Get With The Plan: April 22, 2012

Shawn, 59, and Cindy, 55, are ready for retirement in June. They want to make sure their investments are ready, too.

“Our biggest concern is continued loss of stock and investments savings,” Shawn said. “We’re worried about knowing when we really do have enough saved to make retirement a reality and maintain our current lifestyle.”

The couple, whose names have been changed, has saved $113,000 in 401(k) plans, $704,800 in IRAs, $601,600 in mutual funds, $38,200 in a brokerage account, $16,000 in money markets, $71,400 in savings and $5,500 in checking. Cindy doesn’t bring in income because her employer went out of business, but Shawn has a healthy salary plus an annual pension of $38,000 from a former employer.

The Star-Ledger asked Greg Plechner, a certified financial planner with Modera Wealth Management in Westwood, to help the couple see if they’re ready for retirement.

“They currently spend $110,000 each year, including taxes,” Plechner says. “Assuming a net rate of return of 5.5 percent, an average inflation rate of 2.3 percent and a life expectancy of age 90, the couple’s financial plan suggests that the goal of early retirement is certainly attainable — with some caveats.”

Plechner says most importantly, Shawn and Cindy need to be mindful of their cash flow and asset allocation.

“The couple should be congratulated for having such a healthy balance sheet with significant retirement savings and no liabilities,” Plechner says. “However, 30-plus years is a very long time period to project without steady income.”

He says it’s important that they “keep minding the store” and have a plan in place during this next phase of their lives.

Plechner says regardless of whether you have $100,000 in savings or $1 million, it ultimately comes down to how much one spends relative to income. For this couple, with about $1.4 million in invested assets, they should plan to withdraw no more than 4 percent, or $56,000, annually after taxes, and that’s a significant reduction from their current spending levels.

Plechner reviewed the couple’s current portfolio allocation. They have approximately 11 percent invested in cash, 46 percent in bonds, 33 percent in stocks and 10 percent in alternatives.

He says they’ve been smart to invest mainly in exchange-traded funds and mutual funds with low expense ratios, and underlying products that closely follow the corresponding asset class.

“You want products that are ‘pure’ and transparent,” Plechner says. “If a fund, for example, says it invests in U.S. investment grade bonds, make sure that you don’t see a large position in say, junk bonds.”

He says many products claim they invest in a particular asset class, but when you closely examine their actual holdings, it can be very different.

At first glance, Plechner says the couple’s portfolio seems well diversified. Within fixed income, they own U.S. investment grade bonds, treasury-inflation bonds and mortgage-backed bonds. They also own a variety of stocks, including U.S. large growth companies, U.S. large value companies and mid-cap stocks, and some exposure to commodities and gold.

But Plechner sees opportunities for further diversification. The couple currently has little exposure to U.S. small company stocks, emerging market stocks and some alternative asset classes such as real estate.

Plechner says depending upon their risk tolerance, they also may want to reconsider their overall allocation.

“With the days of capital gains on bonds likely behind us, it may be a good idea to allocate a greater percentage toward both U.S. and international stocks and reduce their exposure to bonds to target a higher overall portfolio return,” he says.

Asset allocation is also important. The couple’s taxable account currently holds ordinary-income producing investments. Because these investments don’t receive the beneficial tax treatment that qualified dividends do, it may make better sense to reallocate them to a tax-deferred account such as an IRA.

Although the couple has $1.4 million in retirement savings, any slight hiccup over the next few decades — such as a few poor performing years in the fixed income or equity markets early in their retirement, escalating inflation or a longer life expectancy — could throw their financial plan off balance, he says. For reasons like those, there may be significant advantages to delaying full retirement as long as possible.

Besides the loss of income, he says they’d be forfeiting other benefits of employment, such as the ability to contribute to a tax-deferred 401(k) and health care benefits.

Individuals generally are not eligible for Medicare until age 65 so if Shawn was to retire this year, they would have to consider alternatives for health insurance.

The couple should also consider what full retirement at this early age would mean for Shawn’s Social Security benefits, Plechner says. Generally speaking, the earliest an individual would be able to begin collecting benefits is age 62. In addition, the earlier an individual starts collecting, the lower the annual benefits will be. Although there are many factors to weigh when making the decision, Plechner says he generally advises that the higher income spouse wait as long as possible to collect benefits, particularly if he or she is fairly healthy and not in need of the income.

Though technically “millionaires,” Plechner says it’s essential for Shawn and Cindy to carefully assess their options over the next few years.

“With rising debt still a problem, not only among individuals but also within our own governments, the ability of the couple to build up their savings, live without any debt and even be in a position to consider retirement at such an early age is a admirable lesson for us all,” Plechner says.