Get With The Plan: February 16, 2014

21614Oscar, 57, is out of work, and he has been for some time. He has a college degree, but he hasn’t been able to find a job in his field.

“Finding a job that pays is hard at my age, since employers are reluctant to hire ‘older’ candidates,” he says.

Oscar wants to save for retirement — which he was planning to be age 67 — and he’s also debating where to live long-term. He doesn’t own a home, and he doesn’t think he’ll stay in New Jersey because of the high cost of living. He’d consider moving down South, and he knows working part- or full-time after 67 may be a necessity.

He also wants to reduce the balances on his credit cards, but without more income, he’s struggling to get by. There’s a shortfall every month when it’s time to pay bills, and he keeps adding to his credit cards to close the gap.

Oscar, whose name has been changed, has saved $178,000 in 401(k) plans, $10,000 in a money market and $100 in checking.

And, Oscar’s unemployment benefits are scheduled to expire in May.

The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help Oscar get moving in the right direction.

Oscar’s situation will depend in large part on whether he’s able to find a job. Kazanchy looked at what could happen with or without employment.

For these projections, Kazanchy assumed Oscar would get a job paying $40,000 a year.
He says in retirement, Oscar will need $32,000 a year, in today’s dollars with a 3 percent inflation rate, to fund his after-tax living needs.

There aren’t many places Oscar can cut his spending.

“It is a bare-bones budget,” he says. “Rent is a third of the budget and health care plus credit card payments make up another third,” Kazanchy says. “The discretionary piece is small.”

Oscar says he still has a good credit score because he pays his bills on time, so Kazanchy says he could take a look at transferring his credit card balances to lower rate cards. If he does, though, Kazanchy says he needs to make sure any fees are small or waived completely.

The assumptions of what Oscar would need for retirement include success at one of his long-term goals of buying a condo. Kazanchy assumed a cost of $150,000 in today’s dollars, again with a 3 percent inflation rate.

“In order to fund the purchase, he will need to save a 20 percent down payment and finance the remaining 80 percent with a 30-year fixed mortgage, and I assumed a rate of 6 percent, since we don’t know where rates will be in 10 years,” he said.

Once Oscar gets a job, Kazanchy recommends he keep his current budget and not increase spending.

Then, he should use his excess cash flow to pay off his credit card debt. He can pay it off over three years if he pays $5,000 a year, in addition to the $300 per month Oscar pays today.

After the debt is paid off, three years from now, Oscar should save the excess cash flow of $5,000 a year in a fund for a home down payment. If he does this for six years, he’ll have $30,000 on hand to buy the condo he wants.

Kazanchy says as the down payment account grows, Oscar should consider investing the funds in a high-quality, short-term bond fund.

Oscar also needs to boost his retirement savings, and Kazanchy says he should plan to aggressively invest the savings in a 100 percent stock portfolio.

“The current allocation is 100 percent in U.S. stocks, so I recommend being globally diversified to improve risk/return tradeoff of the portfolio and reduce chances of long-term subpar performance if the U.S. market suffers,” Kazanchy says.

Oscar currently has three different 401(k) plans, and Kazanchy recommends he roll them all over into one IRA. This will make his investments easier to track.

Social Security is also a very important consideration for Oscar.

“I assume he takes his benefit at 70,” Kazanchy says. “This is a huge part of his financial plan as he has built up a nice benefit and would be in line to collect total payments of $675,118 from age 70 to the end of his life expectancy — age 90.”

Deferring to age 70 allows him to earn 8 percent delayed retirement credits from 66½ to 70, Kazanchy says, and allows him to maximize his benefit.

“If Oscar is able to find this employment and follow the recommendations, he will have a high probability of achieving his financial goals,” he says. “Running 10,000 simulations of investment returns on his plan, he reaches age 90 with assets remaining 76 percent of the time.”

Kazanchy says this is a good success level to work with, considering that Oscar would be able to adjust many variables, such as his spending, along the way. Also, if everything goes according to plan, he will have built up significant home equity as a safety net.

Things change drastically if Oscar is unable to find employment at a salary of $40,000.

“If Oscar is unable to earn enough to save for a down payment on a retirement home, he would likely need to work an additional two to three years, and then fund the down payment from his retirement plan assets,” Kazanchy says. “Increasing his working years and shortening his retirement is not ideal but could still lead to a workable plan if Oscar is only able to earn around $32,000 instead of the desired $40,000.”

And earning significantly less would force Oscar to reconsider his lifestyle goals, Kazanchy says.