Get With The Plan: January 26, 2014

12614Mark, 56, and Kelly, 57, have raised two children, putting them through college without incurring any debt. They’re now putting a spotlight on their retirement, for which they hope to move to a warmer weather area and travel when they want.

“Will our money run out before we run out of heartbeats?” Mark asked. “We hope to be able to retire comfortably and pursue special personal interests, partially fund grandchildren’s educations and share an inheritance with our children.”

They’re also considering the purchase of a smaller property out of state near one of their children.

The couple, whose names have been changed, have saved $96,400 in 401(k) plans, $705,900 in IRAs, $30,200 in a brokerage account, $14,000 in savings and $12,000 in checking.

Also, Kelly expects a pension of about $900 a month when she retires, while Mark has $50,000 in a pension account that offers a 5.25 percent return. He expects that account to be converted into an annuity eventually, and he hopes those funds would cover Medicare parts B and D.

The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help Mark and Kelly position their assets for a long retirement.

“They have a done a great job saving for their future retirement so far,” Meckler said. “The goal to a successful retirement is to save 15 percent of your income and they are doing well beyond that.”

But like most families, they can do even better.

Meckler says historically, we are in a very low tax environment. In 1986, the top tax bracket was 50 percent, in 1981 it was 70 percent and in 1960, the top tax bracket was 91 percent, he says.

Meckler believes taxes will go up over time, so the couple should keep that in mind.

“Mark may want to consider and hedge his bet somewhat and ask his employer if they offer a Roth option to his 401(k),” he says. “With the Roth you contribute after-tax dollars to the plan, all the growth is not taxed and eventually when you start withdrawals, it is also tax-free. If you feel taxes will go up in the future then the Roth is the way to go.”

Meckler says when most people plan for retirement, they only focus on their assets and pension plans. But in order to be successful, he says, you need to make sure you have all of your risk insurance in place and in the proper amounts.

“Mark and Kelly have medical insurance and long-term disability policies through their employers, but they do not have long-term care insurance,” he says. “I feel with their assets, they should definitely consider long-term care insurance.”

Meckler says the annual cost for assisted living or nursing home care can cost $100,000 per year and would significantly impact their assets. While they consider this issue, they should also make sure they have updated wills and health care proxies.

Looking at life insurance, Mark has a $500,000 10-year level term policy that was recently purchased, and his company provides him with another $155,000 of coverage. Kelly has $300,000 of term life coverage.

Meckler says when he does retirement simulations, he tries to look at all scenarios. The first is to see what would happen if either spouse was to pass away prematurely — like, immediately — to see what impact that would have on the surviving spouse.

If Mark were to die today and Kelly wanted to maintain the same lifestyle they have now, she would run out of money by age 81 based on Mark’s current life insurance amount of $655,000. Through this, Meckler considered all their other investable assets earned an average of 6 percent.

Given this, Meckler says the couple should consider increasing Mark’s life insurance coverage.

“Less than 1 percent of term life insurance is ever paid as a death claim,” Meckler says. “Life insurance is a critical component of their financial plan, but a permanent policy could make more sense for them.”

A permanent policy would pay a death benefit now and in future years, it could be used as asset protection insurance to allow them to spend down some of their assets and also allow them to leave money to their children in a much more cost-effective way than having term insurance.

For his retirement projections, Meckler assumed a 6 percent rate of return, a 3 percent inflation rate for general living expenses and a 2 percent inflation rate for Social Security. He also assumed they’d continue funding their retirement plans at current levels, as well as the $500 to the joint account.

He then assumed they’d retire at age 66 and continue their current lifestyle. At that time, Kelly would receive a $900-per-month pension. They’d also have Social Security.

“When to begin Social Security is a very important planning technique,” Meckler says. “Since they will have significant assets at retirement, they may very well want to wait until age 70 to begin, depending on health issues and other factors.”

Each year they wait, the benefit will go up by 8 percent, he says.

Assuming these parameters, he says, they will be able to retire at age 66 comfortably.

When Mark is 66, the house will be paid off, and the numbers show they should be able to downsize and buy the property near their child.

Meckler warns that any type of modeling that assumes a linear growth rate can never be counted on. As such, he says they should really update their plan annually to make sure they are still on target.

“If the stock market has a couple bad years, especially when you are taking income from your portfolio, it can dramatically affect your assets,” he says.

And that’s why asset allocation is so important. Mark’s IRA is approximately 70 percent equities and 30 percent fixed income, while Kelly’s 401(k) is 80 percent equities and 20 percent fixed income. As they near retirement, they may want to cut back on equities.

“If you lose 10 percent one year, you only need an 11 percent return the next year to get back to even,” he says. “If you lose 50 percent, you need a 100 percent return to get back to even. Being too aggressive can backfire in retirement.”