Get With The Plan: December 22, 2013

122213Rudy and Virginia, both 57, have been thinking carefully about their retirement now that their two children are out of the house and financially independent.

“We expect to live a similar lifestyle to our current spending habits — not income levels — for the first 10 to 12 years,” Rudy says. “After approximately age 72 or 74, we then expect a steady decline in activity — and spending — and understand that our early spending will leave us with less later, and that is by design.”

They hope to retire at 62 — sooner if they can afford it.

The couple, whose names have been changed, have saved $438,300 in 401(k) plans, $200,000 in mutual funds, $44,600 in savings and $5,200 in checking, plus they have $83,400 in a safety deposit box.

Rudy also has $7,800 in stock options, and they’re both expecting pensions — worth $27,000 a year at age 62, or slightly higher if they wait to take benefits.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help Rudy and Virginia map out their money for retirement.

D’Agostini says early retirees need to ask themselves: “What will retirement look like for me?”

“By this, I mean what will change when you stop working? Where do you expect to live, what activities will you pursue? Will you take more time to travel, and if so how much, and to what expense?” she says.

D’Agostini says conventional thinking was that you would need 70 percent to 80 percent of your income in retirement. But baby boomers have redefined retirement. Often they are more active in retirement, pursuing new adventures, buying a business, traveling, educating themselves further and so on.

“These activities come with a price tag, so before retiring, it is good to consider what you will do when you wake up on the first day of retirement,” she says.

Rudy and Virginia have raised two financially independent kids, and the couple don’t think they will have any money obligations for them.

D’Agostini says she priced in 100 percent of their current spending, indexed for inflation. The couple says as they age, they expect they will spend less as their activity level wanes.

D’Agostini says there are generally three phases to a long retirement. First is the “go-go,” where early retirees travel more and spend more because they have more free time.

After some time, and with the onset of some medical issues, there is the “slow-go” phase, where spending on activities is reduced, but medical spending increases. Lastly, later in life, there is the “no-go” phase, where health issues take precedence.

Both Rudy and Virginia expect pensions totaling nearly $30,000 a year, plus Social Security, so D’Agostini looked at ways to maximize Social Security.

“Since they plan to retire at age 62 and will not have any competing income, they would benefit from Rudy collecting his benefit at age 62, and Virginia to hold off, and allow her benefit to continue to trend up to age 70 until she collects,” she says.

Each year that you postpone collecting, your benefit will continue to rise approximately 7 percent to 8 percent a year. Once you begin to collect, the benefit is now subjected to increases by the Consumer Price Index, or CPI, which for this year is only 1.5 percent, D’Agostini says.

“Since Virginia has the higher benefit, letting hers trend upward longer makes the most sense,” she says. “If she predeceased Rudy, he would step up to her higher benefit, maximizing the income overall.”

D’Agostini says some decisions should be considered when making the choice of when to collect.

First, because you could begin collecting at age 62, you need to assess if you need the income.

If you are still working, and below your FRA or Full Retirement Age, then you could lose half of the benefit if you earn too much. Second, she says, you should consider your health and your family life expectancy. If you are healthy and expect to live a long life, then you may be compromising a large piece of your benefit by collecting too soon.

Given all these considerations, D’Agostini says there’s good news. They can retire at age 62 with a projected 162 percent of their expenses. In fact, it appears that they could retire as soon as next year if they choose.

“Part of this is due to the diligent savings by the couple, and partially it is due to the amount of guaranteed income that they have between pensions and Social Security,” D’Agostini says. “Together these will cover nearly $84,000 of their current $110,000 per year expenses, or 76 percent.”

The couple are vigorously paying down debt in an effort to be debt-free when they retire, which D’Agostini calls excellent.

D’Agostini also looked at their investments, which she says could be used to generate retirement income.

“Although there is some debate around the issue, conventional wisdom puts safe withdrawal rates for a long retirement around 4 percent, so they could expect an additional $25,000 to $30,000 of income if necessary,” she says.

Right now they have 77 percent of their assets in equities, but their risk tolerance questionnaire shows they’re too aggressively invested and would be better suited by a more moderate portfolio.

D’Agostini says they should also look to some alternative asset classes.

One possible risk lies on their horizon: the potential of needing long-term care in the future. In New Jersey, the cost of an assisted living facility averages nearly $72,000 a year, with nursing homes costing more than $109,000 for a semi-private room, according to the Genworth 2013 Cost of Care Survey. Home health aide costs average more than $48,000 a year.

“Unless you have large financial resources, it is difficult to fund these expenses, and maintain the lifestyle for the other spouse,” D’Agostini says, and she recommends they look at long-term care insurance policies.