Barry, 52, and Jeanine, 45, have two college educations to pay for, with one starting in September, and the other two years later. But Barry, the primary breadwinner, would like to retire around the same time their oldest child graduates from college.
“I would like to retire in three to four years, sell our main home in Monmouth County and move to our current vacation home at the Jersey Shore,” he says. “I would like to purchase a home in Florida ASAP to take advantage of the favorable home prices.”
They’re not sure how to structure their assets for reliable long-term income without having to worry about the stock market’s fluctuations.
Barry and Jeanine, whose names have been changed, have saved $1.32 million in 401(k) plans, $297,500 in IRAs, $208,800 in mutual funds, $129,000 in money markets and $1,000 in checking. They also have $164,000 set aside in college accounts.
The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple juggle their two main goals.
Power used an after-tax retirement income of $100,000 per year, increasing every year for inflation, for his analysis. This was based on their home goals, plus the couple’s desire to take one to two months a year to ski out West during retirement.
The calculation didn’t include a mortgage on their Shore home, which would be paid for from proceeds from the sale of their primary residence. It also didn’t include a mortgage for the cost of a home in Florida, which they would buy with cash.
“They’re running too high a probability of running out of money retiring if they retire in three or four years with the $100,000 budget,” Power says. “A much more comfortable retirement age would be Barry at age 61 and Jeanine at age 54, which is still very early retirement age success relative to most people.”
In this scenario, the couple’s analysis projects an 80 percent probability of success using a moderate conservative investment approach.
Instead of assuming a constant rate of return on their assets, Power used a Monte Carlo simulation to evaluate the outcome of their portfolio over time. By varying the rates of return and inflation to simulate the fluctuations that can be experienced in the marketplace, a more accurate reflection of the real life ups and downs of the investment environment is presented, he says. This process uses historical performance of the securities market for broad asset classes such as “small-cap equities,” or “long-term bonds,” and more.
When it comes to asset allocation, Barry says they have been invested 100 percent in stock mutual funds — so they’re willing to accept risk — but in retirement they’d probably want to have less risk in favor of capital preservation to ensure they have enough cash through retirement.
For that reason, Power assumed a moderate conservative asset allocation of 35 percent in stocks and 65 percent in fixed income/money market.
“Since he is retiring so early, he’ll need a portion of his portfolio earmarked for growth to help keep his portfolio withdrawals growing with inflation,” Power says. “In addition, because the window between working and retirement is less than 10 years, they are invested far too aggressively.”
He recommends they reduce their portfolio risk immediately and switch to a moderate allocation. This will help lock in on the profits they’ve had since March 2009 and better protect against a major stock market correction that would require Barry to have to work longer than he wants to so his portfolio can recover.
In addition to having too much money in the stock market, the couple has $200,000, or 10 percent, of their total investment assets in Barry’s employer stock.
“With retirement in close range, I would recommend against having that much exposure to any one company,” he says.
If you dig a bit deeper to see what kinds of equities they own, they are heavily weighted in U.S. large-cap equities at 52 percent versus Power’s suggestion of 13 percent. They also have 11 percent in small-caps, while Power suggests 4 percent. And international equities make up 21 percent of the portfolio, but Power recommends 13 percent.
“They could spread those heavily weighted assets more evenly across other asset classes not represented in their portfolio such as U.S. mid-cap, emerging markets, REITs, high yield bonds, international bonds and short-term bonds,” he says.
On the bond side, Power says emphasizing towards short-term bonds could help protect their principal against rising rates.
Power had some other ideas to help this couple in retirement.
While he assumed they’d pay cash for the Florida home because they have enough liquidity, they could consider buying now and renting it out until retirement, and getting a mortgage for the property.
“Getting a mortgage may make sense for the write-off since the property would be treated like a business and the mortgage interest would be written off 100 percent against the income the property generates,” he says. “You can get a 7/1 fixed to adjustable interest only mortgage for approximately 4 percent.”
That means a $350,000 home with a 20 percent down payment would have a mortgage of about $11,000 a year. If the rental income can cover the properties expenses and then some, plus they keep $280,000 or 80 percent of the purchase price invested in markets, that can be a nice way to make your money work hard for you, he says.
Plus, a 7/1 fixed-to-adjustable mortgage would also tie into his suggested retirement age of 61, so they could pay off the mortgage near or at retirement and not worry about the mortgage reaching its adjustable period.
The couple should also consider long-term care insurance, especially because of their age difference. That means they need to be “extra careful to plan for the younger spouse to make sure he/she has enough assets to bring them to the end of their lives.”
This couple are especially vulnerable because neither of them have pensions.