Get With The Plan: November 30, 2008

Claire and John, like most families, were rattled when the stock market took a dive this fall. But they have a long-term outlook, and they know they’ll need exposure to equities to reach their long-term goals.

‘‘Our two main goals are to fund a large portion of our child’s college and retire by age 60,’’ John says.

The couple, whose names have been changed, have saved $192,000 in John’s employer retirement plan, $16,000 in IRAs, $65,880 in an annuity, $34,000 in taxable mutual funds, $21,000 in bonds, $10,600 in Certificates of Deposit and $16,000 in checking. For their child’s edu- cation, they’ve set aside $18,300 in a 529 plan. John also expects a pension worth about $2,500 a month when he leaves work at age 60.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to get the couple on track to meet their goals.

‘‘Based on their current spending with a 3 percent inflation rate, it looks like they would need about $8,350 per month to cover their expenses at age 60,’’ Pallitto says. ‘‘However, since they will be retired and probably spending more, I will use $10,000 per month for expenses.’’

Pallitto says John is adding $15,000 a year to his employer retirement plan. To be more conservative, Pallitto excluded the employer match and estimated an annual rate of return of 8 percent. The account would then be worth about $1.1 million at age 60.

‘‘If you assume that from age 60, the portfolio earns 5 percent a year, he can take out $5,000 per month dur- ing retirement without depleting the account,’’ Pallitto says. That would bring the couple’s retirement income to $7,500 (including the pension but excluding Social Security, which would come a few years down the line).

Claire works part time, so she can take advantage of self-employed retirement accounts. The majority of their expenses are covered by John’s salary, Pallitto says, so Claire can save most of her income.

Pallitto says she could open a Solo 401(k) plan to shelter most of her earnings from taxes. He prefers that option over an IRA, which would allow her to defer up to $5,000 and may be limited by IRS rules, or a SEP- IRA, which would allow her to defer up to 25 percent of her profits. A Solo 401(k) would allow her to defer $15,000 as an employee-deferral before applying the 25 percent rule. If she funds a Solo 401(k) with $15,000 per year with an 18 percent return over the next 15 years, she’d have nearly $700,000. From that account, she could spend $3,000 per month without depleting the account, Pallitto says.

That would bring their income at age 60 to $10,500 — more than they probably need.

For college, Pallitto thinks today is a great funding time for the couple. He recommends they move $5,000 from their checking account into the 529 plan as soon as possible, and continue to fund $500 per month thereafter. The move would give them about $110,000 by the time their child is ready for college.

‘‘It may not fund the entire amount for college but I would rather them increase their personal, non-retirement savings over the next eight years, too,’’ he says. ‘‘Overall, they are in much better shape then I think they realize.’’

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