Get With The Plan: December 27, 2009

122709Amelia and Norm are the Energizer Bunnies of debt repayment. In their late 40s, the couple have already paid off the mortgage on their primary home, the mortgage on a vacation home and they carry not a penny of con- sumer debt.

They figured a debt-free life would help them prepare for retirement.

“Ideally, I would like to retire at age 55 from professional work to then work part-time,” says Amelia, 48. “At that point, we would like to consider selling our two homes, move and buy a home in another part of the country with potentially cheaper housing costs and warmer weather.”

According to their plan, Norm would work full-time until age 63.

The couple, whose names have been changed, have saved $242,000 in 401(k) plans, $54,000 in IRAs, $71,000 in an annuity, $60,903 in mutual funds, $30,000 in a Certificate of Deposit, $45,000 in a money market and $4,000 in checking.

The Star-Ledger asked William Knox, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple take a closer look at their retirement goals,

“Given their relatively low level of spending, their chances of achieving their retirement goals are extremely high,” Knox says.

To determine how a move to a lower-cost area in 2016 might work for the couple, Knox and the couple assumed their two current homes would generate gross proceeds of about $650,000, and their new home would cost about $600,000. The difference in cost would be spent on relocation.

Knox also assumed that after they moved, Amelia’s part-time job would bring in $20,000 a year, and Norm would find new work paying 75 percent to 85 percent of his current compen- sation.

Knox then considered three separate scenarios.

The first assumed they’d live in New Jersey until 2016, then they’d work in their new state at reduced salaries until 2027. Annual after-tax living expenses would fall to $37,000 in today’s dollars.

In the second scenario, Knox made the same assumptions but compared higher after-tax living expenses of $77,000 a year.

Finally, the third scenario took a look at what would happen if both Amelia and Norm retired early, in 2016, when they move out of state. After-tax expenses in that scenario would be $37,000 a year in today’s dollars.

“According to our analysis, Scenario 1 is the most successful scenario, which is not a surprise, as it combines the longest employment period and the lowest spending levels,” Knox says. “Scenarios 2 and 3, while also successful, were reviewed so as to provide a sense of the impact changes to specific variables will have on their overall financial success.”

To increase their chances of success, Knox has a few suggestions, starting with asset allocation. Amelia and Norm have a large part of their portfolio invested in “balanced” and “lifestyle” funds.

“While these vehicles can take some of the stress out of pick- ing individual mutual funds, it’s important to make sure they’re being used appropriately,” Knox says.

When investing across several of these types of funds, Knox says it’s difficult to maintain a firm grip on the level of diversification in a portfolio. For this couple, the majority of their investments — 70 percent — is in global large- cap stocks. Fixed income takes a 25 percent stake, with 2 percent in emerging markets and 3 percent in real estate.

The couple could better diversify by backing off the global large-caps and gaining some exposure to domestic and international small cap stocks, commodities, inflation-indexed bonds and hedging strategies, he says.

Within the fixed income side of their allocation, Knox says they should consider using short-term bond funds in place of the fixed- income exposures offered by the balanced funds they currently use, which have bond holdings that are more intermediate-term and long-term in nature.

Amelia and Norm should con- tinue to max out their employer- sponsored retirement plans, and when they each reach age 50, they should boost their contribu- tions to include the $5,500 (for 2009) catch-up contribution allowance.

Knox applauds the couple’s emergency fund, but notes they may have more cash on hand than needed. Just their money market account alone would cover one year of expenses. They could pull some of the other cash equivalents and add to their investment portfolios if they so desired, he says.

Knox says they should begin researching long-term care in- surance policies within the next three to five years to help protect against the possibility of exorbitant medical bills in the event one or both of them need any level of health care assistance.

“Given their clean bills of health, finding an appropriately priced policy should not be a problem,” Knox says.