Get With The Plan: December 12, 2010

121210Bill and Mara are eyeing an early retirement. Both in their early 50s, they’d like to leave their jobs within three years, sell their New Jersey home and build a home on land they own in North Carolina.

“We would like to quit our current jobs in three years and only work part time when living in North Carolina, but would like to understand if working at all will be a requirement,” says Mara, 54.

Bill and Mara, whose names have been changed, have accumulated $530,045 in 401(k) plans, $1,032,000 in IRAs, $260,000 in mutual funds, $45,000 in brokerage accounts, $8,000 in a money market, $8,000 in savings and $500 in checking.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help Bill and Mara determine if their consistent saving is enough to let them retire in three years.

“Barring any unforeseen circumstances, they will be able to enjoy a 30-year retirement beginning in 2013, having accumulated 147 percent of their anticipated retirement expenses,” D’Agostini says. “In fact, if they desire, they could actually retire in 2011.”

She says every year they hold off retiring may increase the potential of a long and successful retirement.

That doesn’t mean the couple will be without challenges.

The largest concern for most people is how they will fund the rising costs of health care, D’Agostini says. According to a report by the National Association of Insurance Commissioners, health care costs can escalate to nearly one-fourth of your overall expenses later in life. To make sure those costs are considered, D’Agostini says of her calculations, on top of the projected 3 percent inflation for most expenses, she calculated medical inflation at 5 percent.

“They will have the ability to obtain COBRA for 18 months upon termination from employment, but then will have to find individual coverage for seven or eight years until Medicare is available for each of them,” she says. “At this point, they will need to find a supplemental plan to Medicare coverage as well.”

Long-term care insurance is another consideration as nearly two-thirds of all individuals will need some form of long-term care in retirement, D’Agostini says. Nursing homes can cost more than $85,000 a year and assisted living facilities more than $50,000 a year, so this is a big cost to take on, even with the couple’s substantial assets.

D’Agostini says Bill and Mara should think about buying policies because they’re still young, rates are affordable, and they’re still in good health and insurable.

“Often people look to obtain LTC insurance when they start showing signs of aging, and this is the very time when you either can’t secure it, or it is too costly to make sense,” she says.

On their investments, D’Agostini says the couple have been excellent savers, and they have done “a superb job of living within their means.” After running a cash flow report, it appears they have a surplus of more than $47,000 a year.

D’Agostini recommends they increase their retirement savings while they’re still working. Mara contributes the max to her 401(k), but she also should take advantage of the $5,000-per-year catch-up contribution for those older than age 50.

Bill should be saving an additional $6,000 in his IRA, D’Agostini says, to take advantage of the tax deferral.

“Since they will still be in a relatively high income bracket in retirement, it might be wise to put this away in the Roth 401(k) option if it is available for Mara, and for Bill to put his $6,000 in a Roth IRA if he is eligible to contribute the full amount based on his income level,” she says.

Roth options are after-tax contributions, but they grow income tax-free and come out income tax-free if held until the age of 59½ or for five years. Also, they would not be required to take Required Minimum Distributions, or RMD, on the Roths at age 70½.

“RMDs could put them in a higher tax bracket, forcing them to take income that they might not need,” she says. “It also has the added benefit of transferring the tax-free element to their adult child if there is any left over upon their passing, making it a vehicle to consider for wealth transfer.”

The couple’s asset allocation is not consistent with their moderate risk tolerance.

D’Agostini says Bill and Mara are largely in stocks but should look to increase their bond percentage, including some municipals, as well as decrease the amount they have in cash. She says they’re largely over-positioned in large-cap value stocks.

“They should look to rebalance their account at least annually or if their financial situation changes,” D’Agostini says. “The additional diversification will help reduce volatility.”

If they have additional cash flow surplus each year, they should contribute to the asset classes that are under-weighted, she says.

Bill and Mara should start serious plans for their anticipated retirement expenses.