Get With The Plan: December 13, 2009

121309Reena, 54, is a divorced mom of three. Her two oldest children have completely flown the nest, and her youngest has two years of college to complete. That’s why Reena is ready to consider retirement at age 65, but she wants to make sure she’s well-positioned for that move.

“I would describe myself as risk-averse, but my 401(k) portfolio is almost all equities,” she said.

Reena, whose name has been changed, has saved $178,008 in 401(k) plans, $340,727 in IRAs, $14,900 in a brokerage account, $15,000 in a money market and $17,000 in checking. She also has $50,000 set aside to cover those last two years of college.

The Star-Ledger tapped James Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown, to help Reena make sure her current track is the one that will get her to her goals.

“Reena has a relatively modest lifestyle for her income level and asset base, putting her in a strong position to achieve her retirement goals,” Sonneborn said.

Sonneborn ran several scenarios to see how Reena would fare.

The most successful scenario looked at Reena’s wealth if she maximized 401(k) contributions, retired from her current job at age 65 but continued her consulting position until age 70 — something Reena says she’d like to do. Sonneborn said this provides Reena with a very high probability of having sufficient wealth to see her through retirement.

The alternative scenario was to see if she could retire earlier. Sonneborn assumed Reena maximized her 401(k) contributions, left her full-time job at age 62 and continued consulting until age 65.

“While the results were not quite as robust, this scenario also appears to be reasonably achievable with a high degree of confidence should Reena wish to leave the workforce earlier than intended,” Sonneborn said.

There are moves Reena can make to improve, or ensure, her positive outcome.

First, she has a 401(k) loan of nearly $20,000 while she has ample liquidity in non-productive bank accounts. Reena estimates the interest cost on the loan is between 3 and 4 percent, while her money market accounts yield almost nothing. Sonneborn said she would be better off paying off the loan and investing for greater potential growth within a tax-deferred plan.

That could be the way to maximize contributions in her 401(k) plan. Reena currently saves 6 percent of her salary, which is just enough to gain the company match.

“With the over age 50 `catch-up’ provision, Reena could contribute a total of $22,500 instead of the $6,000 she is currently contributing,” Sonneborn said. “According to the financial projections, she can comfortably make this additional pre-tax savings without impacting her lifestyle, allowing for a more secure retirement.”

Reena shared that her family has a history of dementia. Sonneborn said it would be wise to consider long-term care insurance for this reason. He said Reena is a non-smoker and at an age where long-term care insurance is still reasonably priced.

“We would typically suggest an individual take an elimination period of 12 months which lowers the cost, and invest that savings in a longer — preferably lifetime — coverage period with inflation adjustment,” Sonneborn said.

He estimated this could cost about $3,000 a year.

Next, Reena’s portfolio. About 86 percent of her assets are in equities yet she says she’s risk averse. Sonneborn said Reena’s financial objectives look to be achievable with a more balanced portfolio of 50-60 percent growth and 40-50 percent fixed income.

“She can improve her overall risk-adjusted returns through adopting an even more globally oriented, multi-asset class portfolio by including international small stocks, a more meaningful allocation to emerging markets where much of the world’s future growth will occur, REITs, commodities, hedging strategies, international bonds and inflation protected fixed income securities,” he said.

She should consider refinancing her mortgage, which has an interest rate of 6.25 percent, well above the average for qualified borrowers. A refinance would provide for substantial interest savings over the life of the loan, Sonneborn said. The monthly interest savings could be applied to principal as a way of shortening the term of the mortgage.

Finally, she should consider rolling her IRAs and an old 401(k) plan into an IRA. Combining the four accounts would give her simplicity in tracking investments, he said.