Get With The Plan: January 16, 2011

11611Brian, 58, and June, 46, have concerns about retirement and they’re not sure how long they can afford to remain in New Jersey. Their biggest worry is how their 12-year age gap will affect their planning, especially because they will have significantly higher out-of-pocket medical expenses with Brian retiring long before June is eligible for Medicare.

‘‘We are open to the idea of relocating should remaining New Jersey residents become financially impossible,’’ June says. ‘‘We do hope to have options here, especially if our children don’t drink the financial Kool-Aid and choose to remain residents of New Jersey.’’

College planning for two of their children, 15 and 12, is their other main money concern. Their 19-year-old is on active military duty.

The couple, whose names have been changed, have saved $246,022 in 401(k)s, $58,513 in IRAs, $533,338 in a brokerage account, $98,118 in money markets and $500 in checking. They also have $108,121 in college savings accounts, much of which was funded by the children’s grandparents. There’s also some family money: a one-third share of a rental home owned with Brian’s siblings.

The Star-Ledger asked Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, to help the couple look at their options.

‘‘The 12-year age gap presents a few very valid financial concerns,’’ Garutti says. ‘‘As Brian is the financial provider for the family, when he decides to retire, that could be it for them from an earned income perspective.’’

Given that the couple isn’t sure where they will live or what their expenses may be when Brian turns 66, Garutti says it’s hard to know their likelihood for success. In their favor is that by then, their mortgage will be paid off and the 401(k) contributions will stop, which means $1,200 less per month in the budget.

Garutti says one of the couple’s biggest challenges short-term is to determine their risk tolerance, create an investment plan and stick to it. June describes her risk tolerance as bi-polar: the short-term is too conservative and the long-term is too aggressive.

That kind of tolerance level often happens by default or lack of coordination, Garutti says, so June and Brian need to sit down and decide in what direction they’d like to go.

Brian’s 401(k) is invested as follows: 60 percent in a target-date fund, 20 percent in a stock fund, 9 percent in an index fund and 11 percent in company stock. Garutti says once the couple makes decisions about their risk tolerance, they need to review the 401(k) offerings and reallocate.

Brian saves 9 percent of his salary to his retirement plan. His company match was suspended in 2009 and for 2010 and 2011, the match is 1.5 percent. Garutti says Brian should contribute the max — $16,500 plus a $5,500 catch-up contribution because he’s over age 50. The increase will give them a larger retirement nest egg and lower their taxable income, Garutti says.

June has a 401(k) from a former employer and she hasn’t made changes to the account in many years. She says “laziness” is the only reason she’s never rolled the account to an IRA.

‘‘More often than not it is generally in a client’s best interest to roll their former 401(k) plans to their own IRAs once they are no longer employed at a company,’’ he said. ‘‘An IRA allows nearly limitless investment options whereas the 401(k) investment choices are provided by the employer.’’

Therefore, Garutti recommends June roll her 401(k) to an IRA.

The couple owns a few stocks in a brokerage account, but few of the holdings were strategic buys. Some shares are from the demutualization of a life insurance company, others are spinoffs, for example.

‘‘[The shares] were not purchased by choice so I wonder if this is another ‘lazy’ holding,’’ Garutti says. ‘‘If so, maybe the money could be put to better use.’’

If the couple finds Brian’s increased 401(k) contributions put pressure on their budget, the brokerage funds could be used to supplement cash flow, Garutti says.

If Brian retired today, the couple could buy into a retiree health plan with his current employer, but it would cost more than they pay now. Brian and June think Brian’s employer may make cuts to the retiree health plan in future years, so they’re not sure what will be available to them. And once Brian is eligible for Medicare, they will still have to pay premiums for June until she is eligible.

On the college front, they have a nice amount earmarked for college, but those funds aren’t seeing much movement.

‘‘Most of these proceeds are invested in money markets which are essentially not growing,’’ Garutti says.

He says that even though the couple is debt averse, college loans should be a serious consideration when the time comes.

‘‘The concept of children having ‘skin in the game’ is growing in popularity,’’ he says. ‘‘The thinking is that if a child is responsible for some of the cost of the education, then they may take it more seriously.’’