Get With The Plan: December 6, 2009

12609Bart, 57, and Cheyenne, 56, are inches away from an empty nest. Their oldest child recently got married, and their younger one is tying the knot this summer. Bart and Cheyenne paid for both their kids’ college educations, wanting them to have a debt-free head start.

Now they’re turning their attention to themselves.

“Our biggest financial concern right now is to be sure we have enough funds to hopefully retire in three to five years, and possibly reduce some debt before then as well,” said Bart, noting that he and Cheyenne would consider leaving New Jersey for a more tax-friendly state.

The couple, whose names have been changed, saved $32,770 in IRAs, $27,787 in a 403(b), $18,660 in a brokerage account, $54,802 in mutual funds, $3,100 in savings and $8,425 in checking. Bart and Cheyenne both expect generous pensions when they retire. If Bart retires in 2012, he’d receive lifetime medical benefits and a $3,200 per month payment from his current job, and at age 65, he’ll receive $265 a month from a previous job. Cheyenne could receive a monthly pension of $4,000 per month if she retires this year.

The Star-Ledger asked Andy Tupler, a certified financial planner with Tupler Financial in Raritan, to help the couple see if they’re ready for retirement.

“They should feel good about the fact that they have lived within their means and have already paid for both of their children to attend college,” Tupler said. “They are fortunate to both have pensions. That, along with Social Security, will cover most of their desired retirement income and, along with their investments, will allow them to retire in 2012.”

Tupler worked with the couple to determine how much they’d need annually to cover their expenses. He started with their current take-home pay, then reduced that amount by items that will no longer be an expense in retirement, including their mortgage and the funds they’d no longer need to set aside for retirement savings, but could instead spend. He also factored in the lower property taxes they’d expect if they move to a less costly state. They determined Bart and Cheyenne would need $93,000 of income a year.

“The $93,000 will also give them money to travel during retirement, which is one of their goals,” Tupler said.

They’re more fortunate than most people today, Tupler said, because they have pensions that will meet most of their retirement income needs. Also, the pensions will grow each year based on inflation.

The biggest question for Bart and Cheyenne will be deciding which pension payout formula to take.

“If both spouses live a long life, the choice of pension option doesn’t have a dramatic effect on their ability to fund their retirement,” Tupler said. “But if either spouse passes away very early in retirement, choosing the wrong payout can mean the difference between a comfortable retirement or a drastic reduction in lifestyle for the surviving spouse.”

Tupler said the 100/50 option, which only pays the surviving spouse half the monthly payment after the first spouse dies, would pay the most income if both spouses live long lives. But if one spouse dies early, that formula wouldn’t provide sufficient funds for the surviving spouse.

In contrast, with the 100/100, or level pension option, the pensioner would take a lower monthly payment, but that same payment would continue for the surviving spouse, so there would be no dramatic change to retirement income if one of the spouses dies early, he said.

“They should each choose the level pension option, 100 percent and 100 percent, so that the pension income is high enough for the surviving spouse to continue the same standard of living whether they both live a long life or one of them passes away early in retirement,” Tupler suggested.

Tupler applauded the couple’s forward planning. They purchased long-term care insurance several years ago, which Tupler said will help to cover most of the expenses if either of them requires long-term care services in their home or in a facility.

“This allows the ailing spouse to get the best care, while not burdening their kids and not affecting the standard of living for a healthy spouse,” he said.