Get With The Plan: May 4, 2008

Hanna and Milo are entering a new phase of their life together, and it’s resulted in a lot of questions about their finances. They’ve just had twins.

‘‘We have tried very hard to be smart about money, but doubling the size of our family has surely made us feel less confident,’’ says Hanna, 37.

They’re wondering if they should maintain their primary and vacation home mortgages, or pay off one of them. They also want to figure out how to finance college educations, pay for day care and still retire at age 60.

Hanna and Milo, whose names have been changed, have so far saved $399,146 in their 401(k) plans, $142,978 in IRAs, $251,758 in mutual funds, $49,000 in a certificate of deposit, $42,000 in savings and $8,000 in checking.

The Star-Ledger tapped Douglas Duerr, a certified financial planner and certified public accountant/personal financial specialist with Duerr & Duerr in Montville, to help the couple tackle the money changes parenthood brings.

‘‘Their portfolio of assets is one which most 60-year-olds would be proud of, and they have accomplished this prior to either one of them turning 40,’’ Duerr says.

Hanna and Milo have done an excellent job saving in both of their retirement plans, as well as in brokerage accounts and savings accounts, Duerr says. At the same time, they have been paying additional principal pay- ments on both their primary residence and vacation home mortgages. Duerr says even though they have done an admirable job of amassing assets and minimizing debt, there are several things they need to do to solidify their financial position.

‘‘Their spending habits currently allow them to save approximately $45,000 a year after maxing out in their 401(k) plans, Duerr says. But those savings are likely to be significantly lowered as some of the extra funds will be used toward the new expenses related to having a family.

One of their goals is to set aside enough funds to pay for each child’s college education at a state school. Based upon the current average cost of a in-state public college, adjusted annually for a 6.5 percent increase in costs, Hanna and Milo need to save $320 per month. Duerr says this assumes the investments earn a return of 8 percent and they reinvest all dividends.

‘‘By doing this, they will amass approximately $200,000 in 18 years,’’ he says. ‘‘The best way to achieve these goals is to start saving in a 529 savings plan.’’

Duerr says by using a 529 plan, all of the earnings, if used for higher education costs, will be tax-free upon distribution. Given the couple’s track record for saving, this should be an easily achievable goal, he says.

The couple also would like to retire by age 60. Duerr says, given their savings in their retirement plans and personal investments, they should be in good shape. If they continue to save the maximum amounts allowed in their retirement plans and if they save just half of what that have previously done outside of those plans — due to their newly increased expenses — they could save almost $6.5 million by the time they are 60, Duerr says. This assumes they will achieve an average 8 percent rate of return prior to retirement.

Duerr thinks they’ll do even better, in part because both of their mortgages will be paid off by the time they retire. Without the mortgage expense, their income needs in retirement will drop considerably. This additional disposable income can then be used for additional hobbies and travel in retirement, he says.

One essential thing the couple needs is to draw up a will and establish a guardian for the kids. Duerr suggests they also establish a trust in case Hanna and Milo die before their kids are fully grown. Additionally, Hanna and Milo need to name a trustee who would manage the money in such a trust.

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