Get With The Plan: December 29, 2013

122913Joey, 65, and Molly, 64, say they’re frugal folks, and their budget proves it. Joey has already mostly retired — he works part-time — and Molly is hoping to stop work in two years.

The bigger question is what to do with all their cash.

“I believe we have enough money to carry both of us through retirement, however I think we have too much money in the bank earning next to nothing,” Joey says. “I have a lot of money in mutual funds, and I’m reluctant to put too much more in funds because of the risk.”

Joey and Molly, whose names have been changed, have saved $196,000 in 547 plans, $196,000 in IRAs, $218,000 in mutual funds, $582,400 in money markets and $21,500 in checking. Together, they will have pensions worth about $27,000 a year.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help the couple set a proper asset allocation to take them through their retirement years.

Lynch said when he looks at a financial plan that focuses on retirement income, he sees two basic scenarios.

The first is that people without much in savings think they can live at a level of income from their investments and Social Security that is in no way realistic. They believe there is something wrong with them if they can’t draw down 10 percent of their money annually and not run out of money.

On the opposite side, he sees people who have saved all their lives but have a very difficult time spending.

“I almost have to give them a ‘permission slip’ to spend more,” he says, and Joey and Molly fall into that category.

Lynch says their current expenses come to around $41,000 annually. When Molly starts collecting Social Security, their collective benefit comes to $44,000 a year, and they also have small pensions that come to about $27,000 a year.

That means their cash flow is about $30,000 above their expenses.

“If I assume a 3 percent withdrawal rate from their investments, that gives them an additional $40,000 annually so they can spend another $70,000 annually, and I would feel very comfortable that they would not run out of money,” he says. “So let’s have some fun! If you do not spend it, your kids will!”

Lynch says if Joey and Molly were to earn a zero percent return on their money and they lived another 30 years, they could spend $43,000 a year.

“I do not think that they should get a zero percent return, but my point is that if they would not spend the money they are taking in now, taking additional risk really will not benefit them personally in any way — only their heirs will benefit,” he says.

Their two grown children are financially independent, Lynch says, so there is no reason to take any excessive risk. Still, the couple is sitting on about $600,000 in cash.

“This means on an after tax after inflation basis, they are guaranteed to lose money,” he says. “You do not need that much in cash.”

Lynch says the couple should put themselves on a retirement paycheck and develop a bucket list of things they want to do in retirement.

“By having a bucket list, we can figure how much this will cost, prioritize the spending and make sure they can do everything that they have always wanted to,” he says. “By putting them on a paycheck, which is really the income from their investment accounts, they can feel better about their cash flow and feel more comfortable spending their money.”

For this couple, Lynch says the key to a successful retirement for them is to focus on the basics. It is not about big gains, but rather, not having big losses. He says they should avoid anything that could lead to a big loss.

The first would be having too much stock exposure. Lynch says an 80 percent stock portfolio — which they do not have — has the ability to lose around one-third of its value. He’d like to see Joey and Molly have no more than 30 to 40 percent in stocks with conservative holdings.

Next, a big loss could come should either of them need long-term care.

“An LTC situation such as Alzheimer’s can take 10 years or more and cost more than $1 million in care,” he says.

On this issue, people can expect to pay more than $100,000 a year in care, and that doesn’t count the emotional and physical toll on the other spouse.

Another risk is being sued. Lynch says all families should make sure they undergo a full review of all property and casualty — home, auto and excess liability — coverages.

“Generally IRA assets are protected from creditors, but taxable accounts are not,” he says. “Increase your liability coverages so if you have an accident, your assets are not at risk.”

Another risk is not having the right legal documents. The couple’s current documents were made by Joey, who has some experience in the area, but Lynch would rather see them get some professional help.

“What do they say … any person who represents himself has a fool for a client,” he says. “I have seen hundreds of estate planning documents and generally in two minutes I can tell you if the attorney that did the documents is a full-time estate attorney or not.”

Lynch says families have the choice of paying a relatively small up-front cost for a pro, or they could end up with the wrong documents and end up paying dearly on the back end.

“These things cannot be fixed after-the-fact so get a full-time estate attorney who is good, focuses on plans your size, and get some good documents: health care proxies, powers of attorneys, living will and wills, and maybe some kind of trust,” he suggests.