Get With The Plan: April 29, 2012

Jim and Hailey want to know what retirement will look like. The couple, in their mid-50s, have sent two kids to college, and now they’re facing several money realities.

“Jim lost his job but found another at a lower salary,” says Hailey, 56. “Educational expenses have been covered but we’re concerned about our (younger) child’s ability to find a job in this economic environment,” she said.

The couple expect that child to move back home for a while after graduation this spring.

Hailey says they want to protect and grow their retirement savings so they can be comfortable when they stop working. Jim is in no hurry to retire and he says he’d work another 10 years, while Hailey would like to stop sooner — between ages 62 and 65 — but sooner would be a bonus.

The couple, whose names have been changed, have saved $270,500 in IRAs, $200,000 in annuities, $373,500 in mutual funds, $19,500 in a brokerage account, $35,100 in municipal bonds, $42,500 in money markets and $35,000 in checking.

The Star-Ledger asked Douglas Buchan, a certified financial planner with Main Street Financial Solutions in Pennington, to help the couple plot a retirement road map.

“The key to retiring when they want is determined by two main variables: their future investment returns and their future expenses,” Buchan says. “They describe themselves as fairly conservative investors, but it’s important that they balance their ‘risk tolerance’ with their financial goals.”

In other words, Buchan says, there is no need to invest in the stock market at all if you’re okay with working forever, but conversely, it is very possible to retire sooner if you allocate your assets appropriately.

He says he’s highly confident Hailey can stop working at age 62 and potentially at 61 or 60 if the couple’s retirement assets are invested properly. They need to make changes to their portfolio so it’s more broadly diversified and slightly more aggressive.

He says a low-cost, globally diversified portfolio consisting of 60 percent equities and 40 percent high quality bonds should allow them to sustain their lifestyle throughout retirement.

If they flipped allocations to 40 percent stocks and 60 percent bonds, the probability of having enough money to sustain them through retirement is still possible, but far less likely, he said.

Buchan ran several scenarios.

If Hailey retires at age 62, a 60 percent stock portfolio had a 90 percent success level, while a portfolio of 40 percent equities had only a 53 percent confidence level.

If she waits until age 65, the 60 percent equities portfolio goes up to a 93 percent chance of success, and the 40 percent equities portfolio rises to a 70 percent success probability.

“If they’re willing to have a slightly more aggressive portfolio, they should be able to attain certain goals sooner,” he says.

Regardless of which retirement date they choose for Hailey, Buchan recommends a significant overhaul of their investments.

Buchan says the two things that can be controlled with investing are asset allocation and costs.

The couple’s current broker charged them 5 percent upfront commissions for everything they purchased from him, except for the annuity, for which they paid even more, Buchan says.

“Maybe it’s possible to justify such a commission if they were getting ongoing, comprehensive, objective advice, but it does not appear as if they are,” he says. “Actually, objective advice is not possible with brokers, as their fiduciary responsibility is to their firm, not their clients.”

Buchan says brokers have a “suitability” standard for their clients, but their primary interest is with their firm. Compare that to an Independent Advisory Firm or a Registered Investment Advisory (RIA) firm, he says, where their fiduciary responsibility is to their clients.

“Folks with a decent amount of investable assets — say, $500,000 or greater — should always look for a CFP that works at an independent RIA firm versus the commissioned wire-houses,” he says. “The conflicts of interest are significantly reduced, if not eliminated.”

On the portfolio, one big issue is that 30 percent of the brokerage account is invested in a California municipal bond fund. Buchan says he can’t comprehend the reason for this investment: The couple’s adjusted gross income isn’t high enough to justify such exposure.

“But, here’s the kicker. California muni bonds are attractive to high-income earners who live in California as the income is exempt from California income tax,” Buchan says. “They are neither high-income earners nor California residents.”

He says California munis are also higher risk than many other states, so even if they lived in California and were in the highest tax bracket, 30 percent of the account would be too much.

Another change to consider, Buchan says, is that certain asset classes are costing them tax dollars because they’re in taxable accounts rather than tax-deferred accounts such as IRAs. These include REITs, commodities and emerging markets, he says.

Buchan says if they want to stick with an adviser, they should consider a fee-only certified financial planner who can provide them with objective and ongoing investment management as well as insurance, estate and retirement advice.

Or, he says, they could do the investment management on their own, creating a portfolio of low-cost mutual funds with a company like Vanguard.