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Checks & Balances
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April 10, 2000: 10:03 a.m. ET
CNNfn.com's new column helps couple plan for their newborn's education
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - CNNfn.com introduces a new feature, Checks & Balances. People who want advice on handling their short-term and long-term financial and investing goals are invited to write in to the Web site, giving CNNfn.com details of their situation. For those selected, a panel of financial planners will suggest ways to meet those goals.
Ron and Olive Samuel, both age 32, are looking at a distinctly different future. They had their first child, Nadia, in December, and their most immediate financial objective is to start saving money for her college education. "We have $2,500 to invest for college," Olive writes. "Is it wise to open a college fund or a custodial account?"
But the couple has other concerns, too. Ron and Olive, would ultimately like to buy their own single-family home by 2003. They own a multifamily home, part of which they rent. Another child is likely in the offing, too. But that's "in the future," Olive said, and they're not sure of the time frame.
Together, they have an annual salary of around $120,000 from their jobs as public school teachers in Boston, where they live. But Olive has taken unpaid maternity leave to care for Nadia until September, when she plans to head back to work.
 They also make $1,650 a month, or a little under $20,000 a year, from rent on the multifamily home. With bills, a car payment and a mortgage, their expenses run a little over $4,000 a month.
That means that when Olive is working, the couple is able to set aside around $1,400 a month for savings. But while she's on leave, they're dipping into their savings a little.
Ultimately they'd like to open a 403 (b) account -- an account similar to a 401 (k) but for people who work for nonprofits -- through their employer, and set aside $300 a month into that.
They've saved $10,000 in the bank, half of it in a Certificate of Deposit, and a little over $7,000 in three growth mutual funds. They also have a pension from the city and $2,500 in savings bonds.
They also each have term life insurance policies that give them combined coverage of $160,000.
On the debt side, they owe $139,500 on their mortgage, $19,000 on their car loan, $14,000 on their credit cards -- at a low rate -- and $4,000 on college loans.
In the long run, after the second child, "I'd like to go back to work, but I'm not sure if it'll be part time or full time," Olive said. They think they'll stick at two kids and would like to pay as much of their college expenses as they possibly can.
Way off in the future is retirement, which they're shooting for by age 55. "We love to travel and want to continue doing that each summer," Olive said.
But for now, they're willing to accept a moderate-to-aggressive amount of risk to achieve some financial stability, particularly for Nadia's education.
"Our goals are to save enough money for our children's college education, buy a new home and not have to worry about money for retirement," Olive said.
The planners say:
"As is the case with many young couples, Ron and Olive have more goals than they are able to achieve at this point in their lives," said Richard Busillo, a certified financial planner and executive vice president of RTD Financial Advisors in Philadelphia. First they need to prioritize, he said.
Both Busillo and James Barnash, a CFP and vice president with Lincoln Financial Advisors in the Chicago suburb of Rosemont, Ill., were most concerned with an area Olive and Ron didn't stress in their planning -- the prospect that one or the other would become disabled or die.
Their term life insurance is "extremely inadequate," Barnash said. He recommended they buy a universal life insurance policy, a type of permanent life insurance, rather than the term policy they now have.
"They can increase or decrease the face amount, change premiums, even stop premiums -- if there is sufficient cash value -- and will have access to the cash for emergencies and eventually, college funding," Barnash said. And with Nadia to think of, the insurance offers peace of mind. "In the event that either Ron or Olive dies, life insurance provides immediate answers to maintaining lifestyles and fulfilling goals," he said.
Busillo recommended a similar course. Universal life policy would give them more flexibility in the long term, with more premiums and an "investment" or savings angle to the policy. But given Ron and Olive's more constrained budget now and ambitious goals, he suggests they buy additional term life insurance instead.
They should consider an additional $250,000 of "low-load" term life insurance, with at least a 20-year term and a 30-year term if they can get it, Busillo said. Some insurers do offer such long terms. Not that Busillo has anything against universal life insurance, he said, but he feels added term insurance frees up their budget now.
In any case, more insurance "is very important due to the fact that they have a young child and are considering a second."
Paying down debts comes before investing
The next area for Ron and Olive to devote their efforts is paying down debts, both planners agree. "I would suggest they pay down debt before doing any further saving or investing," Barnash advises. "Interest on consumer debt usually is a greater drain on goals than investments are a boon."
Although their credit card debt is at a low rate, Busillo cautioned that the Samuels need to make sure that the interest on the debt is lower than the interest they're earning on their bank account and CD.
"While it might feel good to have money in the bank, it does not make good economic sense to be paying more out in interest on debt than they can earn in interest income," he said.
The Samuels should consider a home equity loan to help them consolidate their debt, including their car loan, he added. The interest may well be lower, Busillo pointed out, and it is tax-deductible.
Retirement planning before college
Right now, plans for retirement and the 403 (b) account need to take a back seat, according to the experts. Once Olive returns to work, they should consider maximizing their 403 (b) contributions, Busillo said, which will save them taxes and help them build a retirement fund.
The retirement plans conflict with the more immediate goals of buying a home and setting aside money for Nadia's college. Many people forego saving for retirement until they have sorted out their children's educational needs, Barnash said. He thinks this is a mistake. Like Busillo, he thinks the Samuels need to maximize their contributions to their 403 (b) as soon as they can reasonably afford it.
Putting $300 a month aside is good but not enough -- at an average 10 percent growth per year, it would produce more than $300,000 by the time the Samuels are 55, Barnash calculates. Given their income and life expectancy, they're more likely to need in excess of $1.5 million in today's dollars "to come even close to a comfortable life style," he said.
Custodial accounts leave a little to be desired
Save for college education with any money that is left, he recommends. If they opt for universal life insurance, they should stop funding the policy when Nadia gets to college age and use that cash to pay for college. "They may even want to tap into the equity in their home," he said. But they should try not to dip into retirement savings to pay for their kids' education, he said.
Barnash said he doesn't like custodial accounts as a college savings vehicle. The money transfers to Nadia when she reaches 18 or 21, depending on state law, a potential problem if Nadia decides she'd much rather spend it on something other than college. There's also the prospect that a child might not go to college or might win scholarships that offset the cost. In that case, "you have no way of getting those funds back [from the child]," Barnash said.
Busillo agreed the tax benefits of a custodial account -- the first $1,400 is at a low tax bracket until Nadia reaches 14 -- are "offset by the risk that the child may not attend college [or will] use the money for other purposes." But Busillo does suggest that the Samuels establish an Educational IRA. It has a maximum contribution of $500 a year and depends on the Samuels maintaining an adjusted gross income under $150,000. Busillo recommends putting the money in an S&P 500 index fund, based on Nadia's age and the Samuels' moderately aggressive risk profile.
That won't meet Nadia's college needs on its own, so the Samuels should set aside any excess cash in their own accounts, the planners said. That way, they have the money on hand if necessary for Nadia's education but can use the money for retirement if Nadia, for some reason, doesn't need it.
One goal may make another hard to achieve
As far as buying a home goes, Barnash pointed out that the Samuels should strive to pay down 20 percent on the house they're eyeing, to avoid paying private mortgage insurance. Given their $250,000 to $350,000 price range, that means making a down payment of $50,000 to $70,000.
If the Samuels earn an average 8.5 percent on their mutual funds, bank savings, CD and other savings, plus the $1,400 they're setting aside each month, "they should be able to meet and exceed this goal," he said.
But both Busillo and Barnash agreed that not all of the Samuels' goals may be attainable at once. Besides the house, "they are also trying to save for college and retirement," Barnash noted. "Ron and Olive may need to change expectations on their goals or change priorities."
Busillo is even more blunt. "Some of their short-term goals [like the home in three years] will be at the expense of their long-term goals," like paying for Nadia's education and retiring at 55, he said. "The bottom line ... is for Ron and Olive to sit down and prioritize their goals and objectives."
Got questions about financial planning? Need some advice? CNNfn.com has organized a panel of outside experts to answer your questions. If you want to be considered for "Checks and Balances," where professional planners suggest ways you can manage your money, send us an e-mail at checksandbalances@cnnfn.com. Include information about your age, occupation, income and assets. Also, share with us any short-term and long-term financial goals you may have. And don't forget to leave your phone number. 
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