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Money Makeover

Retirement funds solid, but college savings lag

Anita and Michael Lotti watch a movie in their Holliston home with their children, Meghan, 11 (left), Julianna, 8, and Jay, 14. Anita and Michael Lotti watch a movie in their Holliston home with their children, Meghan, 11 (left), Julianna, 8, and Jay, 14. (Kayana Szymczak for The Boston Globe)
By Lynn Asinof
Globe Correspondent / August 21, 2011

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Anita and Michael Lotti have three children and no idea how they are going to cover the cost of college. With the first tuition bill just five years away, the Holliston couple figured they needed to find some answers soon.

So they applied for a Boston Globe Money Makeover. “We get conflicting advice every day, and the tax laws are changing constantly,’’ Anita wrote in her makeover application. “We need help creating a strategy that helps us to save for college, save for retirement, and maybe enjoy a yearly vacation with our rapidly growing children.’’

The numbers showed the Lottis were behind in their college savings. Each of the three kids had their own 529 state college tuition plan, funded primarily by Anita’s mom. But none of the accounts had more than about $15,000-not enough to cover even one semester at private colleges where the annual cost now tops $50,000.

The size of those 529 plans, however, is only a small part of the picture, fee-only financial planner Susan Brown of Sound View Financial Advisors told the couple when they met.

The good news, the Walpole-based planner said, was the Lottis had demonstrated financial discipline, both in tracking their expenses and putting away money for retirement. To tackle the college funding conundrum, however, the couple needed to consider the full scope of their finances.

Brown offered a primer on financial aid, a discussion of savings options, and a plan for boosting savings.

“Should you save for college? Definitely yes,’’ Brown said. “Will that hurt you with financial aid? Yes, but some kinds of savings will hurt more than others.’’

Financial aid formulas tend to weigh a student’s assets more heavily than those held by parents. In many cases, the parents’ retirement savings and family home aren’t even part of the financial aid calculation.

That makes it important to pay attention to where you hold your money, Brown said, noting that the Lottis should begin building assets in their own names rather than just funding education accounts specifically for the kids. That diversified approach to college savings also provides greater flexibility in case a child decides not to go to college or the funds are needed for another reason.

Most of the Lottis’ assets are held in a retirement account. “In total you have about $400,000 in retirement savings, and that is a great start,’’ Brown told the couple.

That savings reflects the Lottis’ decision early on to emphasize retirement in their financial planning. Anita, 43, a high school chemistry teacher, contributes 11 percent of her salary to her pension, while Mike, 42, a geologist working for an environmental engineering firm, gets an amount equal to 15 percent of his salary tucked away for retirement by his employers.

“You can borrow for college, but you can’t borrow for retirement,’’ said Mike. “So we’ve been nailing retirement as much as we can.’’

A review of the couple’s cash flow, however, suggested some holes in their plan. There was, for example, no emergency fund, and the couple held virtually no assets outside of retirement accounts. So Brown recommended that the two not only boost their total savings, but also diversify their accounts. She offered two possible plans.

The first would increase the couple’s savings by $15,000 a year. Under this plan, the Lottis every month would tuck $500 into an emergency fund, $300 into an investment account, $300 into a tax-advantaged teachers’ retirement plan, and $50 into each of the kids’ 529 plans.

Plan B was more aggressive, raising annual savings to $20,000 a year by increasing monthly contributions to each of the kids’ accounts to $200. The result: After just three years, the Lottis’ total savings would grow by nearly 50 percent, compared with 35 percent growth projected if they held to their current course.

Saving such a large amount would certainly be challenging, the Lottis said, but Brown’s recommendations gave them a clear direction. “Now we know exactly what we have to do,’’ said Anita. “We have to save more money.’’ Her first target for cutting costs: eating out.

Finally, Brown said, the Lottis should remember that their kids’ school choices will have a big impact on how far savings will stretch. State schools typically cost less, and some private schools that are respected, but considered second-tier, may be more willing to offer aid to attract top students. “The idea,’’ she said, “is to choose a school about a half-stop below your ability so that the school really wants you.’’

To be considered for a Money Makeover, fill out the application at the Your Money section of boston.com/business, or call 617 929-2903.

Anita And Michael Lotti
Goal: Getting college savings on track for their three kids
Recomendations from fee-only financial planner Susan Brown: ■Increase savings by $15,000 or $20,000 a year, allocating no more than about a third to educational accounts.
■Start building an emergency fund to cover unexpected expenses.
■Open a brokerage account, where savings can be used for a variety of purposes in addition to education.
■Put an additional $300 a month into retirement savings.