Get With The Plan: February 17, 2013

21713Jared, 46, and Jen, 51, are looking forward to their retirement. Jared hopes to stop work at age 50—55 at the latest—at which time they expect to need $85,000 a year in living expenses.

But before they make that big change, they’re looking to make another one: to buy a vacation home later this year.

“I am afraid that I will have to postpone my retirement when we buy the house,” Jared said. “Is it smart to buy the house? Please consider that we will sell the vacation house and the current house when we retire, and we will move to a cheaper area than New Jersey.”

The couple, whose names have changed, have set aside $126,000 in a 401(k) plan, $302,000 in IRAs, $363,000 in a brokerage account, $531,000 in mutual funds, $215,000 in a money market and $22,000 in checking.

The Star-Ledger asked Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, to help the couple see if their big-ticket dreams can happen as soon as they hope.

Early retirement is not a slam dunk.

“Jared would like to retire at age 50. However, if he does, there is only a 49.4 percent chance that he and Jen will not outlive their money,” Green said. “By working until age 55 and implementing the other recommendations in this plan, they will increase their chances of a successful plan to 68 percent.”

Working until age 60 would increase the chance of success to 83 percent, Green said, because this will increase the opportunity for additional retirement savings.

In analyzing the couple’s plan, Green made several assumptions. He assumed Jared would wait until age 55 to retire, and the couple would buy a vacation home in 2014. Upon Jared’s retirement, both homes would be sold and the proceeds would be used to buy a smaller home, with $150,000 left over to bolster retirement savings.

He did not factor in Social Security or Medicare benefits, and assumed upon retirement, the couple would buy private health insurance at a cost of $780 per month apiece.

He also assumed Jared would save 100 percent of any surplus cash available each year into the couple’s taxable investment accounts. This would make the money available before age 591⁄2 without the penalties they’d face for early withdrawals from retirement accounts.

Green also recommends they consolidate their various taxable investment accounts into one brokerage account to make it easier to manage and allocate appropriately.

Looking at the couple’s savings, Green says they have a very overfunded emergency cash reserve.

“A proper asset allocation helps maximize the rate of return for the level of risk that is within one’s comfort zone,” Green says. “Due to the historically low interest rates being paid on cash and cash equivalents presently, we recommend shifting a large portion of cash to the fixed income asset class.”

He suggests they reduce their cash stake to $45,000 to cover approximately nine months of living expenses. The rest of the funds should be moved to their taxable accounts “as soon as possible to allow the funds the opportunity to grow with the rest of the portfolio,” he says.

Green says the couple’s risk tolerance also allows for a slightly higher allocation to stocks.

The couple’s current portfolio is 70.8 percent equities, 7.94 percent fixed income, and 21.26 percent cash.

Green recommends they shoot for a moderately aggressive long-term growth model, which would mean a fully invested target of 75 percent equities, 21 percent fixed income and 4 percent cash and cash equivalents.

Green says the couple should continue saving as much as possible before their target retirement date, with Jared making the maximum contributions to his employer-sponsored retirement plan.

“This will lower their taxable income during his working years and provide tax-deferred growth for the assets until required minimum distributions begin,” Green says.

All living expenses and purchases should be covered by income during pre-retirement, and from taxable assets when retirement begins, he said, assuming they stick with an age 55 target retirement date.

When Jared retires, Green recommends he roll over all eligible qualified employer- sponsored retirement plans to an IRA, which will allow for more flexibility and choices of investments.

The couple are also underinsured, which Green says gives them significant exposure to an unforeseen illness or premature death.

“Jared and Jen need to take action in order to prevent depleting their retirement assets in the event of a catastrophic event,” he says. “Moreover, they do not have any other retirement income streams available to supplement cash flow needs in the event of portfolio losses or premature drawdown.”

Their only policy is on Jared’s life, and this is provided by his employer. When he retires, that coverage will be gone.

Green recommends Jared purchase a 15-year term insurance policy with a $1.5 million death benefit. This would cost approximately $1,700 a year.

Green also recommends they consider buying long-term care insurance.

“LTC insurance is commonly thought of to protect a person’s savings or estate in the latter stages of life, or to protect the spouse that does not need nursing home care,” Green says. “In many cases this type of coverage can also be used if the insured requires rehabilitation for any reason.”

They should look for policies with a $300 daily benefit, 5 percent compound inflation rider, five-year payout, 100 percent home health care coverage and a 90-day elimination period. This would cost about $3,000 a year, he says.