Get With The Plan: January 10, 2010

11010Anna and Jim are in their mid-60s and financially stable, but they feel a full retirement may not be in reach.

“I read your column each week and everyone seems to have lots of money. Well, we don’t, and at 66, I am still working and wondering if I will always have to work,” Anna says. “After losing money last October, we have less than ever before. My husband and I are doing the best to stay afloat but still need direction.”

Anna and Jim, whose names have been changed, have set aside $95,781 in 401(k)s, $196,400 in IRAs, $223,885 in annuities, $49,000 in savings and $2,000 in checking.

The Star-Ledger asked Greg Plechner, a certified financial planner with Modera Wealth Management in Westwood, to help Anna and Jim see if retiring — and soon — is a realistic option.

“The good news is that if Anna were to retire in 2010, the couple should be able to maintain their current standard of living,” Plechner says. “The couple seems to have done a few things the good ol’ fashioned way’ — they lived within their means and managed to save.

Plechner says as long as they keep their expenses low in retirement, as they have done in their pre-retirement years, they should have an adequate cash flow.

Still, there are some areas where they can improve, starting with the asset allocation of their savings. Plechner says with an overweight in cash and bonds — 100 percent of their IRAs and 401(k)s are in low-yield money markets and bonds — they need greater diversification.

Despite the couple’s low risk tolerance after losing a substantial amount of their investments during the market downturn, they still need to stay invested in order to ensure long-term inflation-adjusted growth, he said.

“Research has shown that investors who have remained invested during past downturns experienced better portfolio performance during the long run than those who cashed out at the bottom and waited to reinvest,” he said.

Plechner says being invested doesn’t simply mean putting all of your cash into the stock market. Instead, you need a strategic approach, and diversification is the key. Given the couple’s overall lower risk tolerance and their age, he said a diverse portfolio of 50 percent bonds and 50 percent equities may be appropriate. The portfolio should be spread among many asset classes, such as large- and small-cap stocks, value and growth stocks, emerging markets, inflation-protected securities, intermediate bonds, high-yield bonds and even some hedging strategies.

“Well-diversified portfolios such as this one include many different asset classes with low correlations to one another,” Plechner says. “When rebalanced regularly, these portfolios have historically been less volatile and have delivered superior returns at less risk than poorly diversified portfolios.”

The couple also need to consider that a substantial amount of their savings is locked up in various annuity products. For the policies that are variable deferred annuities, there are potential downsides to holding these investments: high expense ratios — sometimes as high as 4 percent, versus a typical open-ended mutual fund charge of 1.3 percent, he says. Also, these offer limited investment options and costly surrender charges, which can range from 4 percent to as high as 11 percent. Plechner says because the couple are in the 15 percent tax bracket, they don’t benefit significantly from one of the main reasons to invest in an annuity in the first place — tax deferral.

Plechner recommends Anna and Jim examine these policies in greater depth to determine which contracts are past their surrender charge period, and then they should review the specific contracts terms to determine the types of guarantees, if any. For the annuities that have watered-down or no guarantees, he says they want to consider surrendering those contracts after considering the tax consequences.

Though Anna and Jim both have already begun collecting Social Security, they may want to consider delaying benefits until later, Plechner says. For each year of delay between the ages of 66 and 70, one receives approximately an 8 percent increase in benefits, he says. Plus, 50 percent of one’s benefits may be taxable if the recipient has combined income falling between $32,000 and $44,000; the percentage increases to 85 percent once income exceeds $44,000.

To make sure their expenses remain low, instead of leasing a new car when their current lease is up, they may want to consider buying.

“Buying a car, whether it is new or used, is more economical over the long term than leasing a car,” Plechner says.

The couple should also check with their insurance agent to see if dividends from Jim’s whole life insurance policy could reduce the premium, which is $1,300 a year. While they’re at it, they should look into the cost of long-term care insurance to see if the cost is worth the potential benefits.