Get With The Plan: February 19, 2012

Charles, 77, is already retired. His wife Tina, 74, likes her job, but she’s thinking of leaving work soon — if they can afford it.

Housing costs are a concern for the couple, and they’re weighing many options.

“Should we sell our home and buy into a retirement community or rent an apartment?” Tina says. “We want to know the best option and what would be the amount on a monthly basis that we could afford for new housing.”

The Essex County couple, whose names have been changed, has saved $77,600 in 401(k) plans, $59,400 in IRAs, $6,910 in savings and $10,560 in checking. Charles also receives a monthly pension of $3,180, and both receive Social Security benefits.

The Star-Ledger asked Eric Furey, a certified financial planner with RegentAtlantic Capital in Morristown, to help Charles and Tina plan for their futures.

“Charles and Tina’s income sources play a key role in the success of their financial plan to the extent that they can reduce their living needs,” Furey says.

After reviewing their budget, Furey noticed they are spending approximately $5,300 per year on a 10-year term life insurance policy on Charles’ life. In the event Charles predeceases Tina while insured, the policy would help pay off most of their mortgage debt, which would in turn help maximize the legacy Tina would leave to the couple’s children upon her passing.

But because leaving an inheritance to their children was not a major goal, Furey said he excluded those premiums from his projections for the couple. It makes a positive difference in their cash flow.

He looked at several housing scenarios for them.

The first scenario assumed they’d remain in their current home indefinitely, spend $74,000 a year plus mortgage expenses and HELOC payments, for a total annual spending of approximately $82,000. This figure drops by $2,400 a year in two years and three months when HELOC is paid off.

“This scenario resulted in a less than 40 percent probability of their financial plan succeeding,” he says. “Their sources of income and asset base are not large enough to offset the carrying costs of their home and living needs for the remainder of their lifetime.”

To make that scenario work, Charles and Tina would have to reduce their annual living needs by $12,000 and eliminate their home loans.

The second scenario had a much better result. It assumed they sell the home and collect net proceeds of $245,400 after paying off their home loans. They’d then move into an apartment, paying rent of $1,800 per month, which reduces their annual living needs to $72,500.

This scenario resulted in a 98 percent probability of their financial plan succeeding, Furey says.

“Once they downsize their home they’ll add the proceeds to their portfolio, which will then be used in conjunction with their pension and Social Security income to pay for their reduced living needs,” he says.

After Tina retires, the couple will have almost $65,000 of annual income, and their Social Security will adjust annually by inflation. Furey says these income sources are their biggest assets, and with that income, they’ll only need to pull $7,500 a year from their investments.

The third scenario is also a positive one.

It assumes again that they sell their home and net $245,400, but they move into a retirement community. He assumed a cost of $300,000 with $3,100 a month for service fees.

This scenario would require them to pull $55,000 out of their investments for the retirement community apartment. Because most of their assets are tax-deferred, they will be required to pay taxes on any amounts withdrawn from IRAs and 401(k)s.

Overall, this move would reduce their annual living needs to $76,000.

He says with this scenario, Charles and Tina’s living needs are reduced and they could use a reverse mortgage on the retirement community apartment — a benefit offered by the community they’re considering — to help fund their living needs.

“A reverse mortgage takes the equity in the apartment, $300,000, and gives them a stream of income,” Furey says. “Any equity they draw from the apartment will be charged interest and becomes a liability to be paid by their estate upon their passing.”

So overall, Furey says selling their home and moving into an apartment will reduce their living needs the most because they eliminate expenses associated with their home.

“Their living needs are also reduced if they move into a retirement community because the service fees of the community and amenities offered are less than the carrying costs and lifestyle of staying in their home,” he says.