Get With The Plan: January 31, 2010

13110Tony and Rose are almost finished with college bills, and now they’re turning their attention to retirement. The couple, 54 and 53, want to retire and enjoy their time while they’re still young and healthy enough to do so.

“Do we have enough, and are we on the right track with our current holdings?” Tony asked. “Additionally, I would like to retire at 59½, so are we saving enough to retire at that age?”

The couple, whose names have been changed, set aside $391,717 in 401(k) plans, $42,497 in IRAs, $98,990 in a cash balance pension plan, $24,592 in a brokerage account, $17,853 in Certificates of Deposit, $92,949 in money markets, $24,441 in savings and $1,334 in checking.

Tony also will receive benefits from a cash balance pension plan, which is currently worth $98,990. At age 59½, he’d have a cash balance of $173,121, or can convert that into an annuity with 100 percent survivor benefits paying $1,256 per month. At age 62, the plan would be worth $220,301, or he could receive an annuity with 100 percent survivor benefits of $1,661 per month.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help Tony and Rose see if they’re ready for retirement.

“They are in much better financial shape than they think to meet their early retirement goal,” Pallitto said.


He said they are currently spending about $5,000 a month to maintain their lifestyle, however, their real estate taxes account for more than 15 percent, or $775, of their monthly expenses. Tony and Rose said they’d like to sell their home and move to a less-costly one when they retire.

“If they move to a lower tax area, and cut down their real estate tax to about $400 a month, they would have a cushion for additional spending when Tony turns 60,” Pallitto said. “He is fortunate that his employer has a non-contributory pension in addition to a generous 401(k) plan.”

Pallitto did some post-retirement income math. At age 60, Tony would receive $1,256 per month for the rest of his and/or his wife’s life from the pension plan. If Tony collects Social Security at age 62, he would receive $1,560 per month, and one year later Rose would receive $1,110 per month from Social Security.

So by retiring at age 60, Tony and Rose would need to draw from savings $57,000 for each of the first two retirement years, $38,500 in the third year and $25,000 thereafter, increasing for inflation.

From a macro-perspective, Pallitto said yes, they can retire when Tony turns 60 because their IRAs and after-tax savings can satisfy their cash needs for the first three years of retirement, and the 401(k) can cover their cash needs plus inflation thereafter.

They’ll also do okay in the tax area.

“Their federal tax liability during the first three years of retirement can be close to zero by taking the needed cash from a combination of pre-tax and after-tax accounts,” Pallitto said.

One concern the couple must address is Tony’s health, something for which they have concerns in the long run.

“We need to protect him and his wife against a long-term disability that could wipe out their retirement nest egg,” Pallitto said.

Tony would like to purchase long-term care insurance to protect their assets in the event of a prolonged illness, but his current medical condition would make the premiums too expensive. Pallitto said a potential solution to this dilemma would be taking an in-service distribution from his 401(k) plan and rolling it into his IRA.

“Many companies allow you to take up to 50 percent of your contributions to the plan and roll it to an IRA while you are still working,” Pallitto said. “In his case, he can roll $83,000 to his existing $42,000, he can invest the $125,000 in a variable annuity that offers a long-term care rider to protect him and his wife from a long-term illness.’’

Pallitto said long-term care riders on variable annuities are not based on health or a medical exam. This would not cover the entire cost of long-term care, he said, but it could offset a substantial portion of the costs, preserving their savings.

Tony and Rose may want to find some higher-rate investments for their cash and liquid assets. Most are currently in very low-yielding accounts. Pallitto recommends they consider short-term bond funds or structured CDs.

“Structured CDs are certificates of deposit offered by some financial institutions that allow you to participate in the stock market appreciation without losing your principal because they are FDIC insured,” he said. “They normally have 5- to 6-year holding periods, which coincides with their needs.”