Get With The Plan: December 20, 2009

122009Roberto and Carlee are planning for retirement. Roberto, 54, would like to quit his full-time job in two years, but Carlee, 45, plans to work another decade.

“The big concern is that when I leave regular work, our health care benefits will also go away,” he says. “There is the possibility she could receive health benefits through her employer if she worked one additional day per week, however, that has not been part of our thinking right now.”

The couple would also like to fund 70 percent of college educa- tion expenses for their children, 11 and 7, and they’d like to have enough money to travel during retirement.

Roberto and Carlee, whose names have been changed, have saved $248,000 in 401(k) plans, $370,000 in IRAs, $240,000 in a brokerage account, $211,000 in mutual funds, $25,000 in money markets and $10,000 in checking. They’ve also set aside $81,000 in 529 plans for college expenses.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/ RICH Planning Group in Mor- ristown, to help the couple see if they’re prepared for the future they hope to have.

“The biggest impediment towards Roberto’s early retirement is the loss of his medical insurance for the family,” D’Agostini says. “If they had to self-insure, this would significantly affect the family budget, as this would add an additional $1,500 or more per month for insurance costs.”

Roberto does plan to work part-time, earning about $25,000 a year, when he leaves his current job, so D’Agostini says it would be wise for him to secure a job that provides health insurance, or for Carlee to work an extra day or more per week to obtain health insurance.

If Roberto and Carlee want to pay for 70 percent of college costs for their children, D’Agostini says they’re not saving enough. She assumed a cost of $35,000 per child per year to be their expense in today’s dollars, and she worked in an inflation rate of 5 percent.

They’d need to accumulate $212,267 for their 11-year-old and $245,726 for their 7-year-old. Assuming an overall rate of return of 6 percent, Roberto and Carlee would need to save an additional $1,480 per month, but if Roberto retires in two years, their cash flow wouldn’t support that level of savings. They may need to tinker with their current plan to reach college goals.

“At the current salaries, they have sufficient excess to fund the children’s education and maintain their current lifestyle,” D’Agostini says. “Should Roberto retire in two years, they would need to alter their spending hab- its, and add income either by Carlee taking additional days, and/or Roberto obtaining a job that pays significantly more than the $25,000 anticipated.”

D’Agostini says retirement for people in this couple’s age range can last up to 30 or more years, and they could live well into their 90s. If they start to take significant withdrawals from their non-retirement accounts, they will more than likely outlive their resources.

While they have done a good job of saving, D’Agostini says, the wrong distribution strategy could lead to trouble. Roberto would be eligible to take withdrawals from his retirement accounts because he’d be quitting after age 55, but D’Agostini says that’s a bad idea.

“He still needs those to grow this nest egg in order to provide for over 30 potential years in retirement,” she says. “Realistically, they could take withdrawals of between 4 and 5 percent from their non-retirement account, but that would only give them ap- proximately $20,000 per year of additional income, and they will still need to tackle the additional medical costs of over $18,000 per year.”

Additionally, the couple are concerned with their asset allo- cation, having nearly 100 percent allocated toward domestic equi- ties. For a more balanced, but still moderately aggressive, portfolio, they need to significantly shift their holdings over time while considering the tax impact of doing so, she said.

They could adjust investments in their retirement accounts now because they won’t be subject to taxation until withdrawals. She recommends they add some fixed income, domestic REITs and alternative investments to further diversify with the goal of obtaining more return with less risk.

Lastly, D’Agostini says the couple should look into obtaining long-term care insurance.

“By taking out long-term care insurance at their relatively young ages, they can essentially take this unknown out of the mix, helping to give them peace of mind and independence in retirement,” D’Agostini says.