Get With The Plan: December 5, 2010

12510Dennis, 45, and Jane, 41, live off the kind of income most people dream of. But Dennis works hard for his family, and he doesn’t want to stay in his high-salary but high-pressure job any longer than he has to.

“Our biggest financial concern is lowering our monthly expenses and paying off all debt, including the mortgage, so that eventually I will have the option to change careers where I do not need to earn as much or have the option to live off my investments entirely,” says Dennis.

He’d like to leave his current job by age 52. The couple also want to fund education for their two children, ages 11 and 9.

Dennis and Jane, whose names have been changed, have saved $9,601 in a 401(k) plan, $480,804 in IRAs, $11,900 in an annuity, $465,484 in mutual funds, $97,670 in college savings and $146,000 in a money market account.

The Star-Ledger asked Brent Beene, a certified financial planner with RegentAtlantic Capital in Morristown, to help Dennis and Jane see if they’re making the most of their resources.

“Dennis’ current salary and bonus supports the family financially and allows them to save a significant amount of money each year putting them in a good position to meet their retirement goals,” Beene says. “However, Dennis’ desire to partially retire at 52 throws a wrinkle in the plausibility of their financial independence.”

Beene analyzed the couple’s early retirement options.

The first scenario imagined Dennis retiring at age 52. Until then, he’d work his current job, fully funding his 401(k), paying off the mortgage and home equity loan and fully funding education for their two children.

“This scenario was unsuccessful, even with Dennis’ substantial income,” Beene says. “The short time to bulk up savings would not support almost 40 remaining years of living expenses, resulting in a low probability of having sufficient wealth to see them through retirement.”

The second scenario uses the same assumptions, but has Dennis working until age 55 at his current job, then in a second career at $175,000 a year. Beene says in order to make this scenario feasible, Dennis would need to work at the second career until age 64.

“While the results were more robust than the base case, this scenario still requires a substantial income need with likely a demanding full-time job, and raises questions whether this would satisfy Dennis’ vision of partial retirement,” Beene says.

The next scenario assumed Dennis retires at age 55 and changes to a less-demanding second career where he would earn $50,000 a year, such as through consulting work.

“The trade-off for less earnings is a longer retirement work life,” Beene says.

To support their current living expense needs throughout retirement, Dennis would have to work this $50,000 until age 80, Beene says.

The last scenario imagines Dennis staying at his current job until age 57.

“In the final scenario, Dennis does not need a “second career” and has the option to work part-time at any salary level for any period of time,” Beene says. “The final scenario not only resulted in flexibility but the best probability of success as well.”

To reach their retirement goals, Beene says the couple need to maximize contributions to Dennis’ 401(k) plan, and when he turns 50, he should also contribute the additional $5,500 catch-up contribution.

At the same time, both Dennis and Jane should max out contributions to traditional IRAs. The contributions won’t be tax-deductible, Beene says, but they’ll still benefit from tax-deferred growth.

Beene took a look at the couple’s investments, and says they’re in line with their moderately aggressive risk assessment. Still, their asset allocation needs more diversification, he says. The majority of their investments are allocated to global large-cap stocks and U.S. small cap stocks.

“They can improve their overall risk adjusted returns through adopting an even more globally oriented, multi-asset class portfolio by including international small stocks, REITs, hedging strategies, international bonds, high yield bonds, infrastructure, frontier markets and a more meaningful allocation to emerging markets where much of the world’s future growth will occur,” Beene says.

Dennis and Jane saved for their kids’ college expenses, but they don’t have a specific savings plan in place. Beene says to fund approximately $40,000 of college costs for both children, the couple should set aside $11,200 a year for their 11-year-old, and $10,600 a year for their younger child through 2023. The analysis assumes a 5-percent college tuition inflation rate and a 6-percent rate of return.

Health insurance should be a consideration if Dennis retires early because he’ll no longer have coverage through his company. Beene recommends they assume health coverage, which will cost $15,000 a year until are eligible for Medicare at 65.

“Health insurance can be expensive and should be a significant consideration when making the decision for both spouses to retire early,” he says.