Get With The Plan: April 13, 2008

Peter, 47, and Jolie, 49, have two incomes, no dependents, and changes to their financial future. Jolie’s company recently announced it is discontinuing its pension plan and adding a so-called enhanced 401(k) plan. The couple want to know what the change will mean for their retirement outlook.

‘‘We want to retire actively and very comfortably,’’ Peter says. ‘‘We are looking to see how we should adjust our savings patterns and investments to compensate for the change and see if we are on the right track.’’

The new 401(k) increases the employer match to 75 percent of the first 6 percent of contributions, up from 50 percent of the first 6 percent of con- tributions. Jolie will receive a pension of $772.50 per month at age 65 from the old pension plan. Peter will also get a pension, which would be worth $52,200 a year, if he retires at 65. The couple also have been saving.

The Star-Ledger asked David Fuhrman, a certified financial planner with National Wealth Management in Moonachie and Morristown, to help the couple assess their prospects.

‘‘Their positive savings rate clearly indicates that they are living well within their means while making substantial investments in their retirement assets,’’ Fuhrman says.

They’d like to retire when Jolie is 64 and Peter is 62.

The change in Jolie’s pension plan won’t derail the couple’s retirement plans, Fuhrman says. Including matching contributions from employers, they are currently contributing more than $31,000 per year to 401(k) plans. They’re also making extra principal payments on their mortgage.

The couple’s asset allocation is on track, too. Fuhrman says their mix of 70 percent equities, 18 percent fixed income and 12 percent cash is consistent with their moderate risk toler- ance.

To analyze the couple’s situation, Fuhrman used something called the Lifetime Economic Security Plan, which projects and recommends the optimal level of current consumption, savings and insurance to sustain the highest household living standard be- tween now and the couple’s deaths. The plan uses a 38-year retirement period from ages 64 and 62 to ages 100 for each of them. It assumes investment rates of return of 7 percent and inflation at 4 percent.

Based on the plan, Fuhrman found the couple can afford to spend more today — $10,000 more.

‘‘They can afford to spend this additional consumption on themselves, increase their charitable contributions or purchase a second home,’’ he says. ‘‘If they choose to continue their high savings rate, they could be in a position to retire at younger ages or increase their living standard in retirement.’’

Fuhrman recommends they stop making the extra principal payments on their mortgage. The 5.5 percent interest rate on the mortgage is inexpensive on an after-tax basis, he says. Assuming a 28 percent Federal income tax bracket, which Fuhrman says is unlikely to decline, their after- tax interest cost is less than 4 percent. They should be able to earn a net return above 4 percent per year with a properly structured investment portfolio.

The couple also wanted to know if they have enough life insurance, Jolie having nearly $500,000 of coverage and Peter with $360,000.

Fuhrman says due to the considerable gap between Jolie’s earnings and Peter’s earnings, Jolie doesn’t need any coverage, while Peter needs more for the next 10 years, at which time retirement assets would be sufficient for Jolie to maintain her lifestyle in the event of Peter’s death. Fuhrman says Peter should immediately buy a 10- or 15-year term policy with a $500,000 death benefit.

‘‘With a properly managed invest- ment program, their current net worth and savings rate should be sufficient to enable them to retire within 15 years and maintain their current lifestyle through a long retirement period,’’ Fuhrman says.

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