Get With The Plan: April 21, 2013

42113George, 57, and Belinda, 56, have raised three children who are financially independent, and now they’re setting their sights on retirement.

George would like to retire from his high-stress job by age 62, and earlier would be better if he can. Even after leaving his job — and possibly moving out-of state, George plans to do some kind of work to cover the couple’s fixed costs because he wants to make sure their money lasts.

My biggest worry is having enough money to cover my wife and me to the age of 90,” George says. “Both our families have lived long lives, late 80s to 90s.”

The couple, whose names have been changed, have set aside $44,250 in 401(k) plans, $428,900 in IRAs, $135,800 in a brokerage account, $192,000 in mutual funds, $6,800 in a money market and $1,100 in checking.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple determine how long their savings will last.

“George and Belinda are an example of ‘modesty is the best policy,’ ” Power says. “They have done an excellent job of saving for their retirement and carrying no debt with the exception of a small car loan that will be paid off prior to retirement.”

Because they lived within their means during their working years, they now have the ability to retire at George’s age 62 or earlier with a very high probability of success, Power says.

And while George is willing to work after retiring from his full-time job, he doesn’t need to.

Power used a budget of after-tax spending of $50,000 per year, increasing each year for inflation. This spending figure remained the same through age 90 with the exception of an addition of $10,000 for travel in the first three years of retirement, and funding to pay for health care until they’re eligible for Medicare.

Power ran projections with George retiring at age 62, and then again at age 60. Neither projection included post-retirement income from a part-time job because there was such a high probability of success at age 62.

“Since George is willing to work after retirement to cover their ‘fixed costs,’ they more than likely can consider retiring even sooner than age 60 if he can be sure to have a job once he retires,” Power says.

But betting on a part-time job has its own risks unless someone has a very clear idea about retirement employment opportunities.

“The last thing you want to do is retire thinking you’ll find another job and you can’t or are unable to work, possibly for health reasons, and eat into your life savings more than the portfolio can handle,” Power says.

For the retirement projections, Power says he used a Monte Carlo simulation instead of assuming a constant rate of return on their assets to evaluate the outcome of their portfolio over time.

The Monte Carlo simulation varies the rates of return and inflation to simulate the fluctuations that can be experienced in the marketplace, so it gives a more accurate reflection of the real-life ups and downs of the investment environment, he says. The model uses historical performance of the securities market with data on broad asset classes such as long-term bonds or small-cap equities.

George and Belinda say they have a moderate to aggressive risk tolerance, which Power says means they should have a mix of 65 percent stocks, 30 percent bonds and 5 percent money market.

They’re more aggressive than that, with a current allocation of 74 percent stocks and 26 percent bonds.

“They are taking on more risk than their risk assessment would warrant and also taking on more risk than they need to accomplish their goals,” Power says.

He recommends they consider taking their stock market exposure down even further, to 50 percent, using a moderate portfolio allocation.

If you dig a bit deeper to see what kinds of stocks and bonds they own, they are too heavily weighted in U.S. large-cap equities at 48 percent, compared with Power’s recommendation of 13 percent. They also have 25 percent in intermediate-term bonds, but Power suggests 7 percent.

“They are missing some asset classes all together, mid-cap U.S. stocks, short-term bonds and commodities,” he says. “To make sure they get the most consistent rate of returns as possible with the least amount of risk based on an appropriate asset allocation, they should make sure their portfolio has as many asset classes represented as possible to help control the volatility of their portfolio by having asset classes that complement each other well.”

Power also says shortening up the maturities of their bond portfolio would be wise “with the inevitability of interest rates rising.”

He says bond prices move in opposite directions to interest rates, so the longer your bonds are to maturity, the bigger potential impact on the principal of the bonds.

Power said George and Belinda are in that group of people who have accumulated a nice nest egg but are not quite self-insured against a lengthy long-term illness. One of them needing care could easily wipe out half of their investment assets, leaving the survivor in a precarious financial situation and possibly requiring their house to be sold to support the survivor.

“The good news is that if they address this issue now through purchasing long-term care insurance, at their current ages, long-term care insurance is quite affordable,” Power said. ” Additionally, and most important, taking on this additional insurance expense will not have a negative effect on them reaching their retirement goals.”