Get With The Plan: March 28, 2010

32810Melanie and Wade are watching their 16-year-old prepare for the next phase of his life —college. The 40-something couple wants to help pay college bills and enjoy a few family vacations before the college halls beckon.

“The college fund we have set up lost quite a bit of money in light of the current financial crisis,” said Melanie.

The couple also are thinking of paying off their mortgage with a home equity line of credit, currently offering a 2.74 percent variable interest rate.

And retirement? They haven’t given it serious thought, they said.

Melanie and Wade, whose names have been changed, have set aside $21,688 in 401(k)s, $30,759 in IRAs, $25,847 in mutual funds, $4,357 in a brokerage account, $6,520 in certificates of deposit, $6,377 in savings and $2,500 in checking. They also have college savings worth $19,881, and Wade will receive a pension upon retirement.

The Star-Ledger asked Brent Beene, a certified financial planner with RegentAtlantic Capital in Morristown, to help Melanie and Wade assess their college plans, debt options and retirement savings.

“They would like to provide financial assistance for him of up to $20,000 a year for four years,” Beene said. “He will be starting school in 2011, and with the rising cost of college, this $80,000 expense will be more like $100,000.”

To make the most of their savings, the couple should open a 529 college savings plan for the college savings. Assets in a 529 plan grow tax-deferred and are withdrawn tax-free if used for qualified college expenses, Beene said.

“They should significantly ramp up the savings to the 529 plan to get a head start on the future expenses,” he said. “It may make sense to pay for school out-of-pocket for the earlier years to allow the assets in the 529 plan to grow.”

Beene recommended the 529 plan be invested conservatively because the time horizon for needing the funds is less than five years.

But retirement is the big egg.


There are three main variables to the retirement equation, Beene said: How much will they earn, what will they spend and owe in tax and how long will they work?

“Melanie and Wade are doing a great job with their spending/budgeting relative to their earnings,” he said.

A big unknown is how Wade’s pension will fare through the financial turmoil faced by the state of New Jersey.

Beene made some assumptions to consider a variety of scenarios to determine how Melanie and Wade could best accomplish their goals and at what age they could be financially independent, meaning they could continue to work, but they could also walk away if they so choose.

Beene determined the optimal scenario has Wade working until age 62 and Melanie working until age 60. In this scenario, they each received a 3 percent increase in wages each year. At 62, Dave would be eligible to receive his pension, and this is also the first year he will be eligible for Social Security.

This scenario also assumed their spending habits remained intact, adjusted for inflation, and that Melanie and Wade would pay $20,000 a year for four years of college education.


The couple need to do more saving for retirement. Melanie should contribute to her 401(k) up to the match. Because they’re in a low tax bracket, contributions to Melanie’s Roth IRA should be maximized if possible — $5,000 in 2010 — and they should also open a Roth for Wade and begin contributing, Beene said. These assets grow tax-deferred and are withdrawn tax-free.

Beene said the optimal scenario includes a portfolio with approximately 60 percent growth and 40 percent fixed income, which would provide a high level of confidence of achieving their objectives.

“Reducing the maturity of the underlying issues in the fixed-income exposure would be prudent in light of what appears to be a rising interest rate environment,” Beene said. “Also adding inflation-protected bonds to the mix would protect against future inflation.”

Beene said more diversification on the growth portion of their portfolio is needed, and should include emerging markets, international small cap, hedging strategies and commodities, together making the portfolio less volatile.

Paying off the mortgage with a home equity line of credit could be a little risky.

“If we knew the rates were going to remain low, then using the home equity line would make great sense as it is a much lower rate, but it is a variable rate and has no defined term,” Beene said.

Over the course of the remaining term of the mortgage, Beene said there is a strong possibility the rate on the home equity line will exceed, maybe significantly, the mortgage rate.

They need to decide if they’re more comfortable with a fixed-rate guarantee or a lower rate with uncertainty.