Get With The Plan: January 24, 2010

12410George and Millicent are preparing for the final steps to start their retirement. They’d love to live part time in their Florida home and part time in New Jersey, but they’re not sure what they can afford.

“We are concerned about fully recovering our prior-to-2008 net worth,” said George, 63. “We want to know how to ‘restructure’ ourselves and whether we can afford even a small and inexpensive second home in New Jersey.”

The couple, whose names have been changed, have saved $730,000 in IRAs, $30,000 in a brokerage account, $15,000 in money markets and $5,000 in checking. They own their New Jersey and Florida homes, but both properties have mortgages.

The Star-Ledger asked Michael Pirrello, a certified financial planner with Mill Ridge Wealth Management in Chester, to help George and Millicent look closely at their retirement budget.

“They have worked hard to accumulate assets and are in relatively good financial shape to afford a comfortable retirement,” Pirrello said. “However, as they approach their retirement, there are some adjustments to their financial plan that need to be made to secure the best possible ‘retirement vacation.’ ”

George and Millicent plan to downsize their New Jersey home, and they’re determined to never again see snowflakes as they split their time between New Jersey and Florida. They’ve so far been able to carry mortgages on both homes, but when they retire fully, they’ll have to contend with a decrease in income.

They plan to sell their home and net approximately $150,000 after expenses and paying off the existing mortgage. With those proceeds, Pirrello said they’d like to pay cash and downsize into a Garden State condo for approximately $125,000, putting the remaining cash into savings.

“This move will save approximately $2,800 in monthly expenses ($33,600 annually) by alleviating the current mortgage payment and a significant amount of the expenses related to their current larger home,” he said.

To afford a comfortable retirement, Pirrello says George and Millicent will have to attack their finances on two fronts: Expense reduction and income creation via their investment portfolio. Their estimated retirement income, even with a downsized Jersey home, will not be enough to cover estimated expenses, Pirrello said.

“This is the tough part, but George and Millicent need to look seriously at cutting discretionary expenses in areas such as household improvements, clothes purchases and vacation expenses,” he said.

One possible area to cut back is George’s expensive term life coverage of $258,000, Pirrello said. The policy only covers George for three more years and is very pricey at $640 per month.

“Once their New Jersey home is sold and they purchase a new home with all cash, the remaining life insurance policy that George owns will provide enough coverage to pay off their main debt of the Florida mortgage,” Pirrello said. “The remaining policy covers George for 10 more years and is much more cost-effective.”

This move would save them $7,680 per year and still allow them to maintain necessary insurance coverage.

The biggest risk to this couple’s retirement plan may be their investment allocation, Pirrello said. Of the $760,000 the couple have invested, only approximately 15 percent is invested in bonds.

Additionally, the majority of the stock holdings are also concentrated among a dozen or so stocks, which limits the opportunity for proper diversification.

“They lost a lot of money in the market crash of 2008 because they were so heavily invested in stocks,” Pirrello said. “Had they been invested in a more conservative/moderate portfolio they would have been able to limit their losses.”

Pirrello said investing basics dictate you invest more aggressively earlier in life because you have a long-term investment horizon and active income. Later in life, you begin to lower the risk as you approach retirement and take measures to protect the hard-earned dollars you have accumulated over time.

Pirrello said stock market losses cannot be made up as easily in retirement, due to limited income and shorter investment time horizons.

Pirrello recommends they change their portfolio to reflect a 30 percent stock and 70 percent fixed-income portfolio.

“In this case, with approximately 70 percent, or $530,000, invested in a diversified fixed income portfolio, coupled with the dividend yield from large-cap stock holdings, this couple will be able to generate additional annual income of approximately $26,000 to help meet expenses,” he said.