Anna Wyatt, 45, was planning not long ago to quit work or at least work part time, but three problems recently arose to hinder that: Her husband, 45, was diagnosed with cancer and heart disease, their investment portfolio plummeted with the market and their new house is now worth less than they paid for it in October 2004. They each earn about $110,000 annually. In 12 years, they’ll have two kids in college.
None of the three financial planners that CD contacted termed the Wyatts’ situation as bleak—based on the expectation that the economy will recover over the long term. John Payne of Houston Asset Management says the couple can consider reducing their retirement target date by a decade and contributing the maximum allowable to their 401(k)s. He advises that they convert their college-savings account to a 529 plan for tax savings, contribute at least $250 per child to the account on a monthly basis and create an emergency fund of up to 6 months’ living expenses in a cash-equivalent account. He also believes that they should purchase 20-year term life insurance to cover any shortages in educational, living and retirement needs and maximize the amount of group and supplemental life insurance that her husband can get at work, if he doesn’t qualify for individual coverage.
Joseph “J.J.” Montanaro at USAA Financial Planning Services believes that funding retirement should take precedence for the Wyatts (over saving for college). He agrees that the couple should start a 529 college- savings plan but only after maxing out their 401(k)s and ensuring that they’re on track for retirement. He says they should consider refinancing their home. Further, he suggests that they consider selling investments with unrealized losses and reinvesting them to benefit from an income tax perspective for years to come.
Linda K. Pietroburgo of Moneta Group figures the Wyatts’ disposable, after-tax cash at about $9,700 a month—after paying their mortgage, property taxes and insurance. She suggests that they refinance their home and contribute $500 per month to a college-savings plan. (She notes that they still will have to supplement costs when college comes along.) With regard to retirement, she believes that they should contribute at least 6 percent of their salaries to 401(k)s.