Get With The Plan: February 14, 2010

21410Tommy and Mandy are in for some big changes. This summer, Tommy’s company will transfer him for at least two years. Work will pay housing expenses up to $31,000 per year, and the couple are trying to decide if they should rent out or sell their home.

Additionally, Tommy, 50, and Mandy, 48, are thinking ahead to retirement.

“We don’t want to be tight with money after retirement,” Mandy says.

The Morris County couple, whose names have been changed, have set aside $8,000 in Tommy’s employer-sponsored retirement plan, $89,000 in IRAs and $500 in checking.

The Star-Ledger asked Michael Gibney, a certified financial planner with Highland Financial Advisors in Riverdale, to help the couple evaluate their impending move, and look to their golden years.

“The most glaring shortfall for this couple is lack of any emergency funds or relatively liquid investments,” Gibney says.

Their only savings are Tommy’s current and former retirement plans, which doesn’t give them a lot of financial planning options. The good thing is that Tommy currently receives a $60,000-a-year pension from a former employer, and he’ll also get a pension when he eventually leaves his current job.

“Given their lack of additional savings, the pensions will need to fund their retirement, which is entirely possible but risky,” Gibney says.

A major question this couple is facing is whether to rent or sell their current New Jersey home when Tommy is transferred for at least the next two years. Gibney says considering the current state of the housing market — down 10 to 20 percent and perhaps close to the bottom — Gibney says they may be better off waiting until they return, at which time they could sell with the hope of a market rebound in two years.

If they rent a new place when they move, they will have a great opportunity to build their assets during the temporary transfer. Tommy’s employer will cover the cost of housing in his new location, and the couple can rent their New Jersey home. This is potential for additional income they can use to build their savings.

If they do rent out their New Jersey home, they need to account for this as if it were a business, Gibney said. They will need to carefully record the income and the expenses on the property, and they may have the ability to deduct as rental expenses the amounts they pay for items generally billed monthly, such as utilities. “Also, by renting, the basis of their property will also be adjusted for depreciation,” Gibney says. “They need to have a thorough discussion with their accountant before they make a final decision.”

If they keep the home but then sell it when they return, timing could mean everything. Depending on their timing, they could risk losing their $500,000 capital gains exclusion, which requires they live in the home for two out of the last five years. Tommy isn’t sure exactly how long this transfer will last, but it’s something the couple should consider.

Tommy and Mandy said they’d also think about buying a new home at the job transfer location, but Gibney said this may not be a good idea. The prospect of this job transfer becoming permanent is remote, Tommy says.

“I would not be comfortable advising to buy a house with the thought of selling it after two years if they return,” he said, noting that short-term transactions can be fraught with issues: Taxes, closing costs, attorney fees, etc.

Turning to the couple’s retirement savings, Tommy asked if he should be more aggressive with his current plan, which is currently invested in a fixed account paying 3.5 percent. Yes, says Gibney.

“They note that they are low to medium risk-takers, while the fund they are invested in has basically no risk,” he says. “Without getting overly aggressive, they can change their investment options to something with a little more earnings potential.”

Tommy’s plan offers few fund choices — mostly lifestyle, or target, funds — so Gibney recommends they choose the 2020 target fund, which is suited for those with investment horizons between 2015 and 2024, and has a 60 percent equity and 40 percent fixed income mix.

The couple has some other saving opportunities, which could be used for cash savings, retirement savings or to pay down debt. Tommy is currently paying child support until July 2011. Gibney says if their budget enables them to easily absorb this monthly payment now, they should consider directing this money to an investment or to paying off their home equity loan once the payment stops next year. And based on their budget, they should have a monthly surplus of nearly $500. If this is correct, Gibney says that’s another savings opportunity.