Get With The Plan: November 1, 2009

11109Dan, Cathy and their 5-year-old son are a young family working to make the most of their finances. They recently refinanced their mortgage, have no credit card debt and are saving for retirement. Cathy is also pursuing a master’s degree, which will lead to a salary boost when completed. Their short-term outlook is comfortable, but they’re worried about long-term expenses.

“I want to make sure we are making the right long-term investments to be able to pay for our son’s college and cover our retirement costs comfortably,” says Dan, 36. “We would like to retire and be able to travel and have our medical expenses covered in case of a major medical issue.”

Dan and Cathy, whose names have been changed for publication, have set aside $87,015 in 401(k)s, $19,000 in college savings, $15,200 in money markets, $5,310 in savings and $8,163 in checking accounts. Cathy can also expect a pension when she retires, which will be calculated at 60 percent of the average of her last three years’ salary if she works 35 years.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to gaze into his calculator-powered crystal ball for Dan and Cathy.

“Unlike most couples in their mid-30s, they are living within their means and saving for their long-term goals,” Duerr says.

The couple lives within a budget based on their base salaries. Dan can earn roughly 30 to 40 percent of his annual compensation in commissions and bonuses. The couple understands these amounts change annually, so they do not count on them for their normal recurring expenses. That’s a smart strategy, so in a year when his commissions are lower, it may not affect their day-to-day living.

One of their major concerns is saving for their son’s college tuition. They’d like to have enough to pay in full for a state school. Duerr said the current cost of a state school, including room and board, is roughly $23,000 per year. Assuming the costs increase annually by 3.65 percent, they’ll need to save a total of about $221,000.

Dan and Cathy have $19,000 saved for college and they planned to add $5,000 a year to the account. Duerr says that may not be enough to fully fund college.

“Assuming they receive a 5 percent return on their investments, they may save approximately $151,00 and be able to fund 68 percent of the cost,” Duerr says.

They have several options. They could increase their annual contributions by $2,748 or set aside more money when Dan receives a bonus or commission payment. Both options would help them achieve their overall goal, Duerr says.

“I would also suggest that they consider to have an amount deposited monthly into this college savings account,” Duerr says. “By doing this monthly they may be able to dollar-cost-average their investments and take advantage of market fluctuations. This would not be possible by only making one large annual contribution.”

Dan and Cathy are also concerned about retirement. They’re currently saving $1,300 a month in their employer plans, which could grow to $1.48 million over the next 30 years assuming a 5 percent rate of return. Increasing contributions to $1,500 a month would give them an estimated $1.647 million. An even higher contribution of $1,700 could give them over $1.8 million.

“They currently have an additional $600 in disposable income since their son is now in kindergarten, so I would suggest they use some of these funds to increase their retirement savings,” Duerr says.

He also recommends they continue to increase their contributions each year as their salaries increase, which could significantly increase the total amount they have for retirement.

Dan and Cathy are risk-averse investors, but if they get too conservative they could miss out on lots of growth potential.

“They have approximately 30 years before they need the funds so they may want to think about taking on a little bit more risk now while they are young,” Duerr says. “They should also look at their overall investment allocation and determine if it meets their overall risk tolerance every few years.”