Get With The Plan: July 11, 2010

71110Mark and Serafina are a typical middle-class couple. They’ve got two incomes, three children and lots of goals.

“Our biggest concern is paying for college for three kids,” Mark says. “We should set up some sort of wills, trust and designate beneficiaries for each other and for the kids.”

They’d also like to retire at age 65.

The couple, whose names have been changed, have set aside $243,168 in 401(k) plans, $19,500 in employer stock, $51,356 in mutual funds, $65,600 in money market funds and $6,800 in checking. They also have a head start on college for their children, ages 8, 6 and 1, with college accounts totaling $45,000.

The Star-Ledger asked James Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to help the couple assess their goals and create a plan to reach them.

“With three children ages 8, 6 and 1, the couple has time, yet needs to be focused on their rate of college savings/investment, as retirement is more than 25 years away,” Marchesi says.

The couple has earmarked $45,000 for college, and now’s the time to make it official. Marchesi recommends the couple sell the $45,000 of taxable joint assets in a tax-efficient manner and open 529 accounts, with the children as beneficiaries.

The couple will need plenty of additional savings given the huge cost of college.

“Today, it costs around $23,000 for a year, in-state tuition, at Rutgers,” Marchesi says. “When their 8-year-old is ready to go to her first year of college in 2020, Rutgers will cost around $44,000.”

To fully fund college today, Mark and Serafina would need a lump sum investment of about $278,000 to conservatively meet the cost for all three children’s total college costs. But Marchesi says for most people — this couple included — initiating a systematic investment program is more realistic.

Ideally, the couple would make 529 contributions of about $2,000 per month to meet college costs, up from their current savings of $300 a month for education costs. While that sounds like a lot, there may be opportunities in the couple’s budget to redirect current spending, such as their miscellaneous costs. They may consider taking a portion of their overfunded emergency cash accounts for the 529, as their savings equal about 9 months of expenses.

Looking at their investments, if Mark and Serafina could develop a more detailed monitoring process, it would help them better evaluate how their investments are operating in relation to their goals.

For example, the $300 per month the couple is saving (earmarked for college) has no investment guidelines.

“It gets added into the mix with no specific time horizon or volatility assignment,” Marchesi says. “Point being that, as the children get closer to college, those monies need to migrate to nearer-term investments that can be liquidated without any significant price consequence.”

Mark’s and Serafina’s retirement assets also need analysis. With 92 percent of their 401(k) assets in domestic investments, the couple is missing out on emerging economies around the globe. They should also further diversify their fixed income holdings, Marchesi says.

The high current level of cash/short-term assets held by the couple is a curse and an opportunity, he says.

“They are cursing the low level of interest they are receiving on those balances, yet should be warming up to the pending opportunities certain stock markets are offering, as well as the eventual chance to migrate low-interest money into a rising-interest-rate environment.”

They do have a significant chunk of cash in Mark’s employer stock. Marchesi says while the stock has done well over the last 10 years, compared to the broad market, it has underperformed over the last five years. They should sell a portion of the stock and reinvest the proceeds in a diversified portfolio.

Retirement is a way off, and Marchesi says their base retirement projections are encouraging given their disciplined spending and saving patterns. Marchesi says it is very possible — if they maintain their current retirement contribution rate from now until they are 65 — that they could afford a very reasonable retirement lifestyle.

“The investment strategy of their contributions will be key, as well as the allocation management of their retirement investments,” he says. “It is a bit premature to detail retirement lifestyle assumptions, given that a number of ‘unknown’ costs can enter the pre-retirement picture.”

On the estate planning front, the couple had good intentions, meeting with an attorney to discuss their desires, yet no estate planning documents were drafted. Marchesi says by the end of the summer, they should draft and sign a will and other pertinent documents.