Get With The Plan: March 16, 2008

Ray, 36, and Ariel, 38, share the same goals as many families. They want to save for retirement and for college, but they have an added financial goal.

‘‘We want to save money for our oldest child, who has special needs and is unlikely to be able to earn an income,’’ Ray says.

The couple’s two other children are ages 2 and 6 months, and Ray and Ariel also want to see if Ariel can stop working to spend time with the kids during their formative years.

The Essex County couple, whose names have been changed, have saved $423,000 in 401(k)s, $157,000 in IRAs, $125,000 in a brokerage account, $75,000 in a money market and $4,000 combined in checking and savings. They also have $45,000 in a 529 plan for their 2-year-old and $51,000 in an account to start the special- needs trust.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help Ray and Ariel juggle their many financial goals.

‘‘They seem well-positioned to attain all of their goals,’’ Pallitto says.

Pallitto started with retirement projections, and he determined if Ariel stops working and doesn’t save any more, and if Ray continues to max out his 401(k) plan, the couple will have a combined $6.5 million by the time Ray is 57, in about 20 years.

Pallitto says they have a solid start for education savings, with $45,000 in a 529 account for their 2-year-old. Though the baby doesn’t have an account yet, the couple have $125,000 in brokerage accounts. He suggests transferring $40,000 into a 529 for the baby, then the couple can add $500 per month to each child’s account.

In addition to their salaries, Ray and Ariel receive large bonuses. This year’s combined bonus will be close to $300,000, of which they should receive about $165,000 net after taxes. They plan to use most of that money to pay off the credit line and the zero percent interest credit cards they used to pay for their new kitchen and home addition.

Next, Pallitto looked at whether the couple can afford to lose Ariel’s salary and still fund a special-needs trust for their oldest child. So far, they’ve set aside $51,000 for their oldest, but more is needed. Pallitto suggests they wait a year before Ariel leaves work so they can save more in their nonretirement savings accounts.

The real soft spot in their financial plan is their insurance, he says. Ray and Ariel are paying more than $3,500 per year for two 30-year term policies, he says, which may not be the best choice. After 15 years, they won’t need the insurance to cover a mort- gage or college educations, but they do need to think of the trust.

Instead, Pallitto advises they each get a 15-year term policy with a $1.5 million death benefit, and a $1.5 million variable universal life policy. Then they can cancel the existing policies. After 15 years, their kids will be in or just entering college, which will be fully funded by their 529 accounts. The cost for each 15-year term policy would be about $525, or $1,050 per year. The cost for each VUL policy would be about $6,500 per year.

‘‘Although the cost is significantly higher than the 30-year term policy, at the end of 30 years, they have several options that are not available with term policies,’’ Pallitto says.

To illustrate, Pallitto says after the 30-year term policy, Ray will have paid $84,870. If he were to die in year 31, there would be no death benefit. But if Ray purchased a VUL assuming an 8.5 percent return paid to age 65, he would pay out $197,550 over 30 years. Pallitto says he could stop paying premiums at age 66, and the death benefit would remain in effect until age 120. Or, if other assets have accumulated beyond their expectations, he could cancel the policy because there are sufficient assets to fund the trust and cover their retirement needs. If he cancels the policy, the cash surrender value of the $197,550 would be $362,115, which is a 3.6 percent return on his investment.

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