Get With The Plan: December 23, 2012

GWTP-122312-01Kathy and George, both 53, are a few steps away from completing two large financial goals. Their child, 21, will graduate from college in May, and the couple’s mortgage will be paid off in August.

So now they’re planning for retirement.

“We want to live a relatively comfortable but not lavish lifestyle,” Kathy says. “Maybe traveling on a regular basis and eventually downsizing our home and possibly moving to a location that has a lower cost-of-living situation — better than New Jersey.”

Kathy and George, whose names have been changed, have saved $255,000 in 401(k) plans, $350,000 in IRAs, $193,500 in mutual funds, $9,400 in a brokerage account, $10,000 in bonds, $10,000 in money market funds and $9,000 in checking. They also have $29,000 in an account that’s earmarked for college bills.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/ RICH Planning Group in Morristown, to help the couple transition to the next stage in their lives together.

“They are hoping to retire in 2025 when they attain the age of 66 and wish to see if this is possible,” D’Agostini says.

She says it’s commendable that they — and their child — have no student loan debt. By some accounts, D’Agostini says it’s estimated that two-thirds of graduates who earned a bachelor’s degree have loans, and the average student loan debt for the class of 2011 rose to $26,500, up from $25,350 for the prior year — a 5 percent increase.

Even while preparing for college tuition bills, the couple put a premium on saving for retirement, with George contributing 12 percent of his income with a 3 percent company match, and Kathy saving 8 percent of her income with a company match of 4 percent.

“This gives total savings of $1,720 per month or over 15 percent of their income, not including the match,” D’Agostini says.

While the savings level is there, the couple’s asset mix requires a bit of tweaking in order to align with their risk tolerance.

Kathy and George took a risk tolerance test, and it found them to be moderately aggressive investors. In order to maintain the level of risk, and not take on more or less risk than is necessary to achieve their goals, D’Agostini says it’s important to rebalance their portfolio every year to realign their assets to their original asset allocation and keep a well diversified portfolio.

Even with those needed changes, D’Agostini has good news.

“They are successfully on track for retirement,” she says. “At this current rate of savings, they could retire in 2019 when they are each 60. If they wait until age 66, their desired age, it is estimated that they will be able to provide 144 percent of their annual expenses, which currently run approximately $11,000 per month.”

And that amount will be reduced their mortgage is paid off. Also, they anticipate selling their Jersey home and relocating to a less expensive area of the country, and it’s likely they will capture some equity from the home. This money can be put to further use to generate income in retirement.

D’Agostini says one of the largest contributors to their retirement plan is their combined Social Security income. George and Kathy were both born in 1959, so their Full Retirement Age would be 66.

George would get $1,916 per month at age 66, and Kathy would receive $2,352 per month. At age 70, George’s benefit would be $2,529 and Kathy’s would be $3,105.

“Each year that they delay taking the benefit gives them roughly 8 percent more of benefit until the age of 70. This becomes the base going forward,” she says.

In making the decision about when to claim Social Security, D’Agostini says there are several items to consider.

The first is need. Is there a way to work longer, or use other assets to put off collecting and allow the benefit to grow?

Next, consider your health. If you are in poor health, with a more limited life expectancy, then perhaps it would make sense to collect sooner rather than later. Average life expectancies in the United States have increased, with a male’s life expectancy averaging 80 years old, and females averaging 82 years of age. You should also consider your family’s medical history.

D’Agostini ran several collection scenarios to find the best for this couple. She determined Kathy should “file and suspend” at age 66, and at that time, George could begin collecting spousal benefits, which would equal half of Kathy’s benefits.

Then at age 70, George would shift to collect his full benefit of $2,529, and Kathy would start her benefits again at the same age.

That would give them a combined monthly benefit at 70 of $5,634, or $67,608 a year, at age 70.

A need for long-term care could cloud their retirement, D’Agostini says, so they should consider long-term care insurance.

“This insurance would provide for the needed medical assistance, either in their own home, or in an assisted living facility or nursing home,” she says. “It is estimated that if you live to age 65, then there is over a 75 percent chance of needing long term care.”

And it’s not cheap, with nursing care averaging $22 per hour, assisted living facilities costing more than $68,000 per year and nursing homes costing more than $100,000 a year.

“George and Kathy are in the enviable position of being able to retire on time, or even six years earlier than anticipated, with a comfortable cushion,” D’Agostini says. “They have lived within their means, saved aggressively for college and retirement and are reaping the rewards of their fiscally prudent behavior.”