Get With The Plan: December 19, 2010

121910Dean, 54, and Margaret, 52, are about to sail into uncharted territory.

Dean is about to lose his job.

“Since my husband will be facing a layoff within the next few weeks with a potentially difficult time of finding new employment, could we possibly retire next year if I can continue to work part time?” wonders Margaret. “My current part-time job of four days a week has now been reduced to three.”

The couple, whose names have been changed, have saved $571,870 in 401(k) plans, $49,124 in IRAs, $42,700 in an annuity, $18,020 in a brokerage account, $50,595 in Certificates of Deposit, $164,164 in money markets and $5,320 in a checking account. At age 65, Dean should receive a monthly pension of $365.

The Star-Ledger invited Douglas Duerr, a certified financial planner and certified public accountant with U.S. Wealth Management in Montville, to help the couple plan for Dean’s pending unemployment and to look ahead to their retirement years.

“The couple has done an excellent job of living within their means, saving, paying for their child’s college education and paying off their mortgage,” Duerr says. “However, they face a large uncertainty as Dean will be laid off from his current employer in the next few weeks.”

Dean will not receive any type of severance package, so all they can count on is $600 per week in unemployment benefits. The couple is rightly concerned, given the bad economy, that Dean may not be able to find employment and may be forced to retire at age 54.

Retirement at this age was never what the couple had planned. They intended to work into their early 60s, and as a result, amass additional savings for retirement.

Given Dean’s young age, he will have a long retirement ahead of him if he cannot find another job, says Duerr.

Dean and Margaret have saved well. But because of their young ages, they can’t take distributions from retirement plans without penalty unless they make some special plans.

“They can avoid the penalty by taking advantage of IRS code section72(t),” Duerr says. “This exception states an individual must take a series of substantially equal periodic payments.”

Taking these payments can be somewhat complicated, and if not done properly, the IRS can deem the distributions early withdrawals and charge a 10 percent penalty. If they are forced to start taking distributions before Dean reaches age 59½, they need to ensure they have properly followed this exception.

Duerr says the couple’s cash reserve, along with Margaret’s earnings and Dean’s unemployment benefits, will help cushion the impact of Dean’s lost salary until he can find new employment.

Duerr says the couple can plan on significantly decreasing any unnecessary expenses. An initial review of their budget found the couple believes they can decrease their monthly expenses by $1,400.

“The big problem here is that they will need to pay for health care which will cost almost $1,200 per month,” Duerr says. “So as a result, their monthly savings will be minimal given the cost of insurance.”

If the couple makes the cuts they say they can, their annual expenses will be about $88,000. Margaret’s earnings of $80,000 and Dean’s unemployment of $30,000 will mean a shortfall of between $8,000 and $10,000 a year, Duerr says.

“This would be after they pay income taxes and still takes into account Margaret maxing out her 401(k) at $22,000 per year,” he says. “If they are able to decrease some additional items, things will improve even more.”

Given they have a large cash reserve, Duerr says they should be able to easily cover the expenses not covered by their earnings and unemployment. At the same time, if Dean can find a new job without dipping significantly into retirement assets, their situation will improve.

If Dean is unable to find a job and the couple need to take withdrawals from retirement assets, Duerr suggests they put this off as long as possible.

“If they are forced to access these funds, I would recommend purchasing a fixed annuity,” he says. “By doing this they will be able to let their assets grow while pulling an income stream from the accounts.”

Duerr says Dean and Margaret need to realize that a fixed annuity would be a long-term investment. Before choosing such a product, one must completely understand the penalties, expenses, surrender charges and cap rates that may be applicable, he says.

The couple also need to determine their insurance needs. Given Dean’s unemployment, he will no longer have any life insurance because his current policies are through his employer. Dean and Margaret need to determine whether they are comfortable with this or whether they should purchase a policy to protect them should he pass away prematurely, Duerr says, despite the extra expense it would add to their budget.

“They need to keep their expenses in check in order to minimize withdrawals from their savings,” Duerr says. “Hopefully, Dean will find a new position and they can then continue saving for retirement rather than using these assets.”