Get With The Plan: April 17, 2011

41711Drew, 46, has concerns about her financial future as a single woman. She wants to know if her retirement plans are moving in the right direction, and she wants to make sure she can afford to travel — a great love of hers.

“I plan on working past 65 for as long as possible if I am still enjoying what I do,” she says. “Hopefully I will be able to do something that I enjoy on a full-time, part-time or consultant basis.”

Drew, whose name has been changed, has set aside $67,000 in 401(k) plans, $256,500 in IRAs, $6,740 in a brokerage account, $9,650 in mutual funds, $166,500 in a money market and $500 in checking.

She doesn’t own a home, and she’s not sure if she should buy one. She lives rent-free with a family member, and the possibility of relocating for a new job sometime in the future has held her back from buying.

The Star-Ledger asked Michael Pirrello, a certified financial planner with Mill Ridge Wealth Management in Chester, to help Drew project her future retirement and see what she can do to improve her outlook.

“Drew gets an A-plus for her ability to live below her means and save aggressively for her longer-term goals,” Pirrello says. “She is diligent with saving for her planned trips and pays for the trips in advance, without having to incur any debt as a result of her travel.”

Purchasing a home, Pirrello says, would increase Drew’s monthly expenses and adversely impact her ability to save.

“However, she has saved for a possible home purchase and currently has $165,000 in a savings account to enable her to put a sizeable down payment on a home,” he says. “If Drew ultimately chooses to not purchase a home, she can utilize a portion of her house savings to augment her retirement savings and invest those funds accordingly to achieve a potentially higher return over time.”

Drew contributes the maximum $16,500 to her employer retirement plan every year, plus another $5,000 to her IRA.

“The good news is that Drew is taking the necessary steps to buy the ultimate vacation ticket,” Pirrello says.

“In this case, a comfortable and desired retirement lifestyle.”

Assuming no changes, at her current rate of savings and assuming a 7.5 percent rate of return on her retirement assets while working and a 5 percent rate of return after retirement, Pirrello says Drew will be able to reach her retirement goal. Pirrello says this assumes Drew’s income continues to grow at historical inflation of 3.71 percent per year until she enters “semi-retirement” at age 60, and then continues to earn the equivalent of $40,000 from age 60 to 70 before entering full retirement status.

Pirrello also included Social Security income, but at a reduced level.

“Drew will be able to live comfortably through age 95 with a potential surplus at that time of $327,670,” he says.

A potential home purchase changes the numbers. Pirrello says assuming a $250,000 purchase price with a down payment of 50 percent and a mortgage of $125,000 at 5.25 percent, fixed for 30 years, Drew would see an effect on her retirement plan, but he says it’s “somewhat negligible.”

Paying real estate taxes of $500 per month and $690 per month principle/interest payment, Drew would ultimately have about $1,000 less to save in her taxable accounts each month.

“The resulting impact to her retirement plan is that she will need an additional savings of $300 per month until age 70 or an increase in annual investment return from an assumed 7.5 percent to 8.2 percent,” Pirrello says.

Another option would be to delay full retirement from age 70 to age 72 or lower her expenses in retirement.

Drew is still young, so she faces a number of important variables that could significantly impact her retirement plan. Purchasing a home with reasonable related expenses will not derail her retirement dream, Pirrello says.

While Drew doesn’t have a significant need for life insurance, she should consider long-term care insurance, which can help pay for care if she needs it when she’s older, Pirrello says. She should investigate policies when she’s in her 50s. Another strategy to consider is an IRA conversion, Pirrello says. She’s got a hunk of cash on the sidelines for a possible home purchase or to help pay taxes on a conversion, a move that would provide future tax-free growth and retirement distributions — not all at once, but perhaps a portion of the accounts each year.

Now it’s time for Drew to make some decisions, Pirrello says.

“Regardless of the home purchase decision, Drew should stay true to her savings and expense discipline and keep her eye on her ultimate vacation of financial independence and continued travel,” he says.