Get With The Plan: August 16, 2009

81609Mandy is an independent 53-year-old woman. When she reaches retirement at age 62, she hopes to be mortgage-free.

But she knows that every cent she pays towards her mortgage is one penny less that lands in her retirement savings accounts.

“My concern is whether I should put more money into my 401(k) plan or pay more money towards my mortgage principal,” Mandy said. “I want to pay off my house as soon as I can.”

The Middlesex County woman, whose name has been changed, has set aside $55,132 in her 401(k), $19,083 in IRAs, $437 in a brokerage account, $41,425 in Certificates of Deposit, $23,639 in savings and $2,000 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 Mandy balance her resources with her goals for the future.

“Her hopes are to retire in approximately ten years, have her mortgage paid off and maintain the lifestyle that she is accustomed to living,” Duerr said. “This may seem simple enough but, based on her current savings and current contributions to her 401(k), it is unlikely.”

Mandy is currently saving $7,824 per year in her 401(k), and her company matches 50 percent of her first 2 percent, and then 25 percent of the next 4 percent saved. That gives her a total annual contribution of $9,924.

Duerr said Mandy needs to increase her contributions as much as she possibly can. She can contribute $16,500 a year, and because she’s over age 50, she can save an additional $5,500 for a total annual contribution of $22,000.

Upping her annual retirement savings will make a big difference in her account balance by the time she reaches age 62. If she continues to contribute the amount she is currently saving, Duerr said, her total balance will be $185,935 at age 62, assuming a 5.22 percent rate of return. If she instead contributes the maximum amount possible — without the catch-up contribution — her balance will be $300,029. But if she saves the max, plus the catch-up contribution, her savings will be worth $372,305.

“As much as it may seem difficult for Mandy to save this additional amount in her 401(k), she must try to find a way to do it,” Duerr said, adding a review of Mandy’s budget shows there’s probably some room to play.

Based on her budget numbers, Duerr said there is a giant $30,000 amount that’s not accounted for.

“Like most people, she spends more than she realizes on things,” Duerr said. “She needs to set aside some of this money to fund her retirement.”

She should closely monitor her expenses for several months, which will help her see where this extra money is going.

One strategy that may help Mandy set the extra money aside is to “pay herself first.” She can increase the automatic contributions from her paycheck into her 401(k) plan so she won’t have to think about setting the money aside. As long as she has no significant expenses, like her recent kitchen renovation, Mandy should be able to save more without having to sacrifice her lifestyle today, Duerr said.

He also noted Mandy has done a good job of paying down her mortgage. For the past seven years, she has sent $300 in extra principal with every mortgage payment. Mandy is concerned about having her mortgage paid off by the time she retires. This might be a good time to consider refinancing her current mortgage — which has a 7.125 percent interest rate — to a 10-year loan at 5 percent to 5.5 percent.

“By doing this and continuing to pay the same amount she currently pays, she would be able to have her loan paid off in approximately six years,” Duerr said. “At that point, she could save the additional amounts.”

After she pays the mortgage, it would be wise to save some funds outside of her retirement plan, Duerr said. When the mortgage is paid, she could start redirecting those payments to taxable accounts.

Working a few years more would be another option, Duerr said, so Mandy can save more and give her assets more time to grow.

“As much as this may not seem appealing, I would rather she work an extra few years than be concerned about running out of funds when she is in retirement,” he said.