Get With The Plan: February 20, 2011

22011Clark, 61, and Maura, 57, would retire tomorrow if they could. They own two homes, but they expect to sell their New Jersey condo and move to their out-of-state home when they finally stop working.

“Clark expects to work until 65 so he will be eligible for Medicare, although he would like to retire sooner. I would like to retire when he does, but I’m not sure if we will have enough saved,” Maura says.

The couple, whose names have been changed, have saved $678,000 in 401(k) plans, $1,200 in IRAs, $78,000 in mutual funds, $40,000 in a money market, $15,300 in savings and $2,000 in checking.

Clark will also receive a pension upon retirement, and if he chooses the survivor option, he and Maura would receive $1,900 a month for their lifetimes.

The Star-Ledger tapped Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple determine how soon they can retire.

“Clark and Maura, outside of paying the mortgages on two homes, have relatively standard expenses for their income level and asset base,” Kazanchy says. “Both of their current salaries support their lifestyle and allow them to save additional money each year for their future retirement needs.”

The one wrinkle could be the burden of owning two homes, both with large outstanding loan balances, he says.

Moreover, one of these homes has a debt/equity ratio of over 100 percent.

However, selling their New Jersey home will significantly reduce annual expenses in retirement.

The couple’s annual after-tax living expenses are $60,500, not including mortgage expenses. Kazanchy took a look at different spending levels and retirement ages to show the couple their options.

The first scenario assumed they both work five more years. It assumed they’d sell their New Jersey condo at that time and pay off the remaining mortgage balance.

It also assumed before retirement, they’d spend—not including mortgages—$60,000 after taxes, and in retirement, they’d spend $49,000 a year (not including the mortgage or taxes).

He also assumed the couple would max out their retirement savings options—which they’re not doing today—to $22,000 each a year ($16,500 to their respective 401(k)s plus the $5,500 catch-up contribution).

Maura has both a pre-tax 401(k) and a Roth 401(k), so the projections assumed she’d earmark half of her contributions to each, and right now Clark isn’t saving to his at all.

The projection also assumed they’d each receive Social Security benefits at age 66.

“The results show that regardless of their asset allocation ratio between growth assets and fixed income securities, they have a high probability of meeting their long-term goals under these assumptions,” Kazanchy says.

In the second scenario, Kazanchy considered how the couple would fare if they spent $85,000 while working and during retirement, exclusive of mortgage payments and taxes. It showed as long as they have at least 30 percent of their investable assets in growth investments, they have a high probability of success.

For the final scenario, Kazanchy looked at how they would do retiring at the end of 2013 and spending $75,000 a year after taxes, and not counting the mortgage.

With at least 40 percent of their investments in growth assets, they’d have success, too.

That means under a variety of spending plans and retirement dates, Clark and Maura are in good shape, and they can afford to retire earlier than planned.

“For each of these scenarios, a slight increase in their annual after-tax spending can significantly impact their probability of achieving their goals,” Kazanchy says, but if spending increased, they’d need to invest in more equities.

The couple’s portfolio is 63 percent in stocks and 37 percent in fixed income. That’s riskier than they need to be, Kazanchy says, recommending they pare back to 50 percent stock and 50 percent fixed income.

On the equity side, the couple has too much exposure to global large cap stocks, which makes their portfolio markedly more susceptible to risks within that asset class.

On the fixed income side, they own a lot of bond funds with an average duration in the four to five year range, which is longer than Kazanchy likes in this low-interest rate environment.

“The shorter the duration of the bonds they own, the less they expose themselves to a potential rise in interest rates,” he says.

Kazanchy says it’s important for the couple to maximize contributions to employer 401(k) plans—and right now Clark is not contributing at all.

Given their flexibility in spending, Kazanchy says they can afford to purchase long-term care insurance without it inhibiting their ability to achieve their goals.

“The risk of not obtaining this insurance is that either one or both of them enter into a long term care facility or require home care during their lifetimes, and are forced to pay for the expense out-of-pocket,” Kazanchy says. “Long-term care facilities/home health care tend to be significant expense liabilities, and as a result, paying the premium for coverage now could alleviate any financial burden in the future.”

The sooner they buy, the cheaper the premiums will be.