Get With The Plan: April 7, 2013

4713Sam and Regina are juggling the short- and long-term goals that are shared by many parents.

“We would like to retire after the kids graduate from college, approximately at age 55 to 60,” said Sam, 42. “We are preparing for kids bar mitzvahs and college. We are not going to sacrifice these challenges for our own retirement.”

When they do retire, they’d like to travel and move south to a golfing-tennis kind of community, and they say they’d also like to help their kids, ages 10 and 8, “get off to a good start.”

Sam and Regina have saved $109,600 in 401(k) plans, $266,100 in IRAs, $30,000 in a profit sharing plan, $73,000 in mutual funds, $65,000 in certificates of deposit, $12,000 in a money market and $1,000 in checking. They’ve also set aside $108,000 for college expenses.

The Star-Ledger asked Alan Meckler, a certified financial planner with a certified financial planner with Cornerstone Financial Group in Succasunna, to help the couple balance their short- and long-term goals.

“They are saving for their kids’ bar mitzvahs, and college, but are not going to sacrifice these challenges for their own retirement,” Meckler says. “I totally agree with their assessment.”

Meckler says the couple has done a great job saving for the kids and their future retirement so far.

The couple is saving a lot: Regina maxes out her 401(k) plan each year and contributes to a profit-sharing plan, while Sam saves $7,000 per year to his 401(k) and receives a $4,000 match. Plus, they’re dollar-cost-averaging — saving monthly — to several Vanguard mutual funds, plus another $6,700 a year to their kids’ 529 Plans.

“Their total annual savings is $47,268 which is approximately 15 percent of their gross income,” he says. “The goal to a successful retirement is to save 15 percent of your income, and they are doing just that.”

Meckler says when he looks at financial planning, he focuses on three areas: protection, savings and growth.

First, protection, starting with the proper auto, homeowners, and liability umbrella policy in place to protect themselves from lawsuits.

Regina has disability insurance that covers $6,500 per month and Sam has coverage for $2,500 per month. Typically, Meckler says, you can buy coverage for up to 60 percent of your gross income, so the couple may want to increase coverage to the maximum they can purchase.

“If they lose their ability to earn an income, all of their other plans will fall short,” he says.

Sam and Regina each have $1.5 million of term insurance. For Sam, that’s approximately 15 times his income. For Regina it is only 6.6 times her income, so

Meckler says they may want to consider increasing her coverage.

“Less than 1 percent of term life insurance is ever paid as a death claim,” he says. “Life insurance is a critical component of their financial plan, but a permanent policy would make more sense.”

A permanent policy would be more expensive, but it combines life insurance with a savings component.

“It would pay a death benefit now and in future years it could be used as asset protection insurance to allow them to spend down some of their assets and also allow them to leave money to their children in a much more cost-effective way than having term insurance,” he says.

Meckler also says the couple should make sure they have up-to-date wills, health care proxies, and down the road, long-term care insurance.

“If they are not properly protected, they could risk everything else in their savings and growth components,” he says.

Next, savings.

Meckler says typically, investors would want to start with 25 to 50 percent of one year’s gross earnings either in checking, money market, CDs or bank savings accounts, which would give them a cushion for any emergency type of need.

And finally, growth.

Meckler took a look at their long-term savings, assuming an annual rate of return of 6 percent. He also assumed a 3 percent inflation rate for general living expenses, 2 percent inflation rate for Social Security and a 4 percent inflation rate for college.

For college costs, he assumed a price tag of $30,000 in today’s dollars for each of four years for each child.

At Sam’s age 60, the couple would owe approximately $152,000 on their mortgage, and if the house appreciates at 2 percent a year, it would be worth $678,000 at that time.

“They can sell their house and move south and if they wanted to, they could pay cash for their new home,” he says.

For the analysis, starting at Sam’s age 61, he reduced their living expenses to $75,000 in today’s dollars, which with a 3 percent annual inflation rate, will be approximately $130,000 per year.

He also assumed them both starting Social Security at age 67.

Assuming these parameters, Meckler says Sam and Regina would be able to retire comfortably at Sam’s age 60.

He also ran the scenario with a retirement age of 55, but it didn’t work. Meckler says those extra five years of earnings and savings are very significant.

“However, any type of modeling that assumes a linear growth rate can never be counted on,’ he says. “They should really update their plan annually to make sure they are still on target.”

If the stock market has a couple bad years, for example, especially when you are taking income from your portfolio, it can dramatically affect your assets, Meckler says.