Get With The Plan: September 21, 2008

Pete, 41, and Cindy, 38, share the same goals as many young families. They would like to save for their 1-year-old child’s future college education, they’re considering the financial implications of having another child and they’re also concerned about retirement.

‘‘We’d like retirement for both of us in 15 to 20 years and to start a college savings program for our child,’’ says Pete. ‘‘Items we’re pondering that might affect our savings potential are that we may want to have another child and Cindy may want to be a stay-at-home mom in a few years.’’

The Union County couple, whose names have been changed, have set aside $36,323 in 401(k) plans, $255,000 in IRAs, $10,821 in a brokerage account, $65,000 in a money market and $35,000 in checking/savings. They haven’t started saving for college yet.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help the couple assess their situation.

‘‘Their current monthly expenditures are about $7,200, or $86,500 per year, in after-tax dollars,’’ Pallitto says. ‘‘As you can see, that is just short of Pete’s annual salary before taxes.’’

The household will need some income from Cindy to make the plan work, Pallitto says. He recommends they explore options where Cindy can work part time, hopefully at her current employer, or look at other options. He says if she can earn at least $20,000 to $25,000, that would be the minimum needed to make their plan work.

Pallitto says in order to address their concerns, he tried to look at the minimum or worst-case scenario from a financial aspect, not necessarily from a quality of life aspect.

‘‘I can define what they need to do on the financial front to reach their goals, but they will have to determine how it will fit into their family needs,’’ he says. ‘‘Successful financial plans are not static, they are an ever-changing evolution. The plan is merely a map to chart the course.’’

Looking at retirement, Pallitto says they are putting more than $12,000 into their 401(k) accounts — 10 percent of his salary and 5 percent of her salary.

‘‘That level of savings for retirement would be great, but overkill, so I tried to figure out the lowest amount they can save for retirement,’’ he says.

If their retirement assets grow at a rate of 8 percent over the next 20 years and they only contribute $600 per month, they will be able to withdraw $12,000 per month for 40 years starting at age 61, and still have a balance of over $1 million after 40 years.

Pallitto says by reducing the 401(k) contribution, they can use that money for their child’s 529 plan.

For their child’s education, if we assume they need $35,000 a year for college in today’s dollars with a 5 percent inflation rate, they will need to deposit $5,000 now and deposit $600 per month into a monthly savings account. Pallitto recommends they use a 529 plan. If they have a second child, he suggests they transfer $5,000 from their money market account and add another $600 per month to their monthly savings account.

If Cindy decides to work part time instead of full time, some of the 529 plan funding could come from their day- care expenses.

Pallitto says they are paying an extra $100 per month toward their mortgage, but he thinks the money would be better spent for college savings or other savings. Although the extra principal would pay off their mortgage sooner, they could instead use it to facilitate their financial plan, he says.

The only weakness in their financial picture is their life insurance. Pete has a $750,000 term policy and Cindy just has an employer policy worth two times her salary. Pallitto says Cindy should get her own policy, because if she leaves work, she’ll be uninsured. He says she needs a term policy with a death benefit of at least $750,000, and Pete should add another $500,000 with a 10-year term policy.

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