Get With The Plan: May 19, 2013

51913Malcolm and Jessie, in their late 40s, have put the financial needs of their children in front of their own.

They want to pay for private high school for their two children, 16 and 13, and they also want to take care of half of the college costs — all without draining their savings.

“We would rather not take out loans if we didn’t have to as we feel we have very low debt and are proud of that fact,” says Malcolm, 49. “We know that college is right around the corner, so the issue of paying for education will be ongoing.”

He and Jessie want for them, and their children, to come through the next six to eight years without being saddled with education debt.

The couple would like to retire someday, but they say they’re ready to work past their full retirement age — but because they want to, not because they need to.

Malcolm and Jessie, whose names have been changed, have saved $200,000 in 401(k) plans, $179,000 in IRAs, $202,000 in a brokerage account, $91,000 in mutual funds, $67,500 in money markets, $17,900 in savings and $4,800 in checking. They also have $64,000 earmarked for college costs.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with financial planner with U.S. Financial Advisors in Montville, to help Malcolm and Jessie prioritize their many financial goals.

“While they do a good job of living within their means and saving for their future needs, they do have concerns that they will be able to meet their desired goals,” Duerr says.

The couple want to pay for half of their kids’ college expenses, and while they want the kids to have their hands in the cost, they don’t want them to be overloaded with student loans.

“Their intent is to help pay for approximately half of the college costs for their children,” he says. “They fully expect their children to shoulder some of the costs of college and they also do not want to go into debt to pay for college, especially as retirement is nearing.”

Malcolm and Jessie expect the cost of tuition will be around $50,000 to $60,000 a year in total based on the schools they believe the kids would like to attend.

Based on their current college savings accounts, their savings will not cover half of this projected cost, Duerr says. In addition, they’re paying about $30,000 a year for their 16-year-old, but they won’t have this cost for the 13-year-old because that child was accepted into a tuition-free higher-level school.

Duerr recommends that for their younger child, the couple save as much as possible in the next four years.

“I realize this is easier said than done,” Duerr says. “However, they were intending to spend a significant amount annually for (the child) to attend high school.”

Because the high school will be free, Duerr says the funds that were earmarked for high school should be set aside and saved toward college, and be added to the $29,000 that’s already in a 529 plan for this child.

Even if they were only able to set aside $10,000 a year, Duerr says that would give the couple a total of $69,000, with zero growth, set aside for college.

“This would come close to the 50 percent amount they intended to pay for college expenses,” he says.

And for their older child, they can simply switch the annual cost of high school to go toward the child’s college costs.

“This annual expenditure, along with their savings, will more than cover the 50 percent,” Duerr says. “As a result they may also be able to set some additional funds aside for their second child’s college savings.”

Duerr took a look at the couple’s retirement savings.

Right now, Malcolm contributes 6 percent, or $5,100 a year, to his 401(k) plan, and Jessie saves 10 percent, or $12,300, to her plan.

Neither employer offers matching funds.

“If they were to continue to make these same contributions on a monthly basis for the next 10 years and obtained a 5 percent return, their retirement accounts would be worth approximately $854,000,” Duerr says. “If they both continued to work and contribute these amounts for 15 more years and obtained a 5 percent return, then the balances would be approximately $1.2 million.”

Duerr says while the couple would like to try and retire early, at this point, he says additional retirement contributions are essential.

In fact, Duerr says they should focus on increasing what they save, but that may not be a viable option until the children have graduated from college.

“Even at that point they still should have at least five years to contribute as much as possible to their retirement savings,” he says. “Early retirement is a wonderful dream to strive for, but given some of their other current goals, I am not sure how much of a reality that may be.”

They should keep saving and readdress the retirement goal in a few years.

Another key factor, Duerr says, is their true retirement budget and how much they can reasonably withdraw from their saving to ensure they do not run out of funds in retirement.

“As much as they may want to do this now, at the present time they need to think more about savings then retirement budgeting, as retirement is still some time away,” he says.

Staying out of debt and paying down what they owe is another major goal for Malcolm and Jessie.

They mostly have their first mortgage at 3.75 percent, and their second mortgage at 4 percent interest, and they’ve been adding an extra $200 per month on the primary mortgage to hopefully pay it down early.

Duerr says it’s a good idea, but not the right strategy.

“I would redirect that $200 toward their second mortgage to pay this off faster,” he says. “This loan has a higher interest rate so it would make sense to pay this off first.”

Once the second mortgage is paid, they can redirect the funds toward their first mortgage — or increasing their retirement savings.