Get With The Plan: April 25, 2010

42510The meaning of retirement has changed in recent months for Jim and Anna. Jim, 61, was downsized from a six-figure job late last year, and he hasn’t found new work. The couple are having trouble meeting their obligations.

“We obviously find it difficult to pay monthly expenses, including a mortgage on a Florida condo, which is worth less than what we owe,” Jim said. “In addition, I have the option of taking my pension as a lump sum now or waiting until I want to retire in three years. However, if I cannot find a job, I may want to take early retirement now.”

The couple, whose names have been changed, have set aside $267,100 in 401(k) plans, $322,000 in IRAs, $283,000 in mutual funds, $15,800 in a brokerage account, $120,200 in money markets and $14,000 in checking. Jim’s lump sum pension is worth $137,000.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Jim and Anna look at what an early retirement would mean for their money.

“Like all too many people these days, Jim and Anna are in a tough situation as a result of the overall downturn in the economy,” Duerr said.

Currently, Jim is collecting unemployment benefits, but this will end in the coming months. Duerr said Jim is extremely concerned he will not be able to find a job in his field and, although it is not what he initially wanted to do, Jim may be forced to apply for Social Security once he turns 62.

Given the economic downturn and the couple’s income woes, they have become extremely conservative when it comes to investments. Duerr said this is something that needs to be addressed.

“Even though I can understand their reasons for being so conservative they should have a long retirement,” he said. “As a result they need to ensure that their assets continue to grow.”

Duerr said if they are too conservatively invested, Jim and Anna may miss out on investment growth and run a higher risk of using their assets up in retirement. He recommends they re-evaluate their investments and determine a slightly more moderate asset allocation.

An additional option, Duerr says, would be for Jim and Anna to take some of their assets and invest them in a fixed annuity.

“By doing this, they will be able to minimize some of the downside risk,” Duerr said. “They do need to consider that annuities are long-term investments that can have high fees and expenses and can contain surrender charges for early cancellation of the contract.”

But, Duerr said, if knowing some of their assets are protected from market fluctuations eases some of their concerns, it is probably a good idea.

Jim has concerns his company’s pension plan will not survive the current economic downturn, so he’s thinking about taking a lump sum from the plan, rolling it into an IRA.

Duerr said it’s a good idea, especially if the company’s financial security is questionable. Rolling the assets to an IRA will allow the couple to invest the funds in an appropriate manner.

One advantage for the couple is that they have reasonable monthly expenses. The largest monthly outlay is for the mortgages on their two homes. Given Jim’s current work situation, they are giving serious thought to moving to Florida full time in the near future.

At that time, they plan to sell their New Jersey home and use the proceeds to pay off the mortgage on the Florida property.

“Once this is done, they will decrease their monthly needs by almost $2,500,” Duerr said. “They will also decrease their expense with no New Jersey real estate taxes or maintenance and up keep on two homes.”

Another area where they will save is when they become full-time residents in Florida, as they will no longer be subject to state income taxes, Duerr said. Although this may be a few years away, they should not have a problem maintaining their current lifestyle and they will not run a risk of depleting their assets.

“Despite that this was not their path of choice, they are not in bad financial shape to weather this storm,” Duerr said. “They need to continue to keep their expenses in check and consolidate households as soon as they can.

If Jim is able to find a job and work several more years, things will significantly improve. But even if this is not the case, from a financial standpoint, they should be fine and have a good retirement”