Get With The Plan: February 12, 2012

Evan, 51, and Gabby, 53, are saying goodbye to New Jersey. The couple retired this past summer and they plan to give up their apartment and relocate to a condo they already own down south.

They plan a busy retirement.

“We want to do a little traveling, part-time employment of some sort, at least partial fund a college education for a niece, leave some money to a couple of charities,” Evan says.

The couple, whose names have been changed, have saved $540,000 in 401(k) plans, $300,000 in annuities, $50,000 in IRAs, $100,000 in mutual funds, $450,000 in Certificates of Deposit, $100,000 in a month market and $15,000 in checking.

Right now they’re living on two pensions and some part-time work Evan has done for his former employer. Because the income for Evan’s part-time work will end when they leave the state, it was excluded from this analysis. Also excluded from this analysis is their New Jersey rental costs, because those too will end when the couple moves.

The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help Evan and Gabby plan for their senior years.

“They have a done a great job saving for retirement, have excellent state pensions, and will also be receiving Social Security benefits down the road,” Meckler says. “Depending on their health and if either are working part time, that would influence at what age works best for them to start Social Security benefits.”

Meckler says that’s a very important decision, but one that will vary from person to person. For some, starting at 62 makes sense, but other times waiting until age 70 is a better choice, he says.

This couple is too young to make that important decision today.

The couple’s expenses are very reasonable, given that their home is paid for and they have no other debt, so they’re living comfortably on their pensions.

Meckler ran his projections assuming expenses of $4,000 per month before taxes. Assuming $48,000 a year for living expenses and taxes in the range of $10,000 to $13,000 per year, they are currently in excellent shape, Meckler says. Still, he says there are steps they can take to improve the outlook even more.

For his projections, Meckler says he assumed a 3 percent inflation rate on general living expenses and a 2 percent inflation rate for Social Security. Their pensions are not indexed for inflation.

Meckler says his analysis focuses on three areas: protection, savings, and growth.
He says the first and most important is protection.

Meckler looked to see if Evan and Gabby have the proper auto, homeowners and liability umbrella policies in place to protect themselves from lawsuits, and also to make sure they have wills, health care proxies, medical and long-term care insurance. “If they are not properly protected, they could risk everything else in their savings and growth components.” he says.

Along these lines, they both have $250,000 of 20-year term life insurance that has 15 years of coverage remaining. Having life insurance does make sense for them, but they may want to consider permanent policies instead of term, Meckler says, noting that less than 1 percent term life insurance ever pays out as a death claim.

“[A permanent policy] would pay a death benefit now and in future years it could be used as asset protection insurance to allow them to spend down some of their assets and also allow them to leave more money to their favorite charities at a much more cost effective way,” he says.

They should also consider long-term care insurance. In theory, they could use their assets to pay for long-term care, but that could hurt their ability to help out their niece and pass some money to charity someday.

“It’s a personal choice to pay for insurance they may not need or to pay for the care themselves,” he says. “They could always purchase a policy to cover some of the expenses, not all.”

The couple has another protection with their pensions. They both chose a 50 percent survivor option, meaning that if either one of them was to die, the other spouse would collect half of their pension for the rest of their life.

Next, Meckler looked at the couple’s savings and growth.

He says savings comprises such items as savings bonds, Certificates of Deposit, money market accounts, annuities, IRAs and 401(k) plans.

The growth component would be government, corporate and municipal bonds, as well as stocks, mutual funds, collectibles, real estate and tax shelter. He says the couple is overweighted in the savings component and underweighted in the growth component.

“As the assets grow, the effect of taxes grow in proportion and that does not help to create wealth,” he says.

Simply put, the more money your taxable accounts earn, the more you will owe in taxes.

Meckler suggests they consider reallocating most of their CD money when it comes due to bonds, and possibly blue chip, growth stock mutual funds if they are comfortable with the stock market.

“By taking dividends and interest earnings and moving that to different vehicles, it helps to build wealth,” he says.