Get With The Plan: January 6, 2013

1613Bill and Ruby have raised two children, and in their mid-50s, are ready to retire at the end of 2013. Bill says he’d consider some work, but in a less stressful job which will mean less income — and only if he has to.

“Our biggest concern is will I be able to retire early, and how I will get through the next five to 10 years?” Bill says. “I am also concerned about medical insurance from now until I am 65.”

Bill and Ruby, whose names have been changed, have saved $423,000 in 401(k)s, $6,500 in IRAs, $55,000 in an annuity, $2,800 in a brokerage account, $9,100 in mutual funds, $68,100 in a money market, $9,600 in savings accounts and $1,000 in checking. They also own a home in Florida, where they’d like to spend some of their retirement time.

The Star-Ledger asked Brett Danko, a certified financial planner with Main Street Financial Solutions in Pennington, to help the couple decide if their retirement goals are realistic.

“Their goal is to both retire fully at age 57,” Danko said. “However, the various scenarios show they will not be able to do this — no matter the asset allocation — without running out of money shortly after age 65.”

If Bill and Ruby are willing to work longer, they will be better off when they ultimately retire. Working part time may allow the couple to “semi-retire,” but Danko says working full time until age 65 would be ideal so they can earn enough to cover their expenses, save more and not dip into their retirement accounts until a later time. Even if Bill and Ruby work full time until age 65 and earn enough to cover their expenses without further savings to retirement accounts, they may do all right with several caveats, he says.

Health care costs are an issue. They will be covered by Bill’s current employer for 18 months past whatever time he retires, which with their current plan is age 58 or 59.

“Medicare does not start until age 65,” Danko says. “The Affordable Health Care Act — Obamacare — may be able to bridge the gap with insurance at a reasonable price through the state health care exchanges.”

Exactly how this would work will depend on which state they live in, and whether that state will offer these exchanges starting in 2014. New Jersey is not planning to participate in 2014, he says, but this could change.

Bill and Ruby have no long-term care coverage, but it’s something they need to think about.

“Given their net worth and cash flow restraints, it may not make sense to invest in LTC,” he says. “They are right at the edge on whether to rely on LTC coverage or simply spending down assets and relying on Medicaid later in life.”

If long-term care coverage is a priority for the couple, Danko recommends they work full time until age 65 so they can cover normal expenses plus the cost of some long-term care insurance.

Next, cash flow and spending. Danko said the couple’s expenses as reported for this analysis seem “optimistic.” The couple said they went through their expenses twice and they believe them to be accurate. If they are accurate, Danko said, they will need to maintain this spending level to make their plan work.

Danko says his analysis did not cover the equity in their two homes. That money could act as a stopgap in the future.

Overall, Danko was happy with the couple’s investments. Bill and Ruby are currently 35 percent in U.S. equities, 15 percent in international equities, 17 percent fixed income and 33 percent cash.

Danko recommends some further diversification, particularly among their U.S. equity holdings, to include commodities or hard assets. On the fixed income side, he suggests higher quality, lower duration fixed income and inflation-protected fixed income.

“With interest rates at or near historical lows and a sluggish economy that has yet to deal with its deficits and future liabilities, we believe owning high-quality fixed income with shorter-term maturities makes sense in the current economic environment,” he says.

In determining the success of their financial plan, Danko ran several investment scenarios to see if any big changes would improve their outlook.

He considered: a 20 percent equity/80 percent fixed income portfolio with an average long-term return of 4.9 percent; a 60 percent equity/40 percent fixed income portfolio with an average annual return of 7.9 percent; retirement at the end of 2013; semi-retirement at the end of 2013 with income that covered 50 percent of spending, and with no new savings; and retirement at age 65 and not saving anything more from today’s income.

These all took a 3 percent inflation rate into account.

“Only working part time or full time until age 65 will allow Bill and Ruby to retire and maintain their lifestyle,” he said. “Retire now and not (have earned income) will not work for them no matter how their assets are invested.”

It may be possible to semi-retire at age 57 and work part-time until age 65, but Danko says it’s not a sure thing. Working full time to age 65 to cover expenses gives them a much more successful outlook.

The goal would not be to save money, though Danko says that would be helpful, but Danko understands that Bill doesn’t want to stay in his current job because of stress.

“Also, given that Bill will be leaving his current job at the end of 2013, we strongly recommend they maintain a 33 percent cash position as they may need liquidity over the next few years given the instability of the economy and job market,” he says.