Get With The Plan: September 1, 2013

9113Frankie and Dorothy are in their late 40s, and they know they’re a little late in ramping up college savings. Their twin 16-year-olds have their eyes on the Ivy League, but their parents worry about the cost.

“We have no idea how we will afford it, yet we don’t want to say no to the kids,” says Frankie, 49. “We need to know more about borrowing options and scholarships.”

Dorothy, a stay-at-home mom, is considering going back to work. The couple would bank her salary for college costs, but they’re worried the additional income will hurt their chances for financial aid.

When they retire, the couple would sell their home and buy one at the Shore — if they can afford it.

The couple, whose names have been changed, have saved $220,000 in 401(k) plans, $219,800 in IRAs, $1,245 in savings and $500 in checking. They also have 529 plans worth $26,500, and a money market that’s earmarked for college worth $36,900.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, to help Frankie and Dorothy determine their ability to pay for college and meet all their other goals.

“I don’t see any way that they will be able to do it all. Now they have to prioritize,” Garutti says. “These people are living pretty close to break-even based on their estimated cash flow.”

Garutti says it can be hard to juggle future retirement and high college costs, so the couple will have to make some tough decisions.

He says the first place the couple should look is their expenses because many families spend more than they realize.

“It is hard enough to estimate expenses for a couple but with twin teenagers, I am sure a lot of expenses also fall through the cracks, especially when I see revolving credit card debt.”

It’s important for Frankie and Dorothy to be realistic about their financial situation, otherwise they will be greatly disappointed with the results.

“With the assets they have saved, the potential college costs they face, their desire to live in a similarly priced house near the ocean and their current ages of 49 and 46 and a desire to retire ‘as soon as possible,’ something is going to have to give,” he says.

More income will help, and Dorothy is thinking about returning to work and earning an estimated $45,000 a year — but they are fearful that the income will hurt financial aid.

“I am more fearful of their long-term retirement effect,” he says. “Kids can get student loans. No one is going to give mom and dad a retirement loan when they no longer want to — or are able to — work anymore.”

Garutti says it may be a tough pill to swallow, but fully paying for their children’s education is probably not an option, nor a recommendation.

He recommends they meet with a true financial aid specialist as soon as possible. He warns that they avoid a registered adviser who is going to recommend that they put current savings into an annuity or insurance policy to shelter assets from the FAFSA form.

“A true college planner will do more than assist students in the aid process; they can also direct them to schools that will provide additional aid, and/or schools that best meet their educational goals,” he says.

While 401(k) and IRA assets can be used for education purposes, Garutti says he highly discourages it.

“That money is dedicated for retirement and, if depleted for education purposes, it may be impossible to build back in time for when the parents need it,” he says.

Frankie says he recently dropped his 401(k) contributions from $17,500 to somewhere between $5,400 and $6,000 annually. Garutti says that may have seemed like a smart idea if they were trying to find extra cash for college savings, but it opens up a floodgate of other problems.

“In making this switch he also increased his taxable income significantly because he no longer gets the federal and New Jersey reduction in income (for the contributions),” he says. “He better check his withholdings to make sure he won’t be subject to owing taxes as a result.”

Looking at retirement savings, Garutti says Frankie has his assets split between a U.S. index fund and an international fund. If there are other options that can be used for better diversification, they should think about making changes. If they need help with investment selections, they should consider hiring a fee-based financial adviser who can offer a review of their allocation.

Garutti is also concerned about the $36,900 the couple has in a money market, which Frankie and Dorothy say they plan to use for college. That won’t leave much, if anything, for emergency cash reserves should Frankie lose his job.

Garutti also says the couple should do something about their credit card debt. They have one card with a $4,300 balance and a 15.99 percent interest rate, and a second card with $10,900 with zero percent interest for another six months.

He recommends they consider paying off the debt with their money market account, or think about using their home equity line of credit instead.

Looking at retirement, Garutti says the couple does have a decent amount of home equity but they have 23 years of payments left on their mortgage. They want to retire as soon as they can, but in addition to college, they’re considering buying cars for their children.

“Where is the money going to come from?” he says. “They sound like very caring and loving parents, but unfortunately some of their generous and loving desires may cause serious financial problems for them down the road.”

“They need to take a frank look at their financial situation,” Garutti says. “Decisions they make in the near future may significantly alter their retirement lives.”