29 Dec Parents worry about paying for college for kids, 17 and 14
Rudy and Charlotte, both 47, have two major expenses to consider: how to fund college for their two teens, a high school junior and a high school freshman.
They haven’t saved much specifically for college, but they’ve accumulated a nice nest egg for retirement.
Charlotte wants to stop working at age 60, but Rudy is willing to wait until age 65. At that time, he says, he may not be completely ready to step out of the work force.
“I will probably work part-time through retirement, but my wife won’t,” he said.
But first, the couple is concerned about how they will handle the soon-incoming college bills.
The couple has set aside $56,000 for college costs, but their retirement savings have been more robust. They have $455,300 in 401(k) plans, $389,300 in IRAs, $49,000 in a brokerage account, $25,000 in mutual funds, $61,000 in money markets and $2,000 in checking. To help with retirement, Rudy will receive a two pensions adding up to $61,000 when he stops working.
They’re also the part-owner of two investment properties, and their only debt is in mortgages.
Anthony Vignier, a certified financial planner and attorney with Vignier Investment Group in Kearny, put together all the pieces to look at the couple’s future prospects for NJMoneyHelp.com.
“They have done an excellent job of saving and investing for retirement. In addition, they have managed to keep their expenses at a reasonable level,” Vignier said. “They do not project significant increases in expenses in the future except for their imminent college costs, which is a concern.”
THE COLLEGE BOMB
To consider college costs, Vignier assumed the two kids, ages 17 and 14, will both attend and complete college in four years. He used state university tuition as a guide post for both children, which resulted in a potential cost of about $133,000 in total.
“They should save for the younger child through a 529 plan as this provides a tax-efficient way to invest,” Vignier says.
They’ve saved $56,000 for the older child, which includes money in a Uniform Transfer to Minor Act account (UTMA), a 529 plan and other investments.
More savings is needed, but there’s also a chance for other funding.
Vignier said next year, when the child in a high school senior, the couple should complete a FAFSA, or Free Application for Federal Student Aid, regardless of the family’s income. That’s because the FAFSA is what allows a student to apply for student loans and obtain grants and scholarships.
The form is available for submission in January of the student’s senior year.
“The quicker it is submitted, more of an opportunity exists to obtain assistance be it loans, grants or scholarships,” Vignier says. “Available financial aid assistance can decrease the longer you wait.”
He says it’s not a bad idea to consider using the assistance of an advisor who focuses on college planning because it can also be helpful to navigate the process.
They should learn more about positioning their finances to maximize financial aid.
Another key point, he says, is to have the student involved throughout the process so they can be made aware of and recognize the seriousness and financial implications of student debt — not just student loans, but credit cards, too.
“Student loan debt is at an all-time high and there are now many individuals in their late 30s who are still paying off massive student loan debt,” he says. “Now more than ever, picking a college that has reasonable tuition costs, solid course studies taught by an excellent faculty and making informed career choices is a paramount for anyone attending college.”
KNOW YOUR RISK PROFILE
Rudy and Charlotte categorize themselves as moderate to aggressive investors.
Vignier says the investment allocations in both their individual and qualified retirement accounts are mostly in stocks and stock funds, which is in line with an aggressive investment profile and not a moderate one.
He says they are invested exclusively in individual stocks and low-cost exchange-traded funds focusing primarily on small-cap companies, which are companies that are capitalized between $300 million and $2 billion. In contrast, a large-cap fund invests in companies that are capitalized more than $10 billion.
“Arguably, this couple can afford to be aggressive because they will have potential retirement income from Social Security and pensions, which should cover their projected expenses in retirement,” he says. “However, I question whether they are truly aggressive investors.”
Vignier says during the market correction of October 2014, Rudy and Charlotte were very concerned when their portfolio lost between 5 and 10 percent of its value.
“I suspect they that they may be slightly more conservative than what they think are,” he says. “I would suggest that they do a detailed self-assessment of their risk tolerance.”
He says they should also consider being less aggressive with their portfolio, and allocate at least 15 to 20 percent to cash reserves, income and value funds, and plus some short-term duration bond funds.
THE MISSING PIECES
This family has enough life insurance in place, and Rudy even has disability insurance.
But, they do not have any long-term care insurance — the missing piece of their financial situation.
Vignier says they should consider buying long-term care insurance as a strategy to preserve future wealth.
“Long-term care needs can potentially wipe out a significant portion of a family’s wealth,” he says. “The knock against most long-term care policies is that they are expensive and if you never have a need for it the money used to pay the premiums are lost.”
But, he says, there are long-term care policies that guarantee a return of premium when they’re fully paid up in the event an individual decides to cancel the policy. Some also include a death benefit for named beneficiaries for the amount of premiums paid.
Rudy and Charlotte have wills, but there are other documents they need, Vignier says.
They should establish a power of attorney, which would take effect in the event of disability, and a living will, appointing an agent to make health care decisions in the event of incapacity.
Then there are estate taxes to consider.
“While their estate at this point is not subject to federal estate taxes, it will be subject to New Jersey estate tax,” Vignier says. “One strategy to consider is a credit shelter trust, which can allow a couple to maximize $1.35 million in estate tax exemptions, as opposed to only a $675,000 exemption, which is the normal result if only a simple will is used.”
He recommends they meet with an estate planning attorney to work on a strategy for avoiding estate taxes, and to get the rest of the estate planning documents they need.
This story was first posted in December 2014.
Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email .Net Worth:
Assets:
- Checking: $2,000
- Money Market: $61,000
- IRAs: $389,300
- 401(k): $455,300
- Brokerage Account: $49,000
- Mutual Funds: $25,000
- College Savings: $56,000
- Primary Home: $350,000
- Investment Property, N.J.: $55,000
- Investment Property, Fla.: $115,000
- Personal Property: $25,000
- Autos: $40,000
Total Assets: $1,622,600
Liabilities:
- Mortgage: $8,500
- Mortgage/Florida Property: $86,000
- Mortgage/N.J. Property: $70,000
Total Liabilities: $164,500
Total Net Worth: $1,458,100
Budget:
Annual Income:
- Rudy Salary: $110,000
- Rudy side income: $100,000
- Charlotte Salary: $58,000
Monthly Expenses:
- Income Taxes: $3,758
- Housing: $1,700
- Other properties: $1,435
- Utilities: $835
- Food: $1,400
- Personal Care: $100
- Transportation: $550
- Medical: $360
- Insurance: $120
- Entertainment: $100
- Vacations: $400
- Charity: $100
- Gifts: $100