Get With The Plan: May 17, 2009

Louisa, 51, is a divorced mom who is financially keeping it together, but barely. When the bills are paid, there’s not much left over for debt payments or long-term savings, although she’d like to set money aside for retirement and for college savings for her 12-year-old child.

“I would like to be able to pay for my child’s college education and be able to retire at approximately age 66,” Louisa says. “Her father will not pay unless we go to court and he is forced to pay.”

Louisa, whose name has been changed, has about $1,000 in her checking account and she’s expecting a pension from her education job worth 67 percent of her top three years’ salary at age 66. Louisa started her career in the education field, then left for 10 years. When she returned, she decided to “buy back” the pension accrual time she lost. She has been paying $513 a month into the system for another three years. At age 66, she’ll also receive lifetime health benefits.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help Louisa make the most of her money.

“Like many single parents, Louisa is worrying about paying for her child’s education and retirement,” Pallitto says. “Louisa works in the education field and is reminded every day about the escalating college costs she will be facing for her child in 5 years.”

Luckily, Pallitto says, her pension plus Social Security benefits at age 66 appear to be more than sufficient to maintain her current lifestyle during retirement, adjusted for inflation.

Although her retirement may be secure, Pallitto says her current income plus child support does not appear to be sufficient to meet her current lifestyle. Her expenditures are about the same as her income, which explains why she has been unable to save an emergency fund or accumulate a savings account. It also explains how her debt has increased over the years, Pallitto said.

About two years ago, Louisa refinanced her home to consolidate her credit card and other debts. Now, with the declining real estate market and strict lending requirements, she is stuck with a 20-year mortgage with an interest rate of 7.125 percent, and she’s unable to refinance to lower her rate.

“Therefore, it is even more important for her to get a better understanding of her spending and live within a balanced budget,” Pallitto says.

He strongly suggests Louisa set up her home finances on Quicken or Microsoft Money to accurately account for her budget.

Louisa sets aside $600 a month to pay the bills during her time off in the summer, but that’s not enough. Pallitto says Louisa should establish a more significant emergency fund or short-term savings account before she focuses on saving for college.

Currently, she sets aside $600 per month and her income tax refund to cover her summer expenditures. Pallitto recommends she adjust her withholding to take home more money — and get a smaller refund — so she can bump up her monthly savings to $1,000. She also needs to go through her expenses closely and see if she can save another $200 per month from her spending. Pallitto says it won’t be easy.

“It will be difficult to accumulate a comfortable savings until her car is paid off in two years and her pension buyback is paid off in three years,” he says. “At that time, she will have an extra $900 per month to add to her savings account.”

Because of the nature of Louisa’s work, her child has seen many college campuses and wants to go to a local New Jersey college, which Pallitto says should help keep the costs down. In addition, Louisa’s ex-husband will be responsible for a portion of the cost — something Louisa should fight for, should it become necessary.

To help with college savings when the time comes, Pallitto recommends Louisa consider the pros and cons of the New Jersey 529 College Savings Plan administered by Franklin Templeton. The plan offers New Jerseyans a one-time scholarship of up to $1,500 for the first semester at any New Jersey school, subject to minimum participation and contribution requirements. That could be a big help for Louisa’s college savings.