Get With The Plan: February 7, 2010

2710Peter, 56, and Kayla, 55, have enough money saved to pay for their college sophomore’s education, but they have other financial concerns. They’d like for Kayla to retire in two years and Peter in four.

“We envision retirement with no financial worries, being able to pay off our credit card balance every month and starting with a nice nest egg,” Kayla says “having the ability to travel, play golf and enjoy life after working hard and putting our daughter through college.”

The couple, whose names have been changed, have saved $290,292 in 401(k) plans, $33,821 in mutual funds, $2,997 in a brokerage account, $5,327 in a money market, $2,937 in savings and $4,328 in checking. They’ve also set aside $98,465 to cover college costs.

At age 60, Peter will receive a monthly pension worth $3,231. When she reaches age 60, Kayla will have a monthly pension of $3,526. Both of the pensions will give a 100 percent benefit to the surviving spouses.

The Star-Ledger tapped Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple assess their retirement prospects and to take a look at their debt concerns.

“For the most part, they are in a very good place,” Lynch says. “They own two homes, only one has a small mortgage, a reason- able car payment and modest credit card debt based upon their combined income. Best of all, they both have nice pension plans and medical benefits for life — a sweet deal.’’

Lynch understands why they’re concerned about their credit card debt, but he says he’s not overly concerned about it
as long as they continue to pay it down while they’re saving for retirement.

Lynch has other concerns for the couple.

First, asset allocation. Half of Peter’s 401(k) is invested in his employer’s stock, and the other half is in a stable value fund.

“Having more than 20 percent of your money in any one stock or fund, even if it is Berkshire Hathaway — which dropped about 50 percent of its value in six months from September 2008 through March 2009 — is extremely risky,” Lynch says.

Lynch says he’d rather see the account more spread out, using at least six to eight mutual funds, giving Peter a maximum 50 percent stock exposure, based on his time frame.

Next, their pensions. Most pensions offer two basic options: a single life annuity or a joint and survivor option. The difference is the single life only pays while you are alive. Once you die, your spouse gets nothing. On a joint and survivor, you get a reduced payout, but if you die, your spouse can get a percent- age of your benefit, for the duration of his/her life. Most people, Lynch says, don’t want to take the single life option because if the pensioner dies early, the surviving spouse is left with nothing.

For this couple, the difference in payouts between the single life and joint and survivor option is almost $14,000 annually — a lot of money to leave on the table. Rather than take the lower payouts, they could opt for the larger single life payouts and buy life insurance policies that would make up the difference. Then the surviving spouse could use the insurance proceeds to purchase an annuity to replace the lost pension income.

“They have more control over their money and greater income in retirement,” Lynch says. “The older they live, the less funds they would need to purchase an annuity due to the shorter life expectancy. Either way, the survivor gets substantially more money, or the funds can be given to their child.”

If at some point they do not need the death benefits, Lynch says they can surrender the policies for their cash values or even sell then to a settlement company for a profit.

Peter and Kayla are considering moving out of New Jersey to a less-expensive state sometime during their retirement. Lynch says they should plan far in advance for this move.

Instead of selling both their primary residence and their vacation home at the same time, they should take advantage of tax law concerning the sale of homes. They could first sell their primary residence and pocket a $500,000 tax-free gain from the sale. Then, they could declare their vacation home their primary residence for the next two years, and when they sell, they’d be eligible for another $500,000 tax-free gain.

“During this time, they can still purchase a property in an- other state and start living there, but they’d need to spend at least six months annually at the New Jersey property,” Lynch says. “This can potentially save them over $100,000 in taxes.”