Get With The Plan: February 1, 2009

New Jersey has the highest median household income in the United States, according to the U.S. Census Bu- reau. And while many in the state are struggling, others, such as Karen and Alan, have been able to hold on to high-paying jobs. Still, their goals are like many who have smaller incomes.

‘‘Retirement with financial security is our goal,’’ says Karen, 55.

Karen and Alan, whose names have been changed, hope to downsize to a smaller home with no mortgage when they retire. But they’ve watched a lifetime of investments lose significant value in the past year. What remains: $380,493 in IRAs, $53,362 in 401(k) plans, $131,000 in a brokerage account, $34,873 in mutual funds and $211,573 in cash accounts.

Doug, 58, also expects to receive a monthly pension worth nearly $1,700 a month, and Karen expects a pen- sion of $1,367. Added to Social Security, they’ll have monthly income of nearly $6,500.

The Star-Ledger asked Doug Duerr, a certified financial planner and certified public accountant with Duerr Wealth Management in Montville, to help the couple see if their long-term plans will need to change now that their investments have lost so much value.

‘‘Despite the overall economic environment, they have a good asset base they can live off in retirement,’’ Duerr says. ‘‘They are not exactly sure when they may actually retire, but it would make sense for them to work a few more years in order to increase their retirement assets.’’

The couple’s plans to downsize and live in a mortgage- free home will help on several fronts: They’ll lower their monthly expenses, eliminating the big-ticket mortgage, and the smaller home will probably lower their property taxes and utility costs. Plus, there should be money left over after the sale of the current home and the purchase of a smaller one, so these funds could be added to the nest egg.

Working until age 62 may be a smart choice, Duerr says, because at that point, both Karen and Alan would be eligible for Social Security and for their pensions.

‘‘They are extremely fortunate to have pensions, so I would suggest that they work until they can begin to draw down on these funds,’’ Duerr says. ‘‘This will allow their personal assets to last much longer in retirement.’’

Duerr ran some retirement calculations to determine if the couple would have enough money to cover the funds they’d need in addition to their pensions and Social Security. Duerr assumed they’d contribute the max to their retirement accounts — including catch-up contributions — while they worked, a 5 percent rate of return and 3 percent inflation. This calculation only considered retirement funds, and it excluded any additional money they’ll have if they downsize their home. He compared the numbers for retirement in three, five and seven years.

If they retire in three years, Karen and Alan would have a significant shortfall, running out of funds in about 18 years, so Duerr says this is not a viable option. If instead they work another five or seven years, the couple won’t outlive their assets, he says.

Alan and Karen need to make some changes to their asset allocation. They say they are conservative investors with a low risk tolerance, but their investments don’t match. Nearly 100 percent of their investments — aside from their emergency fund — are in equities.

‘‘This allocation has resulted in a loss of value of ap- proximately 35 percent,’’ Duerr says.

He says like many investors, this stock-heavy allocation was fine when the market was doing well, but last year’s drop has caused them to look more closely at their comfort level. Fortunately, their time horizon and pensions will allow them to afford a more moderate allocation now while they wait for investments to rebound, and they can change to a more conservative allocation once they reach retirement.

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