Get With The Plan: August 29, 2010

82910Tom, 56, and Viola, 55, are looking forward to retirement. After raising two children, they’re ready to put themselves and their financial future first.

“Our biggest concern at this time is to be financially secure to retire at age 62 with appropriate assets to live comfortable and have appropriate health care coverage and long-term health care for my wife and myself,” Tom said.

When they retire, they’d like to leave New Jersey and move south to live near their children.

The couple, whose names have been changed, have set aside $85,000 in 401(k) plans, $670,272 in annuities, $423,858 in mutual funds, $115,000 in savings and $11,000 in checking.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to assess this couple’s retirement readiness.

“My only question is why wait until you are 62,” Pallitto said.

In addition to Tom’s healthy salary, he collects an annual pension worth $40,000 from a former employer. They spend about $85,000 per year, and they’re adding about $60,000 to $70,000 per year to their savings accounts, and another $22,500 to his 401(k) plan.

“I think they can comfortably retire when Tom is 58,” said Pallitto. “If Tom works another year and a half, he will add another $30,000 to his 401(k) and accumulate another $70,000 in savings after paying for his daughter’s wedding.”

The sale of their New Jersey home would net from $425,000 to $450,000.

They could use the proceeds to buy a home near their children, which they estimate would cost between $300,000 and $325,000.

That would leave them an additional $100,000 to $125,000 to add to their savings, which they could use to bridge the gap from the time they retire to the time they collect Social Security.

Because Tom already is receiving a pension from his previous employer in the amount of $40,000 per year, they only need to come up with $45,000 to $50,000 a year from their savings to maintain their lifestyle before they start collecting Social Security in four years, Pallitto said.

“The additional savings from the next year and a half of $70,000, plus the estimated remaining equity of $125,000, could cover their needs without tapping into their current savings,” he said. “During this four-year period from age 58 to 62, their tax liability would be about $5,500.”

At age 62, Tom could collect $22,000 per year from Social Security and the following year when Viola turns 62, they will receive about $32,000.

Pallitto said the most important component of this couple’s retirement income is the annuities they purchased two years ago.

“They effectively created a second pension by purchasing a variable annuity with a guaranteed income rider,” he said. “If they wait until Tom turns 64, the annuities will pay about $60,000 per year for the rest of their lives.”

But these particular annuities don’t force Tom to wait until age 64. At age 59½, he can take up to $45,000 each year for the rest of their lives.

Therefore, Pallitto said, you can see they will have more income than they spend in retirement, and they will have the luxury to draw the income from various sources, such as savings, 401(k) or annuities, in a tax-efficient manner.

The only weakness in their current situation is they do not have long-term care insurance in the event of a prolonged illness, Pallitto said.

“If they purchase a joint long-term care policy now they could buy more than adequate coverage for $450 per month,” he said.

A policy would mean a slight increase in their current monthly expenditures, but overall, when retirement comes and their mortgage payment ends, it will not be a net long-term increase.

“In fact, the $1,500 they are currently paying on their mortgage will be used to pay for their health care and LTC insurance if they retire at 58,” Pallitto said. “Therefore, our approach would recommend that they consider retiring when Tom is 58 rather than 62. The long commuting hours and work days are mostly going to taxes.”

The couple’s current asset allocation outside of the annuities may be more risky than needed, Pallitto said. They were targeting an 8- to 10-year time horizon because they didn’t think they had enough assets to sustain a comfortable retirement.

The couple is investing along a growth and income allocation, but Pallitto recommends an income with a growth strategy approach instead.

“The annuities they purchased two years ago assure them that they will not outlive the income stream from those assets, and therefore they don’t need to take on additional risk.”