Get With The Plan: August 7, 2011

8711Michael, 68, and Emma, 61, have been close to pulling the retirement trigger, but the economy has made them pause.

“Right now we’re worried about lost wages. Emma had her hours cut from 40 to 16,” says Michael. “Ideally, we’d like to keep our New Jersey and North Carolina homes, but realistically, we’d sell the New Jersey home and retire comfortably in North Carolina.”

The couple, whose names have been changed, have saved $289,300 in 401(k) plans, $333,300 in IRAs, $195,750 in mutual funds, $32,000 in a money market fund and $10,000 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 the couple look at their retirement outlook.

“Michael and Emma are like many couples nearing retirement,” Duerr says. “They have worked their entire lives and saved to enjoy their golden years. Again, like most families, the effects of the current recession have led to concerns on their retirement.”

Because Emma’s hours have been cut drastically, there are fewer earnings available to go to current expenses and to be set aside for their retirement.

Michael is semi-retired and he’d like to fully retire in two years. Emma is still trying to work full time, but she’d like to retire when she is 66, in about four years.

“This would be the best scenario for them since she could then take full Social Security and they both would be eligible for Medicare,” Duerr says. “Even though her hours have been cut, she hopefully will be able to still work at her current employer until she is age 66.”

The couple say they’d like to keep both of their homes in retirement, but they understand that their assets may not allow them to do so. If they can’t keep both homes, they’d sell their New Jersey property and head south permanently once Emma retires.

The couple’s only debt is a small mortgage on their home in North Carolina, which they should have paid off by April 2014. This accounts for $1,862
of their current monthly expenses.

“Once this is mortgage is paid off, this will significantly help them in retirement by not having this payment,” Duerr says. “All too often, people are retiring with large mortgages that they are carrying for a significant amount of their retirement.”

Duerr says that not having any outstanding loans significantly improves their monthly cash needs and could help them to keep both homes.

Given their age and the current state of the market, Michael and Emma say they consider themselves to be cautious investors and are risk averse. Still, they have between 75 percent and 80 percent of their assets in equities.

“This is not what would be considered a cautious allocation,” Duerr says.

He recommends they make a radical shift and go with 60 percent to 70 percent of their assets in fixed income.

This should be done as part of a move to readdress their overall risk tolerance, and then they can make moves for their portfolio. Duerr says they should focus on more income-oriented investments, because as they enter retirement, they will need to off of these assets.

They both currently have life insurance through their employers, but those policies will end when they stop working. Given that they will have their debts paid off once they retire and they have no children counting on them financially, Duerr says it’s fine if they don’t want to buy any new life insurance.

Long-term care insurance, though, should be given serious consideration.

“If either Michael or Emma were to need long-term care, it could significantly deplete their assets and cause financial hardship for the other spouse,” he says. “It is a significant annual expense but one which I feel seriously needs to be addressed for any couple at their age.”

Even with carrying two homes and paying the mortgage on the second property, Duerr says Michael and Emma have a very reasonable budget, which will get to be even more reasonable when the mortgage is paid.

“Given the large nest egg they have saved for retirement, they should be able to obtain a modest return of 3 to 4 percent to live off,” Duerr says. “With this and both of their Social Security benefits, they should have no problem covering their expenses which includes maintaining the two homes.”

Duerr says if at some point they feel they cannot afford both homes, they can then sell the New Jersey home and have these additional assets to live off for the rest of retirement.

“They are close to beginning what should be a long and comfortable retirement as long as they continue to keep their expenses in check, pay down their second mortgage, and make some necessary tweaks to their assets,” he says.

“Once these items have occurred,” he says, “they will be headed in the right direction heading into retirement.”