Get With The Plan: March 25, 2012

Brian and Yanna are 50-somethings juggling several goals. They want to help their teens, ages 17 and 15, with college costs, but they’re also worried about retirement.

“How are we going to pay for college? And retirement? We didn’t save enough money,” Yanna says. “I would love to retire from full-time work at age 65, 10 years from now, and probably work part time. My husband would like to retire in 13 years from now and work part time.”

The couple is also wondering if they should refinance their 4.75 percent 15-year mortgage, which has seven years remaining.

The couple, whose names have been changed, have set aside $12,300 in 401(k) plans, $213,500 in IRAs, $29,500 in an annuity, $23,900 in mutual funds, $600 in bonds, $630 in certificates of deposit, $16,800 in savings and $3,900 in checking. They also have $49,400 earmarked for college.

The Star-Ledger tapped Douglas Buchan, a certified financial planner with Main Street Financial Solutions in Pennington, to help the couple juggle their many goals.

“For Yanna and Brian, retirement is important, but they are mostly focused on the short-term problem of paying for college as they have a junior and sophomore in high school,” Buchan says.

He says there is no one right college-funding strategy, but each family has to find the one that’s right for them. Everyone has different values and goals, and the best thing one can do is to have candid conversations with spouses and children about what’s most important, he says.

“Often parents use their own college-funding experience as a goal for their children,” he says.

For example, Buchan has heard clients say that their parents paid for their college in its entirety, and there is nothing more important than doing the same for their kids. Others say that they paid some or all of their way through college and they believe that helped ground them, teach them more responsibility or to take college more seriously.

“Again, no right answer, but the earlier you know what you want, the earlier you can strategize on how to achieve the goal,” he says.

After talking to the couple, Buchan says it was clear that Yanna and Brian want to pay the lion’s share of college, but they want their kids to contribute some.

“I paid my way through college and believe it instilled great discipline, while Yanna had college paid for her completely and she was very grateful to her parents for that,” Brian says.

Buchan says the couple agreed they would like to pay for three-quarters of each child’s tuition.

Now, that’s still a pretty good-sized chunk of change, depending on where the kids go.

“Since they don’t want their kids saddled with six-figure debt and they don’t want to work until they’re 90, then they probably want their kids to avoid applying to the $50,000-plus per year schools,” he says.

But just as important, Buchan says you can always borrow for college, but you can’t borrow for retirement. “Be careful not to sabotage your retirement plan and goals to pay for college,” he says. “Yanna doesn’t want to work past age 65. Brian will work until 70 if he has to. They both appear to have stable employment, but you never know.”

Some good news is the couple has built up very good equity in their home, Buchan says, so if they’re going to borrow, tapping that equity is most likely the cheapest way to do so. He says the couple could refinance to a 15-year mortgage, taking $150,000 out of their home to help pay for college.

“Given the rate environment, the result of this would only increase their monthly expenses by less than $400 per month,” he says. “Their house would be paid off in 15 years instead of the existing seven.”

Buchan says this couple’s plan has lots of moving parts because they don’t yet know where the kids want to go to school or where they will be accepted. Still, he says a good stake in the ground is to realize that their retirement and college-funding goals are achievable if college costs average no more than $35,000 per year.

“Anywhere above that and it gets a little dicey — meaning either they’ll have to borrow more, which may delay retirement goals, or the kids will have to borrow more, which is also not desirable,” he says.

Another critical note, Buchan says, is that the couple shouldn’t refinance until after they qualify for financial aid because many schools don’t look at home equity when analyzing financial aid need.

He says the majority of schools rely on the federal aid application, the Free Application for Federal Student Aid, which doesn’t even ask parents if they own a home. Colleges that use an additional form, the CSS/Financial Aid PROFILE, will ask about a family’s home equity, he says. With rare exception, Buchan says these colleges will limit the amount of home equity they consider when they evaluate a family’s ability to pay.