Get With The Plan: January 9, 2011

1911Robert, 57, and Myrna, 55, are hoping that when they retire, they can have the same quality of life they enjoy today. They’re just not sure if they can afford it.

‘‘Our biggest financial concern right now is Myrna wants to retire and work in a part-time position, if has to, hopefully from home,’’ Robert says. ‘‘Another concern is whether we need long-term care insurance.“

The couple, whose names have been changed, have saved $125,337 in 401(k) plans, $349,343 in IRAs, $68,000 in an annuity, $184,223 in mutual funds, $18,983 in a money market and $500 in checking. A big plus? They’re debt-free.

The Star-Ledger asked James Ciprich, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple look at their retirement prospects.

‘‘Despite their fears about achieving retirement, Robert and Myrna are much closer to financial independence than they realized,’’ Ciprich says.

The couple’s after-tax spending is about $48,000, and they expect their spending to increase with inflation throughout retirement.

Ciprich ran a few scenarios to see how the couple would fare.

The first looked at when the couple could retire based on their current lifestyle. The second scenario built on the first by adding long-term care insurance premiums to their expenses.
The final scenario tested the amount of life insurance needed to provide income replacement in the event of Robert’s premature death.

‘‘Because the timing of their retirement seems to be on the forefront of Myrna’s and Robert’s minds, our first simulation analysis focused on when they each could retire without jeopardizing their financial goals,’’ Ciprich says.

Ciprich says that Robert and Myrna live a modest lifestyle given their combined income level and current investment portfolio, so the first scenario found they could both retire at the end of 2012. To better this scenario, they could make some adjustments. They should max out their retirement contributions: Robert currently saves seven percent of his pre-tax salary to his 401(k) plan and receives a hefty nine percent match, and Myrna is not making any retirement plan contributions.

Ciprich assumed Robert would earn $62,000 in 2011, and Myrna would earn $41,000. In addition to Robert’s employer’s 401(k) contributions, Ciprich assumed Robert would max out his contributions: $16,500, plus an additional $5,500 catch-up contribution because he is over age 50. Ciprich also assumed Myrna, who is self-employed, would fully fund an Individual 401(k). He also added a $20,000 car expense every ten years beginning in 2012.

‘‘The results of this scenario reveal that both Robert and Myrna can retire at the end of 2012,’’ Ciprich says.

This doesn’t take into account any part-time earnings Myrna may have after 2012.

The second scenario addressed the long-term care insurance question. Ciprich says from a planning perspective, long-term care insurance is generally purchased between ages 55 and 65. As you get older, the premiums for coverage can become cost-prohibitive, the chance of getting a “preferred” rating declines or you may be denied coverage altogether.
Robert’s employer offers long-term care coverage, so that should be the first place to look for a policy. It’s essential the policy be portable, meaning that Robert could continue the plan after he retires.

If that wasn’t available, Ciprich ballparked the cost for the couple at about $7,000 a year for a daily benefit of $200 per person. (Actual rates will depend on the insurance provider and coverage options chosen.)

Including that cost, Ciprich says they can afford the premiums, but the trade-off is that Robert would need to work an additional three years and retire at the end of 2015.

The final scenario looked at the importance of life insurance, which can be used to replace income that is needed to ensure financial independence.

Assuming Robert is the primary income provider based on his salary and willingness to work full-time longer than Myrna, Ciprich ran another simulation analysis to test for the appropriate level of insurance needed on Robert’s life to ensure Myrna’s financial well-being should Robert die early.

Robert currently has $140,000 of coverage, but Myrna would need a total of $700,000 to maintain her standard of living. That number goes up to $900,000 if she will also be paying for long-term care insurance.

Separate from these scenarios, Ciprich had some other advice.

Given the couple’s net worth, they should have at least $1 million of umbrella liability insurance on top of their existing auto and homeowner’s coverage to protect against unforeseen occurrences for which they could be liable.

The couple should add a bit to their emergency fund so it totals $24,000, or about six months of expenses.

And finally, asset allocation. Robert and Myrna consider their risk tolerance to be moderate, yet their portfolio allocation is approximately 75 percent in growth, or risky, assets.

‘‘An allocation of 60 percent in growth assets and 40 percent in fixed income is more appropriate for their risk appetite,’’ Ciprich says.