“We want a comfortable retirement,” Mike says. “We are very conservative, as reflected in our investments.”
But they want to make sure those investments last as long as they do, or better.
Mike and Lynn, whose names have been changed, have $814,300 in IRAs, $3,000 in a brokerage account, $13,500 in checking and $3,000 in savings.
They live debt-free, and outside of their investments, Social Security is their only income.
The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple plan for a long and financially stable retirement.
“As retirees, they want to make sure they do not outlive their assets, while at the same time maintain their current lifestyle,” Kazanchy says. “They also want to remain in their home and protect the assets that they own.”
Kazanchy looked at their retirement analysis, and said they have done a good job of paying off their mortgage and making sure they remain debt-free during their life as retirees.
He ran some different scenarios to see how long their money would last.
The first assumed Mike and Lynn would continue to spend $75,000 a year after taxes, as they are today, with expenses rising at an inflation rate of 3 percent per year.
The results of this scenario are not favorable, Kazanchy says, so it’s probably a good idea they reached out to Get With The Plan.
Kazanchy projects there is a 56 percent chance that they will deplete their assets by the time Joanne reaches the age of 90.
“The primary drivers of these unfavorable results are the couples’ after-tax spending level coupled with a portfolio that is allocated to 90 percent fixed income and 10 percent equity portfolio,” he says.
If Mike and Lynn adjust their asset allocation to a 60 percent fixed income and 40 percent equity portfolio, the chance that they run out of assets by the time Lynn turns 90 decreases from 56 percent to 22 percent.
“This adjustment shows the positive impact on a portfolio’s return that increased equity exposure provides,” he says.
The second scenario assumes the couple reduce spending by $5,000 a year to $70,000.
These results are more favorable than the first scenario. Kazanchy says there’s a 93 percent chance they won’t run out of money by Lynn’s age 90.
“This projection is made with Mike and Lynn maintaining their current portfolio allocation,” Kazanchy says. “This shows the impact of a decrease in after-tax spending level in their long term financial success.
Looking at the couple’s investments, they have a 16-year time horizon when planning to Lynn’s age 90.
Kazanchy says if they have the risk tolerance to stick with their investment strategy through the inevitable ups and downs of the stock market, they should increase their allocation to equities beyond the current level of 8 percent.
“While the fixed-income market has gone through a tremendous 30-year bull market, interest rates are very low today,” he says. “The potential for rising interest rates and rising inflation is one of the biggest risks they face. Having a modest level of equity exposure, for example 25 to 40 percent of their portfolio, would provide them with better hedge against these risks.”
The primary risks that could derail their retirement include a lawsuit or a major medical issue, so Kazanchy recommends they take on some extra protection.
While a homeowner’s insurance policy and auto insurance policy provide liability protection, it is generally insufficient to cover what would be needed to settle a lawsuit, he says.
An umbrella liability policy can provide an extra layer of protection as well as added piece of mind.
These policies sit on top of other insurances, kicking in when other policies have reached their limits. Kazanchy recommends $3 million of coverage.
Next, medical. Kazanchy says while having sufficient medical insurance is important for people of all life positions, it is especially so for retirees, who usually have additional medical needs and costs compared to their younger days.
While Medicare provides coverage for some medical and health services, it doesn’t usually cover everything.
“It is important that retirees look into bridging the coverage gap with Medigap policies. Medigap policies are sold by private insurance companies and cover deductibles, co-insurance and prescription drugs,” he says. “These policies are automatically renewed
as long as the premium is paid.”
Mike and Lynn already have long-term care insurance, and they should review their coverage to make sure they are selecting the maximum amount of inflation adjustments to the policy benefit.
One more note: Many retirees ask about gifting assets either after their deaths or during their lifetimes.
Kazanchy says while an individual can gift up to $13,000 per year per recipient, free of gift taxes, the couple should not make any moves yet.
But Kazanchy recommends the couple wait before gifting.
“They need to focus on living within their means to ensure that their assets last,” he says.
“If gifting becomes more of a priority, they will need to strongly consider increasing the equity exposure in their portfolio and/or reducing other expenses.”