Sue, 70, wants to know when she can stop working, but still afford to maintain her lifestyle. She likes to travel — something she did with her husband, who died in 2007 — and she’s looking forward to stopping work so she can volunteer for the many causes she deems worthwhile.
But can she afford it?
Her only debt is a small home equity loan of $4,200.
“When my husband died it was $57,000. I literally threw money at this loan because I did not want this debt in retirement,” she says.
In addition to her home, Sue, whose name has been changed, owns a vacation cottage that’s rented much of the summer, but she also spends time there.
She’s saved $120,000 in a 401(k) plan, $164,600 in IRAs, $104,000 in mutual funds, $146,800 in a brokerage account, $57,000 in savings and $3,000 in checking.
The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help Sue plot out her retirement future.
“She has done a great job of saving and living well within her means,” Meckler says.
Sue is currently saving 22 percent of her salary to her 401(k) plan, and she’s aggressively paid off most of her home equity line.
Meckler says he’d like to see her pay it off in full right away.
“Her total monthly expenditures minus federal and state taxes are approximately $2,700 per month, but if we subtract the home equity loan payment of $400, her monthly expenses will be $2,300 per month,” he says.
To help ensure a comfortable retirement, Meckler reviewed Sue’s assets and the risks she’s taking. He says she may want to consider a long-term care insurance policy, assuming she’s relatively healthy.
“The cost of nursing home or assisted-living care is very expensive, especially in New Jersey,” he says. “It can easily range from $6,000 to $9,000 per month and those costs could dramatically deplete her assets.”
Sue should also make sure her will is up to date, and that she has a health care proxy and a living will, he says.
For his analysis, Meckler assumed an annual rate of return of 6 percent on her assets.
He also used a 3 percent inflation rate for general living expenses and 2 percent inflation rate for Social Security. He also assumed her two properties would increase in value by 2 percent a year.
“Because she wants to spend more time in her cottage, which would mean less time she could rent it out and collect rental income, and wants to do more traveling, I assumed increasing her monthly cash flow needs by $800 per month,” he says. “This will give her plenty of cushion for doing the extra things she wants to do.”
Assuming these parameters, Meckler says Sue will be able to retire now and live comfortably.
He says if she continued to work either full or part time for the next few years, it would only help build her asset base and increase her retirement income.
But Meckler says any type of modeling that assumes a linear growth rate can never be counted on.
“Sue should really update her plan annually to make sure she is still on target,” he says.
“If the stock market has a couple of bad years, it can dramatically affect her assets, which takes me to the subject of asset allocation.”
Sue says her risk tolerance is conservative to moderate. Looking at her investments, minus real estate, she has about $595,000 of investments, including cash. Of that, Meckler says approximately $100,000, or 17 percent, is in the fixed-income category, which leaves roughly 83 percent in stocks and mutual funds.
“She is currently leaning much more toward an aggressive investor than a conservative-to moderate-investor,” he says. “She currently does not have a well-balanced portfolio by any means.”
Meckler recommends she make some changes to reach a portfolio makeup that’s 50 percent fixed income and 50 percent equities.
Breaking it down further, he suggests 45 percent bonds, 2 percent cash, 18 percent large growth stocks, 19 percent large value stocks, 2 percent mid cap stocks, 3 percent small growth stocks, 3 percent small value stocks and 5 percent international stocks.
“I would also recommend to her to rebalance her portfolio either quarterly, semi-annually or annually,” he says. “This helps to mitigate risk.”
Meckler says certain sectors of the market outperform other sectors over the course of the year, so by rebalancing, Sue can capture more gains and lessen the chance of losses.
Sue may also want to consider taking a portion of her assets and purchasing a Single Premium Immediate Annuity, or SPIA. It’s a contract between you and the insurance company, where you give the insurance company a lump sum of money, and in return, they give you a guaranteed payment for a specified time period or until you die.
“The purpose of a SPIA is to provide you with a guaranteed income stream,” Meckler says. “During retirement market fluctuation of principal, market risk and varying interest rates — interest rate risk — lead to uncertainly of future income.”
He says an SPIA reduces the risk and provides certainty and peace of mind in providing an income you can count on.
“For example, at Sue’s age, she could purchase a $100,000 SPIA and begin to receive $621 per month for the rest of her life,” he says. “That is approximately a 7.4 percent rate of return.”