Get With The Plan: August 1, 2010

8110Mel, 55, is a widower who raised two kids, now 23 and 19, on his own. He’s now looking to get himself ready for retirement in two short years.

“I want an early retirement, to pay for the final three years of college for my youngest and to pay off the house in the next 12 months,” Mel said.

He estimates the college bill to be about $50,000.

Mel, whose name has been changed, expects to receive a $3,400 monthly pension benefit at age 57. He’s also saved $712,845 in his 401(k), $20,000 in IRAs, $165,000 in a brokerage account, $19,000 in college savings, $11,000 in savings and $4,000 in checking.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Mel look into his financial future.

“For most people, these may be lofty goals in such a short time frame, but Mel is on target to achieve them,” said Duerr. “With his conservative approach toward spending and his saving habits, all of these plans should be attainable in the short term.”

Mel currently is on track to pay off his mortgage within the next year. The current balance of the loan is $21,000, with a 5.25 percent interest rate. He has been paying additional principal toward the balance and is set to pay it off by the first quarter of 2011.

“The additional payments may be a little difficult to make given that he is also paying for his youngest son’s college tuition,” Duerr said. “However, once Mel has paid off the mortgage, he will free up the monthly payment and will be able to either allocate these funds for other things — college payments or additional retirement savings — or lower his monthly expenses.”

Either will be a huge help to him once he enters retirement in a few years and is on a fixed income.

Mel is mostly paying for college tuition from current earnings, but he has an account with approximately $19,000 set aside to pay part of the school costs, too. Once he pays off his mortgage in the next year, Duerr said, he will have these additional funds to pay for the school costs.

“The bulk of the costs should be paid by the time he retires, but there will be some left,” Duerr said. “If he is unable to pay for the remaining tuition from his monthly cash flow I would suggest liquidating some of his personal stock portfolio to pay for these costs.”

Mel has kept his monthly expenses in check. Given his retirement savings plans, he should have no problem doing the same when he leaves work. Upon paying off his mortgage, Duerr said, his annual expenses will be virtually the same amount he will be receiving from his pension. With his 401(k) and other investments, he should not have a problem meeting his retirement needs, Duerr said.

“Things will only improve for him once he begins receiving Social Security,” he said. “But should an unexpected need arise, he can use some of his other assets to address that need.”

Mel has been a sure and steady retirement saver. He presently is contributing approximately $18,000 per year, before company matches, and the match is a healthy one: The company contributes 10 percent of his salary each year the firm has a profit. While he’s doing well, Mel could actually contribute about $4,000 more if he wanted to max out his contributions.

“This may not be feasible at the current time but once he pays off his mortgage, I would strongly suggest he maxes out his 401(k),” Duerr said. “By doing this he will be able to save some additional funds for retirement and lower his taxable earnings from the increased contribution.”

And because Mel will no longer have a mortgage interest deduction, the decrease in taxable earnings will help his overall tax situation.

One item Mel needs to address is his current asset allocation in his 401(k) and other investment accounts. Approximately 95 percent of his 401(k) is invested equities. He needs to reallocate a percentage of these assets to fixed income, especially with retirement in the immediate future, Duerr said. Mel should have a long retirement and with the company pension he can be a bit more aggressive if he wishes, but he needs to have an equity/fixed income allocation in the range of 70 percent stocks and 30 percent bonds/fixed income, Duerr said.

Mel should also reallocate his non-retirement investments, as nearly half is invested in company stock he’s purchased through an employee stock purchase plan.

“This is a significant amount to have in one security,” Duerr said. “I would suggest he consider reallocating some of this investment to attempt to reduce his overall exposure to this one security. Also, when we take into account these investments with his 401(k), he is virtually 98 percent in equities, which is much too high.”