Get With The Plan: February 5, 2012

Julie, 60, and Jason, 59, want to make sure their savings last through a long retirement that could start any year now.

“We envision our retirement as a start to the next phase of our life. We plan to stay active, travel and get involved in some volunteer work. Whether we stay put or move in retirement is still up for discussion,” Julie says. “Either way, we hope to lead a comfortable, fulfilling and rewarding lifestyle.”

The Mercer County couple, whose names have been changed for publication, save saved $183,000 in 401(k) plans, $230,800 in IRAs, $405,400 in a brokerage account, $173,700 in mutual funds, $22,000 in savings and $5,000 in checking.

Jason already receives a $500 per month pension payment, and Julie will receive between $53,000 and $57,000 a year if she retires in 2012.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple see if they’re ready for retirement.

“They have done a great job saving for retirement,” Power says. “Their house is paid off and have no other short or long term debts.”

And they’re still saving for retirement, with Jason and Julie each contributing the max to their 401(k) plans. While Julie doesn’t get employer matching funds, Jason receives a generous 4 percent match.

For this analysis, Power used after-tax retirement expenses of $6,000 per month, which equals the expenses of their current working lifestyle.

“I did this because their mortgage is paid off, Julie has health insurance through her state plan — keeping their out-of-pocket to a minimal amount — and they are very happy with the current lifestyle,” he says.

It looks like the couple will have a very strong cash flow in retirement. Their pensions are a big help, and they both have strong earnings records so they should both qualify for maximum Social Security benefits, which are estimated to be $28,300 each at age 66.

That gives them a before-tax income of $110,468, which is well above their approximate before-tax lifestyle of $103,000 per year, Power says.

Instead of assuming a constant rate of return on their assets, Power used a Monte Carlo simulation to evaluate the outcome of their portfolio over time.

“By varying the rates of return and inflation to simulate the fluctuations that can be experienced in the marketplace, a more accurate reflection of the real life ups and downs of the investment environment is presented,” he says.

This simulation analyzes historical performance of the securities markets using broad asset classes such as “Small Cap Equities” and “Long Term Bonds.” Power says the modeling involves the movement of yields through time and then it layers on various equity risk to derive returns.

“As expected, based on their strong retirement cash flow, the couple had a 100 percent probability of success,” Power says.

The couple says their risk tolerance is moderate, but their current portfolio is far more aggressive. Stock investments make up 77 percent of their holdings.

Power recommends they reallocate to reach a 50 percent equity and 50 percent fixed income portfolio.

“Reducing the risk of their investments should help them achieve more consistent rates of return,” he says.

There are other moves they can make to get better aligned with their risk tolerance.

He recommends they start by simplifying their investment account structure.

“They have accounts in too many locations, as well as too many mutual funds. The concern with their current set up is that there is no consistent investment strategy across all
of their investments,” Power says.

The proof of that is that they own mutual funds that have different names, but the funds’ objectives are all very similar. Although it may seem at first glance they are diversified, when you dig deeper into the holdings of each mutual fund, they own many of the same stocks.

Out of the 77 percent they have in the stock market, 44 percent is in large U.S. companies.

Power suggests they have no more than 20 percent in large U.S. companies. He also recommends they explore additional asset classes, including high-yield bonds, REITs, long-term bonds and commodities.

Jason and Julie should review their wills and estate documents to make sure they can both take advantage of the New Jersey estate tax exemption, which is currently $675,000.

To make that work, Power says they must each own $675,000 of assets in their individual names, which is not the case today.