Boston is self-employed, and he wants to sell his business, and soon.
“We’d like to know if I retire in one year and Terri in three years, if our savings will be adequate,” says Boston, 64. “We’d like to continue to afford to live in New Jersey.”
The couple, whose names have been changed, have saved $485,000 in 401(k)s, $355,800 in IRAs, $603,000 in a brokerage account, $67,400 in mutual funds, $5,000 in savings bonds, $115,000 in savings and $47,800 in checking. They also have $250,000 invested in a commercial partnership.
If Terri works for three more years, she can expect a $27,264 annual pension.
The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple see if their assets will last for a long retirement.
“Boston and Terri have done a nice job of building up both their retirement and taxable assets, as well as paying off their primary mortgage,” Kazanchy says.
He ran two scenarios to see how long their money would last in retirement. Both scenarios include Terri maxing out her IRA every year she’s working.
The first scenario assumed Boston retires age 65 and Terri works three more years. It also assumed the couple would spend $80,000 a year after taxes during retirement, with inflation of 3 percent a year. Finally, Kazanchy assumed Boston would sell his business at retirement for $250,000.
“The results of this scenario are excellent,” Kazanchy says. “We project a 99 percent probability that they will not deplete their assets by the time Terri reaches age 90.”
Kazanchy says the couple could even afford to increase their annual after-tax spending level to $110,000 a year and reduce their asset allocation to 40 percent equities and 60 percent bonds, and still have an 89 percent probability of having assets when Terri reaches age 90.
“This helps show the flexibility they have in their spending level and the amount of risk they choose to take with their portfolio,” he says.
The second scenario looked at how things would change if Boston is unable to sell his business.
This would still have a positive outcome, with a 99 percent probability the couple will not run out of assets by the time Terri turns 90.
“Boston and Terri can maintain their current asset allocation of 80 percent equities and 20 percent fixed income and increase their after-tax spending level to $95,000 a year and still have an 87 percent probability of having assets at Terri’s age 90,” he said.
Lastly, the couple has the security of the equity they have in their two homes. If needed, they could sell or downsize a home to provide additional funds for their retirement years.
A contributing factor to the couple’s probability of success is their large allocation to equities. While this allocation has served them well, they are currently taking on more risk than they need, Kazanchy says.
“By maintaining an aggressive portfolio, the range of possible returns is wider than with a moderate to conservative portfolio allocation,” Kazanchy says. “A couple of bad years early on could have a significant negative impact on their retirement cash flow.”
Now that they’re nearing retirement, Kazanchy says this is a critical time to review the portfolio and to make sure they’re not taking on more risk than they should.
Adding more to fixed income will probably lead to lower long-term returns, but it would reduce the risk in their portfolio while still providing the growth to meet their goals, he says.
The couple need to diversify better in the equity portion of the portfolio. Kazanchy says having more asset classes, including U.S. and international large- and small-caps, emerging markets and alternative investment classes, will help.
“The lack of correlation between the various asset classes in a diversified portfolio provides better portfolio construction designed to achieve better risk-adjusted returns,” he says.
While Boston and Terri have a favorable path ahead, there are some risks that could derail them and prevent them from reaching their goals.
These include a lawsuit or a major medical issue. To better manage the financial implications of these risks, Kazanchy recommends they review their insurance coverage for liability, medical and long-term care.
One unknown is whether or not the couple will be able to sell Boston’s business.
“A lot of work has gone into starting and building the business so it is no surprise the business owner hopes to receive some type of compensation or value from the business upon their exit,” Kazanchy says. “Selling a small business is no easy task.”
Even though Boston has taken steps to properly value the business, if it doesn’t sell, the couple’s long-term plan remains solid.
“The proceeds from the business sale can be added to the family’s investment accounts to help increase their after-tax spending level,” Kazanchy says. “However, this is not needed to achieve their current financial goals.”