Another plan for the Jones family

COLLEGE SAVING The couple could refinance their house and take out a new 30-year fixed-rate mortgage at 5% or less and devote the $500-plus monthly savings to make up for the shortfall in Jenna’s college fund. However, we recommend speaking to the college financial aid office about Stafford and Plus loans from Sallie Mae, as well as additional options. They should continue to fund her 529 plan while she is in college. Because James still has three years to go before starting college, they should also continue funding his 529 plan. ELDERLY PARENT If Jenny’s father moves in with them, they could get the $75,000 to build a first-floor addition by refinancing and withdrawing some of the built-up equity in their house. Jenny’s father could use his Social Security and pension to pay the difference in the mortgage as well as the cost of someone to take care of him while Jenny and John are working. VACATION HOME John and Jenny would love to own this home, but until they work out what they are going to do with Jenny’s father and figure out how they are going to fund the balance of their children’s college education, committing to buy this on their own might be difficult. RETIREMENT Given their long time horizon and liquidity outside their retirement plans, their cash position should be decreased substantially, as cash’s value will be eroded by inflation over the next decade while they are preparing for retirement. They should decrease the cash position to the level needed to fund an emergency. For example, if they determine that they would need $100,000 to fund six months’ living expenses — a realistic level given their income, tax bracket and other factors — the couple should lower the cash position in their retirement plans to 10%. This would allow a loan to be taken from a risk-free asset if their money market fund were to be fully exhausted. Given their age, time horizon and risk tolerance, I would split the remaining balance equally between fixed income and equities. This would provide a good balance between preservation of capital and maintaining purchasing power. A good rule of thumb during retirement in your 60s is not to draw down more than 5% of your liquid portfolio a year. Take out more, and you risk eating into your principal during times of heavy short-term volatility. It is hard to know exactly when John and Jenny will be able to retire as so many factors go into the equation. With all their obligations and the need to save significantly more for retirement, a realistic goal for full retirement would be between 65 and 67. LONG-TERM-CARE INSURANCE Because Jenny’s father’s health is failing, they both wanted to know about LTC insurance. If they don’t buy LTC insurance now, there are risks. Currently, they are both extremely healthy; in five or 10 years, that may change. Costs of insurance continuously increase, and policies change, though the changes can be for the better. Right now, they are at an extremely expensive time in their lives. They have one child starting college in the fall and another following shortly thereafter. They still have to pay life insurance and disability insurance costs. They have at least one parent for whom they will be caring. We recommend that we review LTC insurance again before John’s 55th birthday. SAVING To answer the question of whether they are saving enough, they need to do some homework. Over the next month they should each carry a little notebook and write down everything that they buy with cash. It is amazing how much money from an ATM machine seems to disappear and is carelessly spent. Also, they should go through a full year of expenses and do a cash flow analysis. If they pay most of their bills online, it won’t be too difficult. This way, we can see if there is any extra money available for saving and determine if there is anything that they wish to cut out. Also, when we look at what they are spending now, we can get a better idea of what they might want to spend during retirement. LIFE INSURANCE Although the Joneses both have life insurance policies, they need more coverage. Since their retirement and children’s college education are not completely funded, there is still a risk if the family lost John’s $175,000 income. John has a $1 million term policy and life insurance through his employer that would pay a death benefit equal to three times his salary. We decided he still needed an additional $500,000, 10-year term policy. If the Joneses don’t have disability insurance, they should both get it. They might be able to acquire it through their employers.