“We want to either live in the same house we currently have in New Jersey or maybe move, and we also have a small second house and we’d like to spend some months out of the year in both,” Barb says.
The couple would also like to help their son pay for law school.
Barb and Barry, whose names have been changed, have saved $497,700 in 401(k) plans, $24,500 in IRAs, $276,200 in an annuity, $101,000 in mutual funds, $1,400 in a brokerage account, $86,600 in savings and $18,800 in checking.
Additionally, Barry will receive a pension at age 65 that’s estimated to pay out $1,761 per month, or about $21,132 per year.
The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help Barry and Barb see if their money will be ready for retirement when they are.
“Between very generous employer retirement benefits and their commitment to saving, they have a done a great job saving for retirement,” Power says. “And they have very minimal debt.
For this couple’s analysis, Power says he used a very modest after-tax retirement lifestyle of $60,000 per year, increasing every year for inflation, based on the budget Barb worked up.
There’s good news, and it’s all centered around their anticipated cash flow in retirement.
“Between Barry’s pension and both of their Social Security benefits, their retirement expenses will be mostly covered through cash flow,” Power says.
That means even though they have substantial investments, they won’t have to dip in to those accounts to pay most of their regular bills, so the money can continue to stay invested and grow over time.
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, Power says, a more accurate reflection of the real-life ups and downs of the investment environment is presented. This takes a look at the historical performance of the securities market and broad asset classes rather than look at the performance of any individual securities.
Based on their very modest retirement lifestyle goal of $60,000 per year after-tax, strong retirement cash flow and accumulation of a nice-sized retirement nest egg, the couple is projecting out to have a 100 percent probability of success, he says.
“In fact, even after gifting $100,000 to their son, their portfolio assets principal is projected to stay intact even in the worst case market scenario using my recommended asset allocation discussed below,” Power says.
Barry and Barb say their risk tolerance is moderate conservative. Power says from a high-level view, when you look at their overall portfolio, they are in line to be slightly more conservative, with 22 percent in equities and 78 percent fixed income.
Power recommends a slightly different allocation for investors with their risk tolerance, with 35 percent in equities and 65 percent in fixed income/money market.
If you dig a bit deeper to see what kinds of equities they own and what kinds of bonds they own, they are heavily weighted in U.S. large-cap equities with 16 percent, compared with the 9 percent Power would recommend. They also have 51 percent in intermediate-term bonds, compared with the 10 percent allocation recommended by Power.
“They could spread those heavily weighted assets more evenly across other asset classes such as mid-cap, small-cap, international equity and emerging markets on the stock side, and international bonds and short-term bonds on the bonds side,” he says. “Their intermediate term bond exposure may surprise them on the downside if and when interest rates start to rise.”
Having more of those bonds reallocated toward short-term could help protect their principal against rising rates, he says.
Power has some other items he wants them to consider.
The couple has a lot of cash sitting in the bank earning nearly zero interest. He recommends they pay off their mortgage and home equity loan with those funds, or at least invest some of it to earn a better rate of return than they’re paying on the home loans.
“Based on their low mortgage and home equity loan balances, they are most likely paying more principal down than interest so they are not getting much of a write-off for income tax purposes,” he says.
He says they should also consider long-term care insurance. He says he’s particularly concerned about protecting assets about Barry’s need for care, which right now would mostly be paid out of pocket.
“Couples that have age differences like Barb and Barry should be extra careful to plan for the younger spouse to make sure he/she has enough assets to bring them to the end of their lives,” he says.
With that same concern in mind, to protect Barb’s income should Barry die first, he recommends they take the 100 percent survivor option on Barry’s pension. This would reduce their annual income by $4,300 a year, but even with that lower payment and with gifting $100,000 to their son, they would still have a 100 percent probability of success, all other factors staying the same.