Get With The Plan: February 10, 2013

Wayne and Lizzy think they’ve saved enough money to live the dream of an early retirement. Wayne, 57, has just retired, and Lizzy, 53, plans to retire in one year. Their savings habits set aside enough money for college for their two children, and they can now focus on their retirement nest egg.

“Our main goal is to have a proper asset allocation that will allow for us to withdraw enough money to meet our retirement budget needs without putting the principal at any more risk than is necessary,” Wayne said. “We would like an asset allocation plan that offers some protection from future inflation and rising interest rates, and that will not destroy us in the event of a stock market meltdown.”

This couple have run Monte Carlo simulations — which compare different asset allocations to a variety of stock market returns — and they found they have a 90 percent chance of never running out of money. Still, they want to make sure their investment plan is the right one.

Wayne and Lizzy, whose names have been changed, have saved $1.387 million in 401(k) plans, $119,000 in IRAs, $30,000 in a brokerage account, $210,000 in mutual funds and $20,000 in checking. They own their home with no mortgage, have an investment property out-of-state and also own a piece of undeveloped land where they’d like to build a retirement home, funded by the proceeds from the eventual sale of their New Jersey home.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help this couple determine the right set-up for their long retirement.

“They have done an excellent job saving for both their retirement as well as their children’s college educations,” Duerr said. “However, like many couples approaching this change, they are concerned about giving up their careers and beginning this next stage of their lives.”

Duerr said the couple made a smart choice with Wayne’s pension, which will pay $60,000 a year for his lifetime. Should he pass away prematurely, it will pay the annual benefit to Lizzy only until December 2022.

“In order to account for this loss of income should Wayne pass away at a relatively young age, Wayne has purchased life insurance to cover Lizzy,” he said. “This is a good plan to make up for this possible lost income.”

While the couple are concerned about beginning retirement and potentially depleting their assets, Duerr said they shouldn’t worry too much, as long as they stay close to their estimated $95,000 per year retirement budget.

Wayne’s pension means the couple only needs to pull $35,000 a year from their assets, and that’s only until they start to receive Social Security.

“In order to make up this shortfall of the pension income and their budget, they would only need to obtain approximately a 2 percent return on their savings,” Duerr said. “While we are in an extremely low-rate environment currently, this should not be difficult to do.”

This will only get easier in the years to come when the couple are eligible to begin receiving Social Security.

The vast majority of their assets are in retirement plans with their current and former employers. Duerr suggests they move these all to IRAs, though they can’t move Lizzy’s until she stops working. A move to IRAs will open their investment choices, and if done correctly, would be a non-taxable event.

The couple also said they want to someday leave an inheritance to their children, and Duerr said transferring IRA assets would be more efficient than company-sponsored plans after they die.

Duerr said the couple should have 60 percent of their assets in stocks and 40 percent in bonds. Given the overall volatility of the stock market, they should go a step further with diversification, he said.

He suggests they put 10 percent to 15 percent of their assets in so-called alternative asset classes, which include commodities, real estate and natural resources.

“While this may seem more aggressive, having some of your assets in these non-correlated investments should decrease a portfolio’s volatility and stabilize the overall returns,” Duerr said. “Like other investments, these items can be extremely complicated to understand and you need to fully understand the risks.”

The couple currently has about $20,000 in cash, but Duerr recommends they keep one to two years worth of living expenses in cash.

“This can be funds in their retirement accounts or other savings,” he said. “While you may lose out on some potential growth given the current interest environment, many individuals find this to be worthwhile.”

He said the cash assets could be placed in a bank account or in laddered certificates of deposit (CDs). The funds could then be used to pay for various living expenses if the market has a large correction. He said that with this strategy, Wayne and Lizzy can then allow their other invested assets to increase in value again prior to needing to withdraw from these funds for living expenses.

The couple have taken smart steps to protect their assets. When they were in their 40s, they both purchased long-term care insurance, which would help pay for care should they ever need it.

“Both policies cover at least four years of care and have cost-of-living adjustment riders,” Duerr said. “While most couples wait until they are in their 60s to address this need, they obtained the coverage at a much earlier age. This enabled them to get much more reasonable premiums for the coverage.”