“Due to my recent change in marital status and the overall economic environment, I am experiencing a degree of financial uncertainty on how to move forward with my future planning,” said the newly divorced man.
He’d like to stay in his home for the long term, and he hopes in retirement he can live off of income from his investments so he can leave a large nest egg for his daughter someday.
Ying, whose name has been changed, has so far saved $178,791 in a 401(k) plan, $8,194 in an IRA, $4,100 in a money market and $6,500 in checking. His only debt is the mortgage on his home.
The Star-Ledger asked Howard Hook, a certified financial planner and certified public account with Access Wealth Planning in Roseland, to help Ying to work on the challenges of his new divorce and life as a single dad.
“One major change in someone’s life can cause plenty of uncertainty, but in his case there are multiple changes that must be adding even more to his concerns,” Hook says.
Post-divorce, Ying is concerned about providing for himself and his child, while at the same time continuing to save for his future retirement.
Hook says a review of Ying’s current income and expenses shows he has a positive cash flow of approximately $8,000 a year. This is based on the budget Ying submitted to Get With The Plan, and Hook added an annual $2,000 expense for vacations, which Ying says is one of his goals.
“Assuming a 6 percent rate of return and that any positive annual cash flow is reinvested each year, our projections show that he will have accumulated enough of a capital base of assets to be able to retire comfortably at age 67, when he will be eligible for full Social Security benefits, at least under current law,” Hook says.
Ying also expressed concern about the current economic environment and what it will mean for his long-term financial plan.
Hook says he wouldn’t understate what we have all just experienced in this economy, but he thinks the past few years have — and the next few years will — present tremendous opportunity for people who accumulate shares of equity investments at depressed prices.
“A review of history has shown that the economy grows and contracts over periods of time, but the long-term trend is for growth,” Hook says. “This long-term growth is what ultimately drives stock prices higher over the years.”
With a planning period of about 30 years until turning full retirement age, and another 20 to 25 years of potential life expectancy after that, the future still looks bright, Hook says.
The key as always is to stay invested and not panic out of the markets.
“While this may be easier when you are younger, it becomes more difficult as you get older, since your perceived time horizon is shorter and shorter,” he says. “As an aside, I am yet to meet anyone who overestimates their time horizon as it relates to investments.”
As an example, Hook presents this scenario: On Nov. 3, 1992, Bill Clinton won the presidential election. The day before, the S&P 500 closed at 423. From that date through Dec. 3, 2010, the S&P 500 almost tripled, closing at 1,224.
“Two recessions, two wars, two terrorist attacks on U.S. soil, and other long-forgotten ‘the sky is falling’ moments and still, the stock market as measured by the S&P 500 tripled,” Hook says. “Oh, one last thing. Those numbers do not include reinvested dividends, which would have assuredly resulted in even greater than a tripling of an investor’s money.”
Ying says he never includes Social Security benefits when he looks at his own retirement projections, but Hook thinks that’s a mistake.
Hook says this is an indication of being too conservative: Not including Social Security income as part of planning may result in certain things Ying does or doesn’t do because of those concerns, Hook says.
“This may be failure to take vacations, or to pursue a new career, all because of a retirement plan that does not take into consideration an income source that may very well be available,” he says.
Instead, Hook says the approach should be to do a retirement plan using current law, and then the plan can be reviewed periodically to ensure that it’s moving in the right direction and takes into consideration changes in the law.
Rather than planning to live off interest income in retirement — which may be impossible if the current interest environment sticks, Hook recommends a total return approach.
“The growth of a well-diversified portfolio consisting of equities, bonds and cash will consist of three things — interest from the bonds, dividends from dividend-paying investments and growth from stocks,” he says.
Rather than planning to live off investment income, retirees should plan to draw the money they need for retirement in the most tax-efficient matter, he says. The dollars lost to tax-inefficient distributions can really deplete a retiree’s capital in retirement.
Additionally, Hook recommends Ying save some of his free cash flow for his child’s college education using a 529 plan.
He also recommends Ying review his will, power of attorneys and living wills, as well as the beneficiaries of his IRA, 401(k) and life insurance plans.