|
New parents want certainty
|
 |
November 7, 2001: 8:42 a.m. ET
With a first baby on the way, Fred and Tara Roth want solid financial plans.
By Annelena Lobb
|
NEW YORK (CNNmoney) - With brand-new jobs and a baby on the way, Fred and Tara Roth, of St. Joseph, Mich., know that the near future is full of changes. That's why they want to make sure their feet are planted on solid financial ground.
Fred, 30, a regional manager for Whirlpool's Customer Interaction Division, and Tara, 25, a nurse manager in the cardiac unit at Lakeland Hospital, say everyone's opinion is different.
"Some people say we're saving too much, and other people say we save too little," Fred explained. "But I was raised to pay myself first and stash money away for a rainy day."
Before the little one arrives, Fred and Tara want to make sure they're socking away enough for a comfortable retirement and to send their child to college. They also want to make sure they have adequate life insurance coverage and enough in their emergency fund.
Home sweet home
According to Doug Flynn, a certified financial planner with Flynn Zito Financial Planning in Garden City, NY, their first order of business is to dump their PMI, or private mortgage insurance. The Roths owe about $138,000 on a home valued at $158,500. That means they have about 13 percent equity. Typically, if you have less than 20 percent equity, you pay PMI, or private mortgage insurance.
To get rid of PMI, Flynn recommends that Fred and Tara set a short-term goal of paying the remaining 7 percent as quickly as they can. "Their PMI payments could easily be an extra $100 a month, and the sooner they can get rid of that, the better," he said. That money can then go towards their other goals.
"The bank isn't going to notify you when you reach 20 percent equity, either. You have to keep track of it yourself. It's in their best interest to keep you paying PMI, of course, and it's a waste of money for you," Flynn added.
And baby makes three
Both members of this young couple recently changed jobs, making their combined annual income $124,000. The bump in pay will help them with their top priority: minimizing financial risk before the baby arrives.
| |
 A FINANCIAL SNAPSHOT
|
|
| |
|
Annual income: $124,000
Emergency savings: $3,000
401(k) savings: $45,000
Roth IRA savings: $2,500
Home value: $158,500
|
|
|
They currently have life insurance worth about three times their annual salaries. That's adequate coverage for a couple without kids, but they should consider boosting that coverage to between five and ten times their salaries once they have the baby, said CFP Scott Kahan, president of the Financial Asset Management Corporation in New York, NY. Kahan recommends they buy term insurance, because it will give them the most coverage per premium dollar.
The Roths also need to reconsider the size of their emergency fund. Right now, they have about $3,000 socked away in GM bonds. But with monthly expenses of $2,700, both Kahan and Flynn stress that they should aim to save about three to six months' worth of living expenses in their emergency fund.
"They need to think about how much time Tara plans to take off when the baby is born," Flynn said. "Many times, people expect to take a certain amount of time off and end up doing things differently after the child is born. Due to the uncertainty of what's coming up, they should aim to have three months' expenses, at a minimum, in their emergency fund."
Kahan also recommends they put some of the emergency money in something other than GM bonds. He suggests a money market fund, which offers immediate access and little to no risk.
Retirement planning
When it comes to financial planning, Fred's primary concern was whether he saved enough. The couple currently saves $1,700 a month toward their retirement. That's about 16.5 percent of their gross monthly income.
Both planners said the Roths should be congratulated on the amount they save. With their 401(k)s currently valued at $45,000, they're well on their way to a comfortable lifestyle in their golden years.
Currently, their 401(k)s are spread among Fidelity funds that invest in large-cap companies, mid-cap companies, large-cap growth stocks, over-the-counter and international stocks. Flynn recommends that they siphon some of their 401(k) money into value stocks.
"For their age bracket, they've got everything they need except for value stocks. Otherwise, I'm a big fan of their mix," Flynn said.
Assuming an achievable 8 percent return, if they were to continue adding $1,700 a month to their current savings of $45,000 for the next 30 years, Kahan calculated they would have about $2.8 million at retirement.
To minimize the possibility of missing this projected goal due to variations in yearly rates of return and inflation, they can save up to 20 percent of their salaries as they increase throughout the years.
| |
RECOMMENDATIONS
|
|
| |
|
Get rid of PMI as soon as they can
Add value stocks to retirement mix
Increase emergency savings
Increase life insurance coverage
Open a Section 529 account
|
|
|
Fred also has a Roth IRA, and Kahan recommends Tara open one. Distribution of any earnings becomes tax-free upon withdrawal, provided that holding and distribution requirements are met.
"Fred and Tara have youth on their sides," Kahan said. "Because the earnings are never taxed, young people who place highly appreciating assets in a Roth IRA stand to gain tremendous tax savings."
Fred's Roth IRA is in the Janus Fund, a tech-heavy fund. Flynn recommends Fred add some value stocks and diversify there as well.
"The Janus Fund he's got in his Roth is 36 percent tech - that's roughly two times the tech weighting of the S&P 500. Obviously, the S&P is only a guideline, but diversifying away from tech a little bit - they don't have to go crazy - is very important," Flynn said.
Saving for college
Fred and Tara don't know if they're having a boy or a girl, but they do know they want to send him or her to college one day - and education will be even more expensive in 2020 than it is today.
Both planners agree that once the baby is born, the couple should open a Section 529 account to save for college. Education costs are rising faster than the overall rate of inflation, making saving a challenge for many parents.
"The Roths are wise to begin education funding now, so they can save for a full 18 years and maximize the growth of their savings," Kahan said.
According to his calculations, the Roths will have to save about $5,900 a year at a 10 percent rate of return to fund 4 years of college for their child. That's assuming the annual cost of education, in today's dollars, is $25,000, and that the cost of an education will increase by 6 percent every year. According to Kahan's savings' figures, Fred and Tara will be able to save about $300,000 for 4 years of school.
A 529 plan is a desirable education savings vehicle because contributions are not subject to AGI limits and because most plans permit generous annual contributions. In these two respects, 529 plans are preferable to Education IRAs.
Like Education IRAs, earnings grow tax-deferred, and provided that lawmakers do not "sunset" the recent tax law changes, qualified distributions from 529 plans will be federal income-tax free when their child is ready to enter college in 2020.
"Your own state's plan works well, because Michigan offers its residents a state tax deduction for contributions," Kahan added. "Moreover, the Michigan plan, managed by TIAA-CREF, has low fees and expenses compared with other states' plans. You should select an aggressive investment option, given that you have a longer time horizon." 
|
|
|
|
|
|
|
