Get With The Plan: April 15, 2012

Melissa, 59, has simple goals for her future. She’d like to retire at age 66 and sometime soon, lower fixed expenses and move to what she calls a more desirable location that’s closer to her friends and her job.

But the problem that troubles her today is her mortgage.

“I would like to decide about getting a new mortgage. I’m presently in year 2 of a seven-year adjustable rate mortgage,” she says. “Or maybe I’ll sell and make the move.”

Melissa, whose name has been changed, has accumulated $99,000 in a 401(k) plan, $41,400 in IRAs, $4,400 in a money market, $1,000 in savings and $2,500 in checking.

When she retires, Melissa can expect a pension of $54,000 a year and Social Security benefits of $24,000 a year at her full retirement age.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Melissa make smart decisions for her retirement.

“Melissa is on a good path toward retirement,” Duerr says. “However there are areas she should address in order to give herself the best chance of achieving her overall goals.”

First is her adjustable-rate mortgage. Right now, the loan has an interest rate of 3.375 percent, and Melissa is quite happy about that. But her concern that the rate could increase in the years to come are valid.

Melissa has contemplated refinancing this mortgage into a 30-year fixed rate mortgage. She hasn’t made the move because she’s concerned that even though rates are very low today, her monthly payments could increase because the rate she’d get would be higher than the rate she has now.

She’s probably right.

“Melissa’s current monthly payments on her mortgage ­— principal and interest — are $1,072, based on the rate of 3.375 percent,” Duerr says. “If she were to refi into a traditional 30-year fixed mortgage at the current rate of 4.35 percent, her payment would increase from $1,072 to $1,194, or $122 more per month.”

Duerr says while this may not seem optimal, it’s the current loan that needs to be analyzed. He says the interest rate is not likely to stay at these low levels for the life of her loan.

If the rate was to increase to 5 percent, Melissa’s payment would increase to $1,301, or $229 more than she pays today.

If the rate increased to 6 percent, then her monthly payment would be $1,450 or $378 more each month, Duerr says.

“Even though refinancing her loan will increase her current payments, it is most likely the smarter thing to do while rates are still at historical lows,” he says. “If she decides not to do this in the near term, rates could increase, only compounding the situation.”

Another reason Melissa hasn’t refinanced is that she’s considering a move, but Duerr says she may not find what she wants in her price range of $300,000.

“She should consider if this is a realistic goal she could accomplish in the next year or so while houses are still at their current prices as well as mortgage rates at their current lows,” he says. “If she does decide to move then she can convert to a 30-year fixed mortgage at that time.”

If a fast move isn’t feasible, it would be in her best interest to refi while rates are still at historical lows, Duerr says.

Melissa also wanted ideas on how to decrease her expenses in other ways.

Duerr says that, from a review of her monthly numbers, there are not many areas where it appears she could decrease her expenses. He recommends she take a harder look at her costs and see about what changes she can make without significantly decreasing her quality of life.

Duerr did notice that Melissa’s monthly budget shows her total expenses are less than her total income.

That means there should be additional money available, from $15,000 to $20,000 worth. Duerr says Melissa may be giving much of this extra cash to her son for help, but there may also be one-time expenses she’s not considering as part of her budget.

“She should review her annual expenditures again to ensure she has captured everything and possibly find areas where she may be able to decrease her spending,” he says.

Duerr says Melissa’s emergency fund needs to be looked at more closely. A safe emergency balance is somewhere between three to six months of living expenses, he says, which adds up to $12,000 to $24,000 for Melissa.

Duerr suggests she stash away any extra cash to bolster her cash reserves.

“Increasing them to the suggested level cannot happen overnight but if she could put a few hundred dollars a month to savings she should be able to reach a better level of emergency funds in 18 to 24 months,” he says.

On retirement, Duerr says Melissa’s pension and Social Security will be close to her current annual salary, and she’s no longer contributing to retirement plans.

“If she can find the funds either now or when she is not longer helping her son, it would make sense to fund her employer-sponsored retirement plan,” he says. “Any additional funds she could save while working toward her retirement will help her continue to live based on her current standard of living.”