“I would like some strategies and advice on how I should proceed financially so that I don’t get in my own way,” she said.
Lisa, whose name has been changed, has set aside $138,422 in her 401(k) plan, $24,312 in CDs, $2,219 in savings and $1,701 in checking.
The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors in Woodbridge, to help Lisa examine her options.
While Lisa is losing her job, D’Agostini said, she has sufficient skills and job experience to get another good opportunity on the same pay scale.
“She will need that in order to realize a healthy, long retirement,” she said. “Fortunately, she has some savings and a good emergency fund, which will cover nearly four months of her expenses.”
On Lisa’s side is her lifestyle of living within her budget.
Lisa’s first priority should be to conserve what she has, D’Agostini said. Her tight budget is the natural starting point.
“She will want to reduce any discretionary expenses that she has to preserve her savings for as long as possible,” D’Agostini said.
Lisa was interested in accelerating her mortgage payments, perhaps by using funds from her 401(k) plan. Probably not a wise decision, D’Agostini said.
Lisa’s 401(k) plan enjoys tax-deferral and she is at an age where retirement may be sooner than she thinks. She has almost no other debt, and she’s on schedule to have her mortgage paid off in six years – well before her retirement.
D’Agostini said Lisa plans to work until the age of 70, but that’s not always possible.
“Most people plan to retire at age 65, yet the average age falls below 60, mostly due to unforeseen health issues and unplanned layoffs that alter the course,” D’Agostini said.
Along those lines, Lisa should vigorously look for a job using any outplacement resources from her current company, head hunters and social networking sites. She needs to get the word out and network with colleagues as much as possible. The best route into a company is through a referral, D’Agostini said.
Once back at work, Lisa should increase her 401(k) contributions, if her salary permits. She also needs to examine her asset allocation strategy. Because Lisa is extremely risk averse, her projected rate of return is quite low, at only 6 percent over the next 15 years. D’Agostini said if Lisa can tolerate a bit more risk and realize even a slightly higher rate of return, she will enjoy a more comfortable retirement at perhaps an earlier age.
Once her mortgage obligation is finished, it will free up more funds for retirement funding. D’Agostini said after considering Lisa’s risk tolerance, she would be positioned in an asset allocation of 15 percent equities, 13 percent cash equivalents and 72 percent bonds. A shift to more equities will increase her investment risk but also give her the opportunity for a higher rate of return, and thus a chance at a more robust retirement account.
“A major risk in retirement is outliving your resources. If you don’t exceed inflation over time, you will erode your purchasing power,” D’Agostini said. “Even with normal inflation of approximately 3 percent, a gallon of milk, which costs $4 now, will cost you $5.38 in 10 years.”
Lisa should consider heath care costs, which could throw her financial plan off course. Funding health care in retirement could be one of the most significant challenges retirees face. Long-term care is another potential bombshell, with costs averaging $240 to $250 per day at today’s rates, and this cost growing well above normal inflation, D’Agostini said. The cost of long-term care insurance may seem high, but the need has never been more real.
“People are living longer, and many diseases that used to kill us are now becoming chronic diseases,” she said. “The chances of needing LTC are over 50 percent as life expectancy for women is now in the early 80s. Securing LTC insurance would be a wise move, especially while she is still in her 50s.”