Get With The Plan: August 10, 2008

Stuart and Judy want to make a big change in their lifestyle. They’re ready for retirement. Despite their good savings habits, they’re worried about making their money last.

‘‘Though we have assets, we aren’t comfortable retiring, because we fear that the principle will quickly erode, and we would like to leave something for our children,’’ Judy says. ‘‘We question if we could sustain our housing costs if one of us dies and then there is just one Social Security income.’’

Stuart, 66, and Judy, 64, whose names have been changed for publication, have saved $487,000 in employer- sponsored retirement plans, $201,328 in annuities, $144,300 in IRAs, $512,800 in mutual funds and $25,000 in cash accounts. Stuart already is receiving Social Security benefits of $2,000 a month in addition to his salary, and Judy will receive about $1,900 in Social Security when her benefits begin.

The Star-Ledger asked Doug Buchan, a certified financial planner with Tilson Financial Group in Watchung, to help the couple see if they’re financially ready to reduce their workload to three days a week, and then in four years, retire completely.

‘‘Cash flow projections, Monte Carlo analyses and various ‘stress tests’ pass with flying colors, given their assumptions,’’ Buchan says.

Buchan says they may even be able to increase their expenses or retire sooner and still have a highly successful financial plan.

Because the couple’s retirement assets and income will cover their needs, Buchan turned to the couple’s second goal: to leave as many assets as possible for their three grown children. The couple need to consider how to grow their assets and reduce or eliminate estate taxes.

‘‘The federal estate tax threshold is currently $2 million for individuals and $4 million for couples, assuming their assets are properly split and their wills are properly drawn,’’ he says. ‘‘Unfortunately, the New Jersey state death tax threshold is only $675,000 for individuals ($1.35 million for couples).’’

Buchan says with a priority of preserving assets for children, proper wills and appropriate asset splitting are essential. At a minimum, he says a will containing credit shelter trusts and/or disclaimer provisions should be highly considered. Buchan says, given the ever-changing federal and state estate tax laws, it is critical to keep the language of the documents flexible. They should make sure the will is drawn up by an attorney who specializes in estate law.

Stuart and Judy may want to consider gifting assets, which Buchan says is another valuable strategy in estate preservation. They can gift up to $12,000 each, or $24,000 joint, to each child each year with no tax consequences whatsoever.

Buchan says not only do these assets get removed from their estate, they also are able to witness the fruits of their labor by gifting while living. The downside of such a move, Buchan notes, is Stuart and Judy lose complete control of the money. For instance, their children may go buy a Porsche or head off to Vegas with their newfound riches, and there’s little the couple can do about it.

If they want closer control of the assets, Buchan says they can consider setting up irrevocable trusts. They’d still be giving up direct control, but they can decide in the document how and when the assets are to be used. Another option could be to gift to their grandchildren’s 529 college savings plans.

One last note for the couple is to remember the inflation bug will bite and eat away at their investments if they’re too heavily weighted towards cash and bonds. Buchan recommends a more highly diversified investment portfolio across all asset classes, and with a higher percentage to broadly diversified stock index funds.