Get With The Plan: December 14, 2008

Lenny, 62, and Logan, 60, are planning for retirement. The couple hope to relocate to a lower-cost state, travel and financial help their three grown children. But Lenny’s health has added some uncertainty to their plan.

‘‘I have a disability that is progressive, which could perhaps severely limit my mobility and increase medical care costs, so more working years to save and grow my 401(k) and contribute to my wife’s IRA while I can are im- portant,’’ Lenny says.

Lenny and Logan, whose names have been changed, have saved $290,950 in IRAs, $33,000 in Lenny’s new 401(k) plan, $4,158 in a brokerage account, $32,000 in a money market and $15,000 in savings. They own their home mortgage-free, and Lenny has a pension coming. Today, he would receive $2,290 a month with a 50 percent survivor option, with the pension topping out at $2,764 at 65 with 50 percent survivor.

The Star-Ledger asked Michael Maye, a certified financial planner with MJM Financial Advisors in Berkeley Heights, to help the couple plan their future.

‘‘These concerns are prevalent among many pre-retirees with so many difficult choices, such as when to take Social Security, when to begin a pension,’’ Maye says. ‘‘They’ve run some online retirement calculations but they don’t feel confident given the complexity of all the moving parts.’’

Lenny’s illness — muscular dystrophy — puts a big question mark in their plans. Lenny wants to make sure Logan is provided for with additional savings, and they’ll be able to afford whatever unknown medical costs come their way in the future.

Maye says the couple have excess cash flow and as a result, they’ve been targeting $35,500 in extra savings per year, which comes out to a 43 percent savings rate. Ideally, Lenny would like to sock away another $100,000 before he retires, and if they continue this savings rate, the outlook is bright.

To reach their goal of retiring with 80 percent of their pre-retirement income, Maye says Lenny should plan to work until age 65, deferring his pension until that time. Rather than take the 50 percent survivor option with a monthly payout form the pension, Maye suggests he consider a different option. Lenny could choose a $93,000 lump sum plus a smaller monthly cash flow.

‘‘Even though on a discounted cash flow basis, he would end up with $25,000 to $30,000 less, logic says the pension is subject to credit risk so it’s better to take a portion upfront in case the employer runs into future difficulty,’’ Maye says

There are other reasons Lenny should stay at work a while longer. The pension maxes out at age 65. Additionally, Medicare won’t kick in until age 65, and given Lenny’s health issues, it could be difficult and costly to get coverage. Working longer also gives Lenny more time to add to his retirement accounts.

For Social Security, Maye says the couple should wait until full retirement age 66 to collect benefits. If Logan starts collecting early, for example, when Lenny retires from his job, her Social Security would be reduced by 20 percent.

The couple’s current cash position represents almost one year’s living expenses. Maye says that is more than sufficient, so future savings should be invested in other asset classes besides cash.

Their overall allocation matches their self-proclaimed moderate risk tolerance, Maye says, with 56 percent in fixed income and 44 percent in equities. Still, Maye says a 60 percent equities stake would better help them battle longevity and inflation risks. Within the equities, the cou- ple could further diversify with more exposure to interna- tional and emerging markets investments.

If they do decide to relocate when they retire, the sale of their New Jersey home could potentially increase their nest egg while simultaneously lowering their living expenses.

‘‘If Lenny is able to continue to work and save as planned through age 65, the couple will be in pretty good shape,’’ Maye says. ‘‘The one wild card is Lenny’s degenerative illness, but they have purchased long-term care insurance with $175,000 maximum benefits so they have some coverage.’’

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