Financial Makeover: Making Over Randall

Randall wants to jump-start the planning process to become financially secure. His goals are to provide for his children’s education, as well as his and Debra’s retirement. He needs direction on where to start.

Congratulations Randall! There are not many 33-year-olds as focused as you are on getting your financial act together. At your age, jump-starting the financial planning process will make achieving your goals very realistic.

Goal One: College Savings

Let’s start with your goal to provide for your children’s college education. Your children are ages 5 and 3. This means you have a time horizon of 13 years for the 5-year-old and 15 years for the 3-year-old.

You’ll have both children in college at the same time for two years, so it is very important to start saving to fund these goals immediately. Today, a four-year private school’s tuition, room and board averages $25,000 per year. Therefore, if both of your scholars were in college today, you would require about $200,000 to provide each child with a four-year college education.

Using a 6 percent inflation factor for college tuition, room and board (that’s the actual cost of inflation for higher education the past 10 years), an 8 percent return on your college savings investment account, we have estimated that to provide for your children’s college education, you will need to save about $1,100 monthly for the next 19 years.

Why 19 years? The 3-year-old will start college in 15 years but will be in college for four years. So you continue to save $1,100 per month while the younger child attends college. Don’t forget, by the way, that tuition at state schools is less expensive than private schools, and that scholarships are a possibility.

If you can’t save $1,100 per month, save something. The point is to save regularly and be disciplined about your saving.

Goal Two: Retirement Savings

Your second goal is to provide for your retirement. Your wife has what you call a deferred compensation plan. This type of plan is sometimes referred to as a 457 deferred compensation plan provided to municipal workers.

If I’m right and this is a 457 plan, you need to be aware that if the municipality that provides this plan goes bankrupt, your wife’s portion in the plan is subject to creditor claims.

You don’t own these savings until they are distributed from the plan to you. The proceeds are fully taxed when distributed and cannot be rolled over to an IRA because they are not coming from a qualified pension plan.

You currently do not have any qualified savings plans at work. You should talk to the management of your company and ask them to install a 401(k) plan for the employees.

You also mentioned that you have a 6.5 percent fixed life insurance annuity you are counting on as part of your retirement assets. Since we don’t know many details about your retirement goals, here is some basic advice to get you started. We are going to assume you have at least a 30-year time horizon for retirement.

Reviewing the Basics

First fund a Roth IRA every year for you and Debra. Right now that means saving $4,000 per year in Roths. There is talk of increasing the limit to $5,000 from $2,000 per year so this may be helpful in the future.

If you are comfortable with the finances of the municipality Debra works for, you can continue to save in the 457 plan. However, do the Roth IRA savings first.

Now let’s discuss your tolerance for risk. Because you have a fixed annuity life insurance policy, we are assuming you have a conservative tolerance for risk. With a 15-year time horizon for college and 30 years for retirement, our advice would be to educate yourself about market risk and long-term investments.

You need to develop fortitude to tolerate higher levels of risk if you expect to achieve your goals. A moderate or moderately aggressive portfolio will help you reach your goals. While short-term results may sometimes be gut-wrenching, an educated investor knows not to panic.

The Game Plan

So here is the game plan:

Save about $1,100 per month for college education. We would recommend a no-load mutual funds, such as TIAA/CREF Growth Equity fund or Artisan Mid Cap Fund.

Save $2,000 per year ($4,000 per couple) in a Roth IRA. Consider using the following no-load funds: Excelsior Value and Restructuring fund, Harbor Capital Appreciation fund, Artisan Mid Cap, Artisan International fund and Harbor Bond fund.

Continue funding Debra’s 457 deferred compensation plan, if you are comfortable with municipality’s financial situation, but not at the expense of other goals. A clear decision has to be made between college and retirement savings and 457 contributions. Get your company to install a 401(k) plan and max out your contribution to the plan or find employment that does provide retirement plan benefits. Do what’s called a 1035 exchange of your fixed annuity for a TIAA/CREF Variable Annuity. This will allow you to get market-like returns and use this money for retirement. Buy at least a $1 million term life insurance policy for you and at least $500,000 term life policy for Debra. At your ages these will be very inexpensive and give your family some basic coverage. Each of you should own the other’s policy so it won’t be included in your estate. As far as your mortgage is concerned, if you can make an extra payment now and then, do so. But saving for college and retirement are more immediate concerns. Last, but not least, you and Debra should have wills, health proxies and durable powers of attorney to ensure your estate is distributed properly and guardians are appointed for the children.

Guest columnist Ronald W. Rogé, MS, CFP is president of the fee-only Wealth Management firm R. W. Rogé & Company, Inc. in Bohemia, NY. Worth Magazine has continuously selected him as one of America’s best financial advisors. You can visit his website at http://www.rwroge.com.