflation.”

Lynch says it’s imperative for the couple to put themselves in a reasonable position to be successful. Moving their money in and out of different investments or to cash during market volatility — which is what they’ve done — means they will often sell at low points and then repurchase when the market is rising.

“You do not make money like that,” Lynch says.

Additionally, all of the couple’s taxable investments are in individual stocks. Lynch says they’d be better served with a portfolio of exchange-traded funds or mutual funds to stay diversified. For example, right now they’re mainly invested in technology stocks. If they want technology exposure, they should consider a technology fund for some of the assets, and purchase other funds in different areas of the market to supplement the tech fund.

Bill and Jane should also re-evaluate their home loans. Interest rates in their home country are high, and they’re paying 13 percent interest on that mortgage, which costs $15,000 a year in interest alone.

They’re currently making extra payments on their primary home loan, which only has an interest rate of 4.25 percent. Lynch says the couple should instead make the extra payments on the overseas mortgage so they can eliminate that high-cost mortgage sooner.

Based on their goals and expenses, Lynch says they don’t have enough life insurance. Bill and Jane each have a $500,000 term insurance policy.

“This sounds like a lot but it is a little more than three years of income, especially since the children’s college is not funded and there is a lot of mortgage debt,” he says. “I would prefer to see them add an additional $1 million each with 10-year term policies.”

He says this would cost Bill around $800 a year, and $550 annually for Jane.

Finally, this couple has no estate plan, and if they don’t take action, the laws of the state will determine how their assets are divided and who will be the guardians of their minor children. They should meet with an estate planning attorney to make sure their wishes are put to paper.