Turner, 43, and Wendy, 44, are in the midst of raising two children, 7 and 5. But while the here and now can be all-consuming, they’re not losing sight of their long-term goals.
‘‘Our main goals are savings and retirement. We would both like to retire at age 63,’’ Turner says. ‘‘There are pensions, but we’re not sure that the state pension plan will be solvent or that I will make it 25 years!’’
The Morris County couple, whose names have been changed, have so far saved $89,773 in a 401(k) plan, $36,097 in a 457 plan, $117,096 in IRAs, $550,198 in a brokerage account, $50,665 in bonds, $128,774 in money markets and $3,000 in checking. They’ve also accumulated $174,573 in 529 plans for their two kids, which are funded each year by their grandmother. And finally, Turner and Wendy each will receive a state pension when they retire.
The Star-Ledger asked Robert Cohen, a certified financial planner and certified public accountant with Financial Strategies & Wealth Management in Basking Ridge, to help Turner and Wendy evaluate their financial plan.
‘‘After investing in their retirement plan, paying taxes and bills, their cash flow is approximately break even,’’ Cohen says. ‘‘They have a good base of financial assets for both emergency and long-term growth.’’
Cohen says the couple’s primary weakness is lack of the proper amount of insurance to protect their assets.
First, retirement savings. The couple are saving about 11 percent of their income for retirement, and when you include their additional principal payments on their mortgage, Turner and Wendy are saving about 15 percent.
Turner today invests 6 percent, with no match in his 457 plan. If his account earns 7 percent a year over 20 years, he’ll have approximately $441,000 when he retires. The couple’s brokerage account could be worth $2.4 million in 20 years, earning a rate of return of 7 percent after fees and taxes.
Given these and other assets, the couple should have a very favorable retirement from an asset/income perspective, Cohen says.
The mortgage will be paid off in eight years, and as their kids get older, living expenses may decline. Cohen calculates they will need approximately $67,188 in after-tax retirement dollars, so assuming they are in the 15 percent bracket, they would require before-tax income of $79,044.
They’ll receive approximately $74,707 from Turner’s pension after 25 years of service, while Wendy’s will be about $3,600 a year. They will receive a cost of living adjustment, or COLA, after 25 months, which will help them keep up with inflation. They also can expect collective Social Security payments of $25,248 a year at age 62.
‘‘The couple’s income from pensions and Social Security is greater then their living expenses are forecasted,’’ he says.
But now, the part of the plan that’s lacking: insurance.
Turner doesn’t have long-term disability coverage, and Cohen says getting some should be a priority. He can take extended sick leave through work, which provides half pay for 26 weeks, but after that, he’s on his own. Cohen recommends a disability policy that would give a monthly benefit of $2,365 income-tax free, with a 180-day waiting period, at a cost of about $2,250 a year.
‘‘Even though the income from the disability policy will not pay for all living expenses, it will pay for the bulk of the expenses and the remaining cash flow can come from Wendy’s part-time employment and dividend and interest income,’’ Cohen says.
The couple could afford to live off their investments if Turner was disabled for an extended period of time, but that could have a negative effect on their long-term plans.
Another priority is long-term care insurance, he says, which would provide a means to pay at least part of a long-term care bill so the cost of care won’t destroy their net worth.
‘‘The premiums increase with age and may become less affordable as they become older,’’ Cohen says, explaining why it’s smart to buy sooner rather than later.
He would recommend a policy that pays a monthly benefit maximum of $4,500, has a 90-day elimination period and a 5 percent compound benefit increase. The annual cost of the premium is $3,465.