Ben and Sydney are newlyweds. They’re just getting started in their married life, but already they have lots of goals. They want to pay off Sydney’s student loans before the interest kicks in, build retirement savings and see how a family would change their future.
“We want to prepare so we can have two or three children,” says Ben, 33. “Perhaps Sydney can stop working if we have kids.”
Ben and Sydney, 28, whose names have been changed, have saved $44,767 in Ben’s 401(k) plan, $20,200 in IRAs, $44,387 in mutual funds, $2,134 in a brokerage account, $14,490 in checking and $1,000 in savings. Sydney also has $8,000 in an old pension account.
The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple review their prospects.
“Some small changes will put them in a better position, but overall they are in a good spot,” Lynch says.
Lynch says Ben and Sydney have great saving habits and seemingly stable jobs, which in this economy is a tremendous start.
They plan to start a family in the next year or two, so Lynch says this time should be used to prepare. Sydney will probably not work for five to eight years, depending on how many children they have, but Lynch says that will not have a major negative effect on their finances.
Ben is maxing out his 401(k) plan and they’re both saving in Roth IRAs. They have concerns about not being able to make future contributions to Roths because of their income level, but Lynch says they can still have traditional IRAs, although the deductions are phased out above income levels of $166,000 if one spouse is covered by a qualified plan.
Also, Sydney should consider rolling her pension account into an IRA.
“In 2010, you can convert existing IRAs into Roth IRAs with no income limitation,” Lynch says. “In addition, you can pay the taxes over three years through 2012, which is a huge planning opportunity.”
Lynch applauds Ben for buying supplemental disability insurance in addition to the policy he has through his job. Lynch says nobody plans to become sick or hurt, but it happens to one out of three people.
“Stephen King, Michael J. Fox, Christopher Reeve and Alonzo Mourning are all great examples that it can happen to anyone,” he says.
The couple do need more life insurance, especially if they plan to have children. Lynch says Ben should have $2 million in coverage and Sydney $1 million. The couple were looking at whole life insurance policies, but Lynch would rather see them buy less-expensive term policies.
Lynch says the couple don’t have enough cash, and they should have six months’ worth of expenses in a savings or money market account. Most of their current assets are not liquid so they would be difficult to access without penalties. They invest regularly to a taxable account, but Lynch says they should redirect that to their emergency fund until they accumulate enough cash.
Because of the need for cash, Lynch says there’s no need to rush paying off the student loans.
Another source of funding for the emergency fund could be the extra payments they’re putting toward their mortgage.
“Putting more cash into your home does not increase your return,” he says. “It only lowers your interest cost, which is tax-deductible.”
Lynch also would like to see them take out a home-equity line of credit to have as a backup plan should they ever lose their jobs and need more cash.
They also could boost their cash savings by putting their tax refund in a safe account, then increase their withholdings so they won’t overpay their tax bills.
“Everyone loves getting (refunds), however, in simplest terms, you have given the government an interest-free loan for 15 months,” Lynch says.