Get With The Plan: February 28, 2010

22810Marty, 75, and Penny, 73, have six children and 16 grandchildren to keep their retirement years busy. While they’re looking forward to their 50th wedding anniversary later this year, the couple have also looking beyond.

“Our biggest financial concern in managing our finances is to make sure that they will last through the remainder of our lives,” says Penny. “We envision our retirement as being able to maintain our present standard of living. We would like to remain in our present house barring unforeseen health problems and an exorbitant tax rate.”

The couple, whose names have been changed, have saved $876,000 in IRAs, $26,000 in mutual funds, $22,100 in a brokerage account and $1,000 in checking.
Marty will receive annual deferred compensation payouts for the next seven years, but after that, the couple will rely on Social Security and their investments.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help.

“They live a modest lifestyle,” Duerr says. “They are not looking to change this at all during the remainder of their retirement. They just want to ensure that they can continue to maintain it.”

One of the couple’s questions is about paying down their Home-Equity Line of Credit. It’s the only debt they currently have, and it only has a low 2.99 percent interest rate. The required monthly payment is $540. Duerr says they’re not in a rush to pay it off, and that should be fine, given that the interest is tax deductible and the required payment is not too large for them to handle.

The bulk of their assets is invested in IRAs, conservatively invested with approximately 55 percent in stocks and the remainder in bond and money market funds.
Duerr says given their age and risk tolerance, this asset mix is appropriate.

“If they withdraw 4 percent a year from these IRAs annually, they should have plenty of income in retirement when added to their Social Security and the current amount received from Marty’s deferred compensation,” Duerr says.

He recommends they take only what they require right now from the IRA accounts, especially since they still have the additional deferred compensation income.

By only withdrawing the minimum amount they need to cover expenses now, they can let the assets potentially continue to grow for when they no longer have the deferred compensation, he says.

Like most investors, the current volatility in the market concerns Penny and Marty.

They have considered putting some of their assets into a fixed annuity with income benefits to help weather the markets.

Duerr says this strategy is something to consider, but it’s not something they absolutely need to do.

“However, if knowing that some of their assets are protected from market fluctuations eases some of their concerns, it is probably a good idea,” Duerr says. “They do need to consider that annuities are long-term investments that can have high fees and expenses and can contain surrender charges for early cancellation of the contract.”

The couple is planning two large expenditures: Their 50th anniversary party later this year and the purchase of a car in the future. The party is already half paid for, and because Penny and Marty have budgeted for the remainder, that expense should work out fine.

The car, though, requires a little planning. Both their cars have more than 100,000 miles on them, and they’re not planning to buy a new one until they have to.

Duerr says they should start to set aside some funds each month toward the future expenditure.
“Since they hope this will not occur for several years, even if they are able to put aside $100 to $200 a month right now, it could grow to be a sizeable down payment,” he says.

But if they end up needing the car sooner, they may need to draw some additional funds from their IRAs to cover the cost. Prior to changing any withdrawals from IRAs, Duerr says they should determine if there are any fees, surrender charges or other expenses for the withdrawal, including tax consequences.

Finally, one big “if”: Marty and Penny need to give serious thought to what would happen if either one of them should need medical care for a significant period of time.

They don’t have long-term care insurance to help cover these expenses, so they could be forced to deplete a significant amount of their assets to pay for care.

“The cost of long-term care can run into the millions of dollars and can eat up their retirement income,” Duerr says.