Get With The Plan: January 22, 2012

At 71, Claudia is active, energetic and she’s just gearing up. She’s still working full-time, but in 2012, she’d like to pull back to part-time so she can enjoy what she has — if she can afford it.

“My retirement vision is to maintain my current lifestyle,to afford my condo, to travel to foreign places once a year, to travel in the U.S. several times a year and to be able to support myself to an old age,” she says. “I worry that my retirement will be hindered by lack of funds — that I will not be able to travel, dine out, or have recreational opportunities that I want.”

Claudia, whose name has been changed, has saved $839,400 in 401(k) plans, $39,100 in a brokerage account, $24,500 in bonds, $10,600 in certificates of deposit, $47,100 in a money market and $1,600 in checking.

The Star-Ledger asked Megan Brozowski, a certified financial planner with RegentAtlantic Capital in Morristown, to help Claudia financially plan for a busy retirement.

“With longevity in her genes, Claudia would like to see if she can live her retirement dream while having the ability to support herself to an old age,” Brozowski says. “With a considerable nest egg of investment assets, several sources of retirement income and a comparably small mortgage liability, it is evident Claudia is a saver and has lived within her means.”

Claudia isn’t a fan of investment risk, so Brozowski ran several scenarios to test the probability of success that her investment assets will last her until age 93. A 40 percent stock and 60 percent bond asset allocation projects an 84 percent probability of success.

“We also added into the simulation the ability to purchase a long-term care plan with an annual premium of $6,000 a year,” she says.

Brozowski notes there are several factors that may increase the projected probability of success.

First, if Claudia is planning to pursue part-time employment, her income may help reduce the amount she would have to withdraw from her investment assets.

Claudia could also benefit from a more diversified portfolio. Today, over 87 percent of her investments are spread over only five asset classes.

“While a target allocation is based upon the personal financial situation and risk tolerance of each individual, Claudia should consider all-fund options that can help dilute the risk exposure of larger asset specific holdings,” she says

Another risk Claudia needs to consider is longevity risk, which Brozowski says adds an interesting dimension to retirement planning.

“While we all dream of living long and healthy lives, in Claudia’s case, the notion of outliving her assets can be worrisome concern,” she says.

Brozowski says delaying Social Security payments and pursuing part-time work are common sense approaches for retirees to make assets last longer.

“For many retirees, making a portfolio last a lifetime may mean spending less, saving more, working longer, or a combination of all three,” she says.

To further manage longevity risk, there are some other possibilities to consider, though they have drawbacks, too.

Immediate annuities can play a role in a retirement plan for someone who has a higher life expectancy and is in their 70s, Brozowski says. An immediate annuity provides immediate guaranteed streams of income as long as Claudia is still alive. “One key disadvantage is that if she passes away tomorrow, the insurance company gets to keep the money,” she says. “While most insurance companies can provide more guarantees, these bells and whistles come at a cost of a lower income stream.”

In Claudia’s case, given the lower interest rate environment and her potential for financial independence, this route may not be appropriate for her, Brozowski says.

Longevity insurance is another way to mitigate longevity risk. For this, you pay an insurance company a lump sum at the start of retirement and if you outlive the insurance company’s mortality charts on life expectancy, the insurance company pays a monthly sum to you for however long that may be.

“Similar to a fixed deferred annuity, the payout amount is determined at the time of purchase and is not paid out until a specific date,” she says. “The payout can be quite high if you are able to reach very mature ages.”

But, Brozowski says, the most painful disadvantage is providing a large lump sum from your retirement pot to an insurance company without the ability to take the money back should you pass away prior to the set payout date.

Because these funds are typically withdrawn from retirement funds, another element to consider is how your portfolio would have grown had you not purchased the contract.

One thing that Claudia definitely should investigate is long-term care insurance, but given her age, a policy could be cost prohibitive.

“While the simulation took into consideration a long-term care policy with $6,000 in annual premium, such an allotment may not be enough for her to fully insure,” Brozowski says. “It is recommended that Claudia review coverage options as well as the affordability of available plans.”