Get With The Plan: April 1, 2012

Giuseppe, 64, and Alissa, 63, are planning for an active retirement. They’d like to travel to visit their two adult children and their families.

But they have one big question:

“How long will our resources last after retirement?” Alissa says. “The long-term goal would be to conserve the capital base for as long and as much as possible.”

The couple, whose names have been changed, have saved $1.067 million in employer retirement plans, $215,940 in IRAs, $230,940 in bonds, $85,480 in money markets and $6,650 in checking. Alissa expects a pension of $900 a month after retirement, and neither has taken their Social Security benefits yet.

The Star-Ledger asked Brent Beene, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple plan a retirement full of travel with assurances that their money will last as long as they do.

And Giuseppe and Alissa expect that to be a long time.

“Longevity runs rampant in their family as Giuseppe’s parents are active in their nineties and members of Alissa’s family have also lived into their nineties,” Beene says. “Given this notion, we want to plan for well beyond traditional life expectancy.”

With Alissa planning to retire in 2012 and Giuseppe in 2013, the couple wants to know how long their resources will last.

The couple wants to maintain an annual living expense of $74,800 in retirement, and an annual $40,800 vacation expense — double their current costs.

And it’s doable.

“It is apparent that their conscientious spending habits and maximum contributions to retirement savings have played an integral role in their ability to live out a comfortable retirement.” Beene says.

Given the narrow window before retirement, Beene says he highly recommends that they continue to make retirement contributions and to maximize their savings.

Beene took into account their intention to go on one large vacation each year, doubling their annual vacation budget. And given the longevity on both sides of the family, he also included the cost of an annual long-term care policy expense of $6,000. The plan was done with a life expectancy of 95.

The simulations found the couple has an 83 percent change of success with a 60 percent growth-style portfolio.

Beene says the couple may benefit from better asset location and coordination.

“We encourage them to view their portfolio from a total return perspective,” he says. “Asset location incorporates the idea that the placement of assets can lower the tax drag on the portfolio and help achieve higher net risk-adjusted returns.”

Today, their equity and fixed income holdings are spread out among all their accounts. Ideally, holdings should be segregated into different buckets based upon their potential future earnings, capital gains and volatility, Beene says. For example, a high growth asset should be placed in a tax-free account such as a Roth, while assets that experience capital gains should be allowed to grow tax-deferred in a traditional IRA.

Beene says they need better diversification.

“Although many of the investment choices in the current portfolio take on different names, the majority of its current global large-cap positions are invested in the same companies,” he says. “This type of overlap can undermine true diversification by unknowingly over concentrating company positions in the portfolio.”

He says a simple strategy to mitigate overlap is to diversify by asset class and seek funds that have a consistent investment style over time.

On the fixed income side, they should consider the sensitivity of their fixed income allocation given the low interest rate environment. Diversifying in short-term bonds may mean seeking bond funds with low duration, seeking high quality stable value funds, money markets or purchasing CDs.

Given the reasonable probability of success with a 60 percent growth portfolio, Beene says they are able to reduce the growth allocation by about 15 percent.

Another important consideration is when they should each receive their Social Security benefits.

“As a general rule of thumb, delaying benefits to age 70 has historically shown to increase the amount an individual is eligible to receive in Social Security by 8 percent every year,” Beene says.

He says the couple should consider a “file and suspend” strategy which allows Giuseppe to maximize his retirement benefit by delaying his own portion until age 70, while allowing Alissa to obtain half of his retirement benefit, called a spousal benefit.

“This process starts when Giuseppe is eligible to file for benefits,” he says. “Although this strategy would make a younger spouse eligible to obtain benefits before full retirement age, the spousal benefit would be considerably less than the traditional 50 percent payout and be subject to earnings test limits.”

Beene says this idea is important for those seeking spousal benefits but haven’t reached their full retirement age and are still working. Given the fact that there is longevity within their families, Beene says it would make sense to consider long-term care insurance.

“It is important that they make this consideration sooner rather than later,” he says. “As they approach 70 years of age, the odds of being insurable and the exponential cost of an LTC Policy premium put them at a significant disadvantage.”