Get With The Plan: February 27, 2011

22711Tim and Hannah, both 61, have worked hard and saved hard. Now with retirement approaching, they want to play hard, too.

“We want out retirement to be active,’’ Hannah says. “We want to be comfortable to take two or three trips a year, ideally to warmer weather for winter months, and potentially live at our second home half the year—if we keep it.’’

The couple, whose names have been changed, have set aside a healthy nest egg. They have $945,000 in 401(k) plans, $487,000 in IRAs, $22,000 in mutual funds, $4,800 in a money market and $5,000 in checking.

The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help the couple determine if their savings will support the active retirement they hope to enjoy.

Meckler started by looking at how the couple’s expenses and savings would fare if Tim retired next year and Hannah continued working for five more years.

“If Scott wants to retire and they want to continue their lifestyle, they will need approximately an additional $8,000 per month in today’s dollars to support their lifestyle, not including Tim’s Social Security benefit,’’ Meckler said.

At age 62, Tim’s projected monthly Social Security benefit would be $1,622. Meckler says the value of their investable assets at that time would be approximately $1.378 million. These values do not include their homes, personal property or cars.

Based on a 3 percent inflation rate and a 6 percent rate of return on their assets, their portfolio would be depleted by age 98, Meckler says. This scenario assumes Hannah continues to work and she begins taking her Social Security benefits at age 66.

“If she is still working, she will want to wait until at least age 66 which is her normal retirement age so there will not be any income restrictions on her Social Security benefit,’’ he says, noting that Hannah’s projected Social Security benefit at that time would be $2,156 per month.

Meckler says if they waited to retire until Tim turned 65, that would give their assets four more years to appreciate and Tim could contribute another four years to his 401(k) plan. Right now he contributes the maximum $16,500 a year, plus the $5,500 “catch-up” contribution for those over age 50.

Another alternative to a more secure retirement would be for Tim and Hannah to sell one of their homes.

“Not only would that free up a significant amount of money to invest, the real estate taxes and upkeep on one home would save them approximately $1,500 per month,’’ Meckler says.

The lion’s share of their retirement assets are in Tim’s 401(k) plan. When he retires, Meckler says they should roll that money over to an IRA, which would give them more options for investment choices. At that time, they should choose a well-balanced diversified portfolio tailored to their risk level, Meckler says of the couple, who says they have a low to moderate risk tolerance.

“If they decided on a moderate risk portfolio that would be a 50 percent equity allocation and 50 percent in fixed income,’’ he says. “Since they are fairly young and will hopefully enjoy a long retirement, they need to invest some portion of their assets in equities to allow for growth.’’

He’d recommend an asset allocation breakdown of 17 percent large-cap growth, 17 percent large-cap value, 8 percent international stocks, 3 percent small-cap growth, 3 percent small-cap value and 2 percent mid-cap stocks. Of the fixed income, he suggests 48 percent in a variety of bonds and the remaining two percent in cash.

Depending on their tolerance level, Meckler says they may want to consider a variable annuity with a living benefit rider for a portion of this money. He says this kind of investment would guarantee them an income for life, and there are several products available today that would guarantee a return of 5 percent for life.

The couple is in the process of surrendering their life insurance policies, but Meckler says that may be a premature move. Because Hannah is planning to continue working and bringing in an income the couple will rely on, she should still have some insurance. Meckler says a $500,000 10-year term policy would do the trick to protect Tim from the loss of her income.

Long-term care insurance should be another consideration for this couple given their asset base. Meckler says in New Jersey, long-term care costs average $60,000 a year for as assisted living facility and could cost more than $100,000 per year for a nursing home facility.

“This type of care for either Hannah or Tim could deplete their assets very rapidly,’’ he says. Finally, the couple should make sure their wills, health care proxies and other essential estate planning documents are up-to-date both for their protection and to make sure their assets are passed along in the most tax-efficient manner.