Get With The Plan: January 12, 2014

11214Rita and Danny, both 63, would like to retire, but they’re not sure if they can.

The couple has raised three children, one of whom is disabled, and they financially support that child — something they say will continue and is part of their retirement plan.

But they fear depleting their savings over time, given that they won’t have pension income in retirement.

“I believe our portfolio is extremely disjointed with no rhyme or reason and too much cash,” Rita says. “We met with some advisers who only wanted to sell us products but did not give us much direction or advice.”

Rita and Danny, whose names have been changed, have saved $1.07 million in 401(k)s, $112,500 in IRAs, $183,000 in annuities, $222,800 in a brokerage account, $72,000 in mutual funds, $60,000 in bonds, $508,000 in a money market and $1,000 in checking.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with Duerr Financial Group in Montville, to help the couple plan their retirement while keeping their disabled child in mind.

“Rita and Danny are like many couples in the early 60s,” Duerr says. “They would like to retire, they are concerned about outliving their assets, and they have a child who requires financial support.”

The first item to address — immediately — is their disabled child. He recommend they set aside funds that are specifically earmarked for her care should something happen to them. He recommends they create a trust for her benefit by meeting with an estate planning attorney who can go over their options.

As part of this plan, Rita and Danny would also need to name a trustee. Duerr says this is usually another family member, so if one of their other children is qualified, they could name another child.

If their disabled child needs more than financial support, Rita and Danny may also need to name someone to provide that care.

The couple says they spend around $105,000 to $110,000 a year, but Duerr says they need to carefully go over their budget and also see what items will change when they retire. By doing this they will be able to come up with a better idea of what they will need annually to cover their overall expenses, he says.

“While this may seem extremely basic, it is quite critical to determine that you can properly plan for your retirement,” Duerr says.

The couple also has some spending in mind. They would like to remodel their kitchen and three bathrooms, and they soon may need to replace two older cars.

Rita and Danny need to sit down and list which of these items are the most important, and determine an amount they are willing to spend on these items — and then stick to those numbers.

“Renovations can very quickly get more expensive than you initially thought once you begin,” he says. “Given that they are concerned about outliving their assets, they need to ensure they do what they need to, but not overspend.”

When it comes to their actual investments, there is no real plan, Duerr says. Their retirement and non-retirement assets are spread among a variety of investments with no real purpose — considerable assets but with no true allocation.

More than half of their assets are in cash.

“While they may want to be conservative with their investments, having this much money in cash is not wise,” he says. “In today’s environment, these assets are earning virtually zero.”

While the assets may be safe from the volatility of the stock and bond markets, they are losing purchasing power simply because of inflation.

Duerr says Rita and Danny need to analyze their concerns and come up with a true asset allocation they are comfortable with. Even if they were to be very conservative, Duerr says, there is no reason to have this much in cash.

One strategy would be to look at their investments for certain periods of time. They may want to try using three categories.

The first would be for their early retirement years, say, from age 65 to 75.

“For these assets they need enough income to supplement their Social Security and cover their annual expenses,” he says.

For assets considered for the next 10-year period, Rita and Danny need to be a little less conservative, allowing the assets to grow so they can cover expenses for their mid-70s and early 80s.

“The last bucket they can be even a little more aggressive with given that they will have approximately 20 years or more until they will need these assets to live on, so they can derive income from for their expenses.

“At all times they need to look at these three buckets and make changes based on the current markets at the time and any changes in their lives,” he says.

Given the lack of order and focus, Duerr says the couple might benefit from working with a professional they trust.

“(Setting goals and creating asset allocation) is not an easy thing to do, and working with a professional who specializes in this could mean the difference between achieving all of your goals or not being able to,” he says.

One of the big planning issues they have addressed is long-term care insurance. They each have policies that last for four to five years.

Duerr suggests they review the policies to make sure they cover certain items, such as in-home care. They should also make sure the coverage limits are increased annually for cost-of-living adjustments.

“If the coverage is not adjusted for cost-of-living adjustments, they may want to see if that can be added without a large increase in premiums,” he says. “Long-term care in the future will certainly cost much more than it does in today’s dollars, so cost-of-living adjustment riders are critical.”