Get With The Plan: December 18, 2011

Kevin and Grace are in their mid-50s and looking ahead. Their one child is in college, and those bills were taken care of by a grandparent. They’re now beginning to ponder their next stage in life.

“We’re thinking of retiring to a lower expense state and doing a lot of traveling,” says Grace, 55.

The couple, whose names have been changed, have set aside $197,100 in 401(k) plans, $425,000 in IRAs, $276,000 across several brokerage accounts, $182,100 in money markets and $3,200 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 see if they can do better on their quest for financial independence.

Duerr says Kevin and Grace have fairly reasonable goals for retirement. They would like to either downsize their current home to a smaller one or move to a less expensive state. They also would like to spend several weeks a year traveling.

“They will also be fortunate enough to have their current home paid off within the next seven to eight years,” Duerr says. “As a result, this will significantly decrease their monthly expenses and help their cash flow once they reach retirement.”

The couple would like Kevin to retire at age 66, while they’d like Grace to leave her current job at age 60 and then work part-time.

Right now, Kevin contributes 10 percent of his pay to his 401(k), or about $8,710, and he has a plan to increase contributions annually by 1 percent. Grace saves $5,400 a year to her employer plan.

“From a review of their annual budget the couple has additional funds each year that they save,” Duerr says. “Given the large cash position they already have, I would suggest that they increase their annual retirement contributions.”

Both Kevin and Grace are over age 50, so they can both contribute the annual $16,500 to their respective plans, plus the additional catch-up contribution of $5,500.

Based on their current annual contributions and assuming a 5 percent rate of return (net of fees, taxes, commissions, surrender charges and the like) their balances at age 66 would be $1.4 million. This takes into account Grace retiring in five years at age 60 and only Kevin contributing after that.

But if Kevin saved $16,500 per year, they’d have $1.53 million at Grace’s age 60, and if he also saved the catch-up contribution, their savings could grow to $1.62 million, using the same assumptions.

“Based upon their current cash flows they could not max out both of their retirement contributions but it would be in their best interests to increase them as much as they can afford,” Duerr says.

The couple’s bigger problem is that they have all their savings spread very thin in quite a few different 401(k)s, IRAs and brokerage accounts. “In the various accounts they have over 300 different stocks, bonds and mutual funds,” Duerr says.

He recommends they consolidate some of these assets in order to help them keep a better eye on their investments. Plus, consolidation will lead to greater convenience because it will cut down significantly on the number of account statements they need to review.

After discussing the couple’s investments and investing strategies with them, Duerr says there doesn’t appear to be a clear reason why they own what they do, and there’s no real need for the significant number of investments.

“By no means would I suggest they not have a diversified portfolio. However, the current holdings do not appear to be accomplishing that goal,” Duerr says. “As a result, they could be hurting their overall investment performance.”

Given their asset base and the large number of specific holdings, the couple should see a financial professional in order to assist them with consolidating their accounts, keeping in mind tax consequences, fees, charges, expenses, cost basis and other issues for each investment.

The couple have sufficient life insurance, but the real concern is a lack of long-term care coverage. Duerr says they may not be able to obtain it for Kevin if they tried because of a health condition. The couple said they looked at policies several years ago, but determined it was too expensive. Duerr says it’s time to take another look, especially while they’re still young.

One other item is that the couple says they expect to someday receive an inheritance of about $1.5 million.

“I would not look at these funds as any guarantee since (the account holder) could need to use these assets for care as the years go on,” he says. “If at some point they do receive a large inheritance, that will only be a help for them in retirement.”

Overall, Duerr says the couple are on their way to planning a fiscally strong retirement. “They need to continue to focus on keeping their expenses low and if they are able to increase their annual retirement savings they should be able to save the funds they need for a long and comfortable retirement,” he says.