Get With The Plan: May 16, 2010

51610Michael, 41, and Glenna, 39, have made college savings for their twin 6-year-olds a priority.

“We have generally been making deposits of $20,000 a year into our children’s 529 plans each year, $10,000 each, and planned on doing this until a balance of $200,000 was amassed, thinking that we would have a good start toward satisfying the total college bill and understanding that there would be more to pay when the children were in college,” Michael said.

The couple, whose names have been changed, have so far saved $160,034 toward that college goal. They’ve also set aside $129,350 in IRAs, $1,140 in a brokerage account, $89,189 in a money market and $1,000 in checking.

The Star-Ledger asked Howard Hook, a certified financial planner and certified public accountant with Access Wealth Planning in Roseland, to help the couple look at their college goals but also to check out their other money management plans.

“Based on the information they provided, it appears that their annual cash flow has a surplus of approximately $15,000,” Hook said. “They should invest whatever additional cash surplus they have into retirement accounts.”

But before getting to retirement planning, Hook took a look at their existing assets and their wishes to fund college for their twins.

The couple have $89,000 in a money market fund that pays very little interest. He says it may make sense to put the cash to work in other places.

First, they should reserve $35,000 of those funds for emergencies, but he recommends they research the many FDIC-insured banks that offer higher interest rates than they’re currently receiving. Another $4,000 from the money market should be put in a high-yield savings account at their bank to help them meet any short-term cash flow shortfalls if needed.

The remaining $50,000 could be set aside for college. Michael and Glenna currently have one account for each of their two children with approximately $80,000 in each. They say they hope to fully fund education for the kids, but they were planning to save $10,000 a year for each child and then stop 529 contributions when the accounts reached $200,000 for each child.

Hook said based on today’s cost of $40,000 for a four-year school, with a 5.5 percent college inflation rate and a 7 percent rate of return on savings, the accounts would fall short after just two years of school.

To reach their goal of fully funding college, they could set aside another $35,000 for each child today, or make monthly contributions of $300 to each account from now until the time college starts.

That’s where the extra $50,000 in the money market account could come in. Hook said they could use the funds to make lump sum deposits of $25,000 into each child’s account in 2011, in addition to the two more years of $10,000 contributions for each child they had already planned contribute.

“Keep in mind there is no guarantee that when the time comes to pay for college that there will be enough in these accounts. Many things could change,” he said. “Therefore, the accounts should still be monitored to make sure the original assumptions are still good.”

Now, retirement. Neither Michael nor Glenna are regularly contributing to a retirement account, but they should. The best bet is for Michael to use an employer 401(k) plan, which would allow him to save $16,500 pretax in 2010, which would lower their overall tax bill by about $5,000. Glenna also should start to save in an IRA up to $5,000 this year.

Where will the money come from? Their current cash flow surplus should do the trick.

“Our retirement analysis showed that if Michael retires at his normal retirement age, 67, and Glenna retires at the same time, they should be able to maintain their lifestyle in retirement,” Hook said. “This assumes that all positive cash flows are reinvested and earn $6,000 a year.”

Those calculations don’t include any proceeds should they ever sell their home.

Michael and Glenna say they are on the conservative side of aggressive when it comes to risk tolerance, so Hook said their allocation should be more heavily weighted toward equities.

“Because they have many years ahead of them, the retirement analysis is likely to change,” he said. “However, beginning to invest any positive cash flow into investment accounts, especially retirement accounts, now rather than later will help ease the burden in future years.”

Hook also said Michael should consider purchasing an additional $800,000 20-year level term life insurance policy to cover any shortfall should he pass away prematurely.