Get With The Plan: May 30, 2010

53010Al and Annie are worried about the dual goals of retirement and college educations for their two children, ages 17 and 15. They know there are loans for college, but they hope to rein in expenses and have savings for their golden years.

“We hope to be mortgage-free and have some investments to live on,” said Annie. Al and Annie, whose names have been changed, have set aside $120,524 in 401(k) plans, $90,741 in IRAs, $139,574 in annuities, $41,841 in mutual funds and $500 in a checking account.

The Star-Ledger tapped Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help the couple think through their goals of college, retirement and a debt-free life.

“As a couple, they are approaching a critical time in their lives — they have large competing goals,” D’Agostini said. “Retirement is rapidly approaching, while college costs for their two teenage children are on the horizon.”

The couple hope to retire at 65 with enough money to enjoy the next chapter of their lives, while being able to give their children the gift of college educations.

D’Agostini said they have done a good job of saving for retirement, but have largely ignored one of the largest expenses a family incurs: college tuition. Their children are 17 and 15, a senior and a sophomore. They hope to fund a two- to four-year community college education for their 15-year-old, and they’d like to provide their older child the opportunity to choose any college.

“To achieve this goal, they need to divert some of their current mutual fund savings to 529 plans for them,” D’Agostini said. “The 529 plan will allow tax-free growth and distribution for college tuition and related expenses.”

D’Agostini took a magnifying glass to the couple’s expenses and, after fully funding Al’s 401(k), they still have sufficient income to fund their college plan at the level of nearly $7,000 per year.

“With some belt-tightening by cutting some discretionary spending, they will be able to fund even more to this goal,” she said. “It might be a goal to save for at least a third of the costs, fund another third from current income and look to round out the payments from grants, loans and scholarships.”

The 529 plans provide a unique exception to gifting rules, allowing for “super funding” of the accounts. Each parent can gift five years of contributions to the 529 plan in the first year, which means a one-time gift of $65,000 per parent. They would not be able to gift again to that child without using up some of their lifetime gifting until year five, D’Agostini said.

To fully fund $50,000 a year for four years for their older child, and another $15,000 a year for four years for their 15-year-old, they’d need to invest a lump sum of nearly $270,000 or a monthly savings of $7,500, Di’Agostini said.

“Since this is not achievable, it would be good to divert some mutual fund accounts to a 529 plan, and put any excess monies to this goal,” she said.

D’Agostini says the couple’s retirement outlook is better. Based on their current savings rate, Social Security and a small pension for Al, retirement at age 65 should be a secure one.

But they’re not out of the woods because both Al and Annie are underinsured, she says. She recommends they look for 10-year term policies that would cover their debts (mortgage, home equity loan and car loans) as well as to perhaps cover the cost of college for the two children, provide sufficient income to the surviving spouse and pay for any final expenses.

“The cost of life insurance dropped recently due to the changes in mortality for men and women, as we are all projected to live longer.” D’Agostini said. “This means that this expense will be reasonable, and that the cost of not having it may be quite significant if one of them should pass at an early age. This will give them the security that they need until the children are emancipated.”

Lastly, as soon as they can afford it, D’Agostini recommends they look to purchase long-term care insurance. Al may have a plan offered through his employer, which is a good thing; the underwriting is generally less onerous, as they use group underwriting, and the premiums are generally more affordable.

“With the local costs of long-term care exceeding $90,000 a year for nursing homes in the state and $70,000 a year for assisted living facilities, it is a wise idea to fund this to avoid an eventual difficulty down the road.”