Get With The Plan: March 4, 2012

Matt, 37, and Kristine, 36, have their hands full with a preschooler and a newborn. They’d love for Kristine to stop working, but they’re not sure their budget could handle the income loss.

“Even though our day care costs would go away, we want to make sure we have a strong plan not only for our current salary structure but also if we lose the other salary,” Matt says. “We think that our expenses are a bit too high and we are trying to manage that down.”

The Morris County couple would also like to retire between ages 55 and 60, and save for their children’s college educations.

The couple has saved $209,000 in 401(k) plans, $126,000 in IRAs, $104,000 in mutual funds, $23,000 in college savings, $135,000 in a money market and $5,000 in checking.

The Star-Ledger asked Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, to help the couple assess their goals and their means of getting there.

“Matt and Kristine are headed in the right direction when it comes to their retirement plans,” Green says.

But Kristine’s potential resignation from her job should be approached with caution, he says. While the couple will be able to cover their living expenses with only one income, the loss of Kristine’s income will limit the pair’s ability to save for all of their goals.

Green says Kristine should consider taking a few years off rather than quit permanently.

For his projections, Green assumed she’d return to work in 2017 at an annual salary of $100,000, when their youngest is in school full time.

Green says this isn’t the only option. To meet their early retirement goal, they could reduce living expenses to allow for additional savings from Matt’s income or they could postpone retirement.

While they consider Kristine’s career, there are additional items they need to act on.

First, Green says it’s essential that they keep saving for retirement even with one income. They should max out Matt’s 401(k), and then do more.

“Matt and Kristine should maximize traditional IRAs for each of them, including the years when Kristine is not working,” he says. “These contributions should be completed even though they may not be deductible.”

The couple is currently adding approximately $1,800 per month to a month market account. Green says they’ve already achieved the advised “emergency fund” of three to six months’ living expenses plus they have funds earmarked for near-term major purchases. Green says they should take any surplus income — including the current money market contributions — and add to their taxable investment accounts so they can achieve a better rate of return.

Green says the couple’s investment portfolio is currently allocated to 57 percent to equities, 18 percent to fixed income and 25 percent cash.

Because they are still young, Green says, “they can afford to take on a bit more risk in their investment portfolio.”

He recommends they rebalance for a target of 66 percent equities, 30 percent fixed income and 4 percent cash and cash equivalents.

For college, the couple is saving $200 a month for their older child and $100 a month for their newborn. Green recommends they keep this savings strategy until Kristine returns to work in 2017. At that time, they’d need to significantly up contributions — $1,575 per month for the older child and $1,888 per month for the baby — to reach their goal of tuition, room and board and supplies for four years of private education for both children.

Green also reviewed the couple’s life insurance. Kristine has $1 million of term and an additional $250,000 through her employer. That policy would cease if she leaves her job. Matt has $2 million of term, and another $1 million through his employer.

“If Kristine were to die at the end of the current year, Matt would require no additional capital to meet ongoing needs,” Green says. “However, if Matt was to die at the end of the current year, Kristine may require around $260,000 in additional assets to cover the loss of future earnings that Matt would have provided.”

Green recommends Matt buy an additional policy.

Neither spouse has disability insurance. A study by the Social Security Administration found one in five workers will be disabled for five years or more during their working careers. This could mean trouble for the couple’s financial plan.

For example, if Matt was to become disabled, the couple would face an average monthly deficit of approximately $5,775. Green recommends they take a look at disability policies, and they should check out long-term care insurance while they’re at it.

Green also looked at estate planning. While Matt and Kristine need wills to name guardians for their children, they should also think ahead. They currently have no estate tax liability, but as the years pass and their assets grow, that could change.

“In the proposed plan, Matt and Kristine’s heirs would be responsible for paying approximately $4.1 million to the federal government for estate taxes,” he says. “This would leave only about one half of the estate for their heirs.”

The couple should consider meeting with an estate planning attorney to discuss strategies that could reduce taxes.