Get With The Plan: November 16, 2008

Fern and Daryl are worried debt is slowing them down. In addition to their mortgage, they have a large home-equity loan and — ouch!! — $22,000 in credit card debt.

‘‘We’d like to reduce our debt to free up money to help pay for college,’’ Fern says. ‘‘If we could do some additional saving for both college and just regular savings, that would be a plus.’’

The couple, whose names have been changed, have saved $14,000 for that important college goal. Their other assets: $7,200 in checking and savings accounts, $10,000 in certificates of deposit, $273,000 in 401(k) plans and $600 in an IRA. The couple, both age 41, also have pensions that should be worth a lump sum of $825,000 in 20 years.

The Star-Ledger asked James Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to help the couple balance their big goals with their big debt.

‘‘There are two good notes related to debt, and we don’t hear that too much these days,’’ Marchesi says. ‘‘Their credit card debt should be paid off in under three years, freeing up more cash, and the primary residence mortgage should be paid off when both Fern and Daryl retire, and possibly sooner if they develop a program to make periodic additional payments.’’

The debt situation could get better, Marchesi says, if the couple has a sterling credit rating. He says they could restructure their high fixed-rate home-equity loan into a prime-based loan. With the economic stabilization plan getting some legs under it, banks will be looking to make quality loans, he says.

In the meantime, Marchesi says they need a program that directs appropriate asset levels to goal-based accounts, and a system that quantifies the process: a financial planning framework.

For college, Fern and Daryl want to afford four years of room and board for their two children, ages 14 and 11. Marchesi says they’re running out of time to save.

With the bulk of colleges ranging from $14,000 to $35,000 annually, Marchesi says the couple would have to save approximately $1,100 per month to reach the low- end of the range, and about $2,900 per month for the higher-priced schools. To save more, the couple should cut back parts of the family budget, such as gifts and clothing costs. They should put their savings in 529 accounts.

The couple have more than 20 years until their desired retirement date, and they’re doing a good job of contributing to their employer-sponsored retirement accounts. Their retirement savings are invested in target-date funds, which will automatically reallocate assets more conservatively as retirement nears. Still, Marchesi says, they are not bulletproof, with most 2015 target retirement funds down around 25 percent year-to-date.

Marchesi says retirement projections have changed dramatically over the past 10 years. In the late 1990s, when account values were soaring, with annual returns of 15 percent to 25 percent seemingly the norm, pre-retirees (retirement minus five to 10 years) used projections that, in retrospect, were way too aggressive. But that doesn’t mean today’s pre-retirees, with depressed account values, can put their money in the mattress and ignore long-term purchasing power risk (largely driven by inflation and tax rates), he says.

Fern and Daryl need to start building realistic retirement projections, so they can manage their investments to help them maintain desired spending levels when they retire.

The couple hopes to reduce expenses when they retire, but their desire to financially help their kids could jeopardize their retirement funds.

‘‘With children come weddings, first homes, business ventures, loans, graduate school and many other possibilities for loving parents to ‘help out’ — increasing costs,’’ Marchesi says.

These goals are separate from their retirement needs and should be funded separately, Marchesi says. They should open separate accounts on their road to retirement in which they direct certain monies on a regular basis so they can financially help their kids.

They’ll need to make sure cash flow directed to retirement accounts does not become compromised by non-retirement goal savings and investments, Marchesi says.

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