Get With The Plan: April 8, 2012

Kathy, 66, and Marc, 68, are entering their retirement years. The couple plan to stay in New Jersey to be near their grandchildren, so how they should invest going forward is a big worry.

“Our concern is whether we will have enough money to cover our retirement and that we will not outlive our resources,” Kathy said. “Hopefully, we will be able to travel to see other parts of this country and possibly Europe to see other family and friends.”

Kathy and Marc, whose names have been changed, have saved $265,000 in 401(k) plans, $12,400 in IRAs, $116,200 in a brokerage account, $37,000 in savings bonds, $2,500 in Certificates of Deposit, $53,500 in money markets, $82,200 in savings and $500 in checking.

Marc has started receiving his $85,000-per-year pension, and Kathy has an annual pension of $11,360, plus Social Security benefits.

The Star-Ledger asked Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence, to help Kathy and Marc make the most of their income and assets as they begin their retirement.

“Kathy and Marc have managed their personal finances well to date as far as their income and expenses are concerned,” he said. “They have a few significant challenges to address in terms of their overall finances.”

They want to travel in retirement, and Pawlik says cash flow projections show they can afford it. But first, they need to gain perspective relative to their income and expenses to better manage their cash flow.

Kathy and Marc have expenses of about $93,000 a year, and Pawlik assumed they would increase with inflation at 3.5 percent a year. He says their income will outpace annual expenses for several years, giving them a surplus they can use for expenses or to grow their investment portfolio.

It’s their portfolio that needs a makeover.

Cash makes up about 21 percent of their total portfolio, which is far more than they need for emergency reserves.

Pawlik suggests they keep $50,000 to $60,000 in cash and consider investing the rest for long-term purposes.

They also need to move around some of their investments.

A large percentage of the couple’s assets are concentrated within a few asset classes, with roughly 40 percent in domestic equities, 38 percent in domestic bonds and 21 percent in cash. This allocation increases the portfolio’s risk while reducing the return potential, he said.

He recommends the couple reduce their allocation to U.S. equities, bonds and cash and add exposure to developed international and emerging market equity and bond investments, as well as alternative asset classes such as commodities, real estate and hedge strategies.

“This may serve to reduce the overall risk of their investment portfolio by implementing a more efficient mix of investments, while concurrently targeting a higher level of overall return,” he said.

They shouldn’t overdo the alternative asset classes, though.

He said hedge strategies that short stocks, for example, are meant to limit the volatility inherent in investing in only long equity funds. It’s a move to balance the portfolio.

Pawlik also took a look at where the couple’s investments are held. They have several 401(k) plans with former employers, and the investments offered are a fixed lineup of funds without much choice.

Pawlik says it’s time for a move.

“These plans should be rolled over into their respective IRAs in order to gain access to a much wider range of investment options and provide flexibility to implement a well-balanced asset allocation strategy for their overall portfolio,” he said.

One big item on the couple’s to-do list is paperwork. There’s a lot they need to do in this category.

First, they do not have beneficiary designations listed on their retirement plans. They should immediately update their designations so their wishes are followed upon their deaths.

Next, Kathy and Marc have wills, but they’re more than 30 years old. New ones are long overdue.

“They should work with an estate planning attorney to update their wills in order to ensure that assets will be distributed according to their wishes, and that appropriate executor and successor executors are named in the will,” Pawlik says.

It’s also essential that they get their other estate planning documents in order. They do not have advance directives, or medical or financial power of attorney documents in place. Without those documents, they could be handing a mess to each other or to their heirs should something unexpected happen.

“These documents are an important part of a sound estate plan and will help to ensure that their medical wishes are clear, and that appropriate individuals are named to handle their medical and financial decisions in the event that either one of them becomes incapacitated,” he says.

Pawlik says Marc and Kathy have enough life insurance given that they have no dependents and minimal liabilities. They should keep the coverage in place to provide extra liquidity to help the surviving spouse with final expenses in the event that something happens to either of them.