Get With The Plan: August 15, 2010

81510Beth, 54, and Chris, 55, aren’t exactly where they thought they’d be at this stage in their lives. Chris was laid off from his $130,000-a-year job in February. That’s changed the whole game.

“We were lucky enough to be able to sell our house quickly, as we had taken money out of the house to pay for our daughters to go to college and had a fairly large mortgage,” says Beth. “We are left with about $200,000 cash, but need to know where to invest it and how to live without touching it, so when Chris gets another job we can buy another house.”

The couple want to remain financially afloat while Chris is out of work, but they hope he’ll find a job soon and they can buy another house. They’d like to retire in eight to 10 years.

Beth and Chris, whose names have been changed, have set aside $228,092 in 403(b) plans, $221,206 in a money market and $10,763 in checking.

The Star-Ledger tapped Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale, to help the couple create a plan that will get them through, and beyond, Chris’ unemployment.

“Unfortunately, Chris has been the victim of the economic downturn, so he and his family are faced with living on one salary and unemployment benefits,” Gibney says. “In Chris’ case, the unemployment benefits are substantially below his former salary.”

It was bad timing that the couple had to sell their home while the real estate market was down, and they’re currently renting. Chris and Beth would like to buy again when Chris finds work, but Gibney wonders if that’s wise.

“I believe in certain circumstances the old argument that it is cheaper to own than to rent may not necessarily be true,” Gibney says.

The argument for renting is stronger if, as they have stated, they will not stay in New Jersey when they retire, he said.

Further, he says, when Chris goes back to work, they can use some of the extra income to increase their savings for retirement.

Gibney sees some room for improvement in the couple’s investments.

He recommends they roll over Chris’ 403(b) and consolidate it with his current IRA. Then, he suggests further diversifying in a well-allocated portfolio.

The current IRA asset allocation is 100 percent in equities. Chris’ time horizon is at least five years. And Beth, with a similar time horizon, has 50 percent of her 403(b) in a fixed account.

Beth will have fewer investment options, assuming Chris rolls his funds to an IRA, which will open up the entire investing universe to his funds. To determine the best mix of assets for their savings, they should do a risk assessment, Gibney says.

Now, the cash.

Beth and Chris have more than $220,000 in a money market account following the sale of their house.

“We always recommend keeping a sum of money very liquid for emergency reserves, and then keeping mid-term money fairly liquid if it will be used within three years,” Gibney says. “But these days, you have to take into consideration that money market accounts and the like are earning virtually nothing, so it may be wise to invest approximately $100,000 of the proceeds from their house in a CD or short-term bond fund.”

Gibney chose the $100,000 figure because the couple may need some of the money to live while Chris is not working. Their monthly expenses are more than $5,000, including insurance premiums, and if they keep two years of expenses in cash, it comes to approximately $120,000. Two years may be too long, Gibney says, but when someone is looking for a job, it is better to err on the conservative side.

If Chris finds a job in less time, they can invest this money with a time horizon equal to their retirement date, with the goal of buying a house in retirement, Gibney says. He says good options for the money include corporate or muni bond funds, depending on Chris’ income.

Life insurance is one area this couple should examine. They have a combined monthly premium of $618 for whole life policies, but a comparable annual term policy for the same death benefit could be about a third less, Gibney says.

“I can’t stress enough here that there are a number of different variables that go into a life insurance premium — health, lifestyle, family history — so they should apply for and get an accurate quote before they do anything with their current policies,” he says. “The good news is that they have accumulated a generous cash value of approximately $60,000 among their four policies.”

This can be beneficial, Gibney says, as the couple could take this cash value and supplement their retirement balances. “$60,000 growing at 8 percent for 10 years can more than double, which will be handy in retirement,” he says.