“Will I have enough money to live on after retirement?” the divorced man asks.
He’d like that to happen at age 73. He collects Social Security and works full-time, but he’d rather spend his time with his family, at the Shore and with occasional trips to Atlantic City. And if possible, he’d like to help pay for college for his grandkids.
Anders, whose name has been changed, has saved $74,000 in 401(k) plans, $50,000 in IRAs, $35,000 in savings and $6,000 in checking. He has a small credit card debt and a sizable mortgage.
The Star-Ledger asked Bryan Smalley, a certified financial planner with RegentAtlantic Capital in Morristown, to help Anders figure out when he can stop working.
“The trouble that Anders is facing is that his retirement nest egg of $169,000, including bank accounts, along with Social Security, is not sufficient to meet his current retirement goals,” Smalley says. “This does not mean that Anders will have to work for the remainder of his life.”
But it does mean that Anders will have to do a lot of saving between now and age 73.
Smalley recommends he start by increasing contributions to his 401(k) plan. Anders can save a total of $23,000 a year, which includes a $5,500 catch-up contribution for those over age 50.
Right now he’s saving 15 percent of his salary, or $9,000 a year, so Smalley is recommending a significant increase.
“Because the recommendation is that Anders contribute on a pre-tax basis, every $1 that he puts in only cost him $0.75, assuming that Anders is in a 25 percent tax bracket,” Smalley says. “So in real dollar terms, it means that Anders needs to find $10,500 a year of extra savings in his budget.”
Although this is still a significant increase to what Anders is currently saving, it appears that he may have the cash flow capacity to make it work, Smalley says.
The second step is for Anders is to reduce some of his living expenses in order to find extra money that he can put toward his retirement savings. The budget items that stick out as potential reductions are his car payment and his life insurance premiums, Smalley says.
Anders will have a car payment of $600 per month for the next two years. Smalley says if he can reduce that to $200 per month, he can free up $4,800 a year for his nest egg.
Then, his life insurance. Anders pays $50 a month for a policy that Smalley says Anders doesn’t need.
“Anders does not have anyone dependent on his income should he pass away, thus, there is really no need for insurance,” he says. “Anders is at a point where he would benefit by saving the amount of the premium payment.”
This decision doesn’t go without risk, though, because his adult children would then miss out on a $100,000 death benefit should Anders pass away. But, Smalley says, given Anders’ circumstances it makes more sense for him to focus on his savings.
By cutting these two expenses, Anders will free up almost half of the extra money he needs each year to maximize his contributions to his 401(k).
A simple back-of-the-envelope calculation of Anders’ after-tax money shows that he has additional capacity in his annual cash flows to find an extra $400 per month to put toward savings. Smalley says. If he can make these cuts, he needs to keep the lower spending throughout retirement.
Next, Anders needs an investment strategy that will help him meet his retirement goals. It also has to have a risk and return profile that will allow him to sleep at night. Anders’ current allocation is close to 60 percent stocks and 40 percent fixed income. Smalley says it’s an appropriate allocation, but he can do a little better.
“It’s recommended that Anders add more global diversification in his retirement accounts in order to increase his potential return while at the same time reducing the risk he is taking on his portfolio.” Smalley says.
To determine at what age Anders is able to retire — assuming he takes the recommended steps — Smalley ran a Monte Carlo simulation to test a retirement age that provides a high probability of success that he will not run out of money through age 91.
“Anders’ current goal of retiring at age 73 produces less than 40 percent probability of success,” he says. “This means that Anders will need to work longer than expected in order to meet his retirement goals.”
If he pushes retirement off until age 77, the probability of success increases to 89 percent.
Another reality for Anders is that there does not appear to be capacity above and beyond his retirement living needs to help pay for his grandchildren’s college educations, Smalley says. However, if Anders is able to find extra money within the $48,000 per year after-tax living expense number to help support his grandchildren’s education, then he should go ahead and help as desired, he says.
“If he is able to lighten his spending, increase his retirement savings and implement a globally diversified portfolio with the appropriate mix of stocks and fixed income, Anders should be able to reach his goal of retiring, even if it is a few years later than expected,” Smalley says.