Get With The Plan: January 25, 2009

Sal, 57, and Sydney, 55, are just about ready for an empty nest. The youngest of their three children is finishing college this year, and the older kids have already completed their higher education. The couple is looking forward to retirement and offering a little more help for their ‘‘baby.’’

‘‘The youngest is planning on attending graduate school in September ’09,’’ Sal says. ‘‘Our goals are retirement at age 65 for us both with little or no debt and helping our youngest daughter with graduate school expenses.’’

Sal and Sydney, whose names have been changed, have set aside $435,000 in 401(k) plans, $395,000 in IRAs, $40,000 in savings and $20,000 in checking. Sal has a pension from a former employer, which could be worth as much as $1,608 a month or could be taken as a lump sum of $315,000. They also own a half share of a summer home, worth $400,000. They’d like to sell the home once the real estate market improves, they say.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help the couple plan for retirement.

‘‘They are in a great position to enjoy their retirement and spend more on vacations or other luxuries that they put aside while paying for their children’s educations,’’ Pallitto says.

The couple’s biggest concern is what to do with Sal’s pension, which he earned at his previous job. Pallitto examined the options payout options.

If they chose the 20-year certain payment, the company would pay $1,516 per month for 20 years or life for ei- ther Sal or Sydney. That means Sal and/or Sydney would receive the payment for the rest of their lives, or if they died before the end of the 20-year term, their heirs would receive the balance.

Or they could take the lump sum, which Pallitto suggests they could transfer into an IRA invested in a variable annuity with a guaranteed income rider.

‘‘By doing so, they are effectively creating their own pension plan but the major difference is they will have control of their funds and there will be a death benefit payable to their heirs,’’ Pallitto says.

If Sal and Sydney transferred the funds to a variable annuity with a six percent guaranteed income rider, they could receive $1,575 per month, or more, for the rest of his life. When Sal dies, Sydney would receive the $315,000 they invested — or more, if they elected an enhanced death benefit. Pallitto likes this option because they don’t need the funds immediately and the monthly benefit could increase by six percent annually, and they’d still retain control of the money.

Sal’s old employer savings account — a combination of pretax and after-tax dollars — is worth $435,000, but 70 percent is invested in the former company’s stock. Pallitto says they should roll the pretax funds into another IRA, immediately selling the stock and rebalancing based on their moderately conservative risk tolerance. The after-tax funds — $40,000 worth — should be placed in a separate account and used to pay off the credit card and student loan debt.

‘‘Paying off these two debts would save them over $1,000 per month, reducing their monthly expenditures to $6,000 per month, which is equal to their new current monthly take-home pay,’’ he says.

Pallitto says proceeds from the sale of the vacation home can be used to pay off any future education loans for their youngest child. And when they eventually pay off their primary mortgage, they’ll reduce their monthly costs to $4,700 a month. Monthly, they expect to receive $2,055 for Sal’s Social Security at age 64 and $629 for Sydney at age 62. Add that to a withdrawal of $2,300 a month from the variable annuity (which won’t deplete principal) and the couple would have enough the pay their bills when they retire without tapping their other savings.