Get With The Plan: September 5, 2010

9510Connor and Emily are in their late 50s and nearing retirement, or so they hope, but their savings concentration has been elsewhere: college bills.

“We have four years of college tuition and fees at about $53,000 a year,” Connor says.
The couple has saved $31,000 in college accounts and $148,200 in mutual funds earmarked for college expenses, plus $518,107 in 401(k) plans, $8,000 in IRAs and $6,000 in a checking account.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help this Union County couple balance their worries about paying for college with their other financial goals.

“Even though they have no definitive retirement date, they need to focus more on planning for this since it will occur in the near future,” Duerr says.

College costs will be approximately $212,000 over the next four years, he says, and they currently have $31,000 set aside in savings and $148,200 in mutual funds to help pay for this goal. For the shortfall, the couple plans to use current earnings, and if necessary, withdraw money from their other investments.

But the couple has other options, Duerr says.

“If this becomes too difficult, they should look into getting a loan to pay for the school expenses,” he says. “If they do this, they can always help their son pay back the loan after he finishes school.”

Dipping into savings to pay for college is a concern to Duerr, who worries they could completely drain their taxable accounts. If a financial emergency comes up, Duerr says they need to have available cash in an emergency fund.

“Most individuals feel comfortable with a reserve of three to six months of normal expenses and currently (this couple’s) savings would roughly cover three months,” Duerr says.

Connor and Emily are in the process of refinancing their primary mortgage and the mortgage on their vacation home. They are rolling both loans into one, which Duerr says will significantly decrease their monthly cash outlay on the mortgage.

“After the refinance, they will have an additional $559 per month,” Duerr says. “These additional funds can be used for the college costs or for additional savings for retirement.”

While the couple has done a good job keeping their debt in check, they need to focus a bit more on their retirement, Duerr says. They currently contribute less than 5 percent of their earnings to retirement savings plans. Connor does have a small pension, but the total annual benefit will only cover a little more than 15 percent of his current earnings. That means the couple’s retirement savings accounts will be key to funding their later years.

Duerr says because they are both older than 50, they can contribute a maximum of $16,500 to their 401(k) plans, plus the “catch-up” contribution of $5,500 for a total of $22,000 per year. Given the pending college bills and current expenses, Duerr says they won’t be able to max out their plans right now, but they need to do what they can to save more for retirement.

“Retirement can last between 25 and 30 years so the more funds they can save now, the better their retirement will be,” Duerr says. “While paying for college is critical, you can always get a loan, but you cannot get a loan for retirement.”

There may be an inheritance in the couple’s future — approximately $480,000 — but this is not guaranteed and the timetable is, of course, uncertain. They can’t count on this money to help with college costs, but if they do receive an inheritance, it could help down the road.

“If they do touch some of their current savings and investments to pay for their child’s tuition, they should have these inheritances to help supplement their retirement,” he says.

One additional area the couple should address is life insurance. Connor has $339,000 of coverage and Emily has $246,000. Both policies are through their employers, and coverage would be gone if they left or lost their jobs.

Duerr says given the pending college costs, they may want to consider increasing their life insurance to cover these expenses should they die prematurely.