Juan and Carla want what most parents want. Their first priority is saving for retirement. After that, they’d like to have enough to send their children, 10 and 7, to college — without having the children burdened with loans.
“We would like to downsize our housing after the kids graduate from college,” says Juan, 43. “We would love to move to a lake region and live in a cottage with ample hiking trails and other outdoor activities close by.”
Juan and Carla, 38, whose names have been changed, have saved $147,000 in 401(k) plans, $173,200 in IRAs, $165,700 in mutual funds, $3,100 in Certificates of Deposit, $11,200 in a money market, $200 in savings and $9,300 in checking. Juan will receive a $36,000 per year pension benefit at age 60, and at 65, he’ll receive a second pension worth about $47,000 a year.
The Star-Ledger asked Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights, to help Juan and Carla come up with a plan to reach their goals.
“The couple are excellent savers, currently saving 16.8 percent of their pre-tax income each year,” Maye says. “The couple is well on their way to being able to retire debt-free given their ages and the fact they only have 12 years left on their mortgage.”
Assuming the couple stays on track and pays off their mortgage before retirement, Maye says he estimates they’d need to spend about $47,000 per year.
That means from pensions alone — not counting Social Security or investments — Juan and Carla could afford to nearly double that spending in retirement.
Juan’s two pensions will get the couple very far in retirement, Maye says.
“The pensions are a huge component of the couple’s financial future,” he says, noting that it doesn’t even count anticipated Social Security benefits.
Maye says that he was conservative in his pension income calculations, assuming neither pension would adjust for inflation, even though they’re supposed to adjust.
He also assumed one of the pensions — the $47,000 pension — would remain the same, but it’s likely to go up if Juan earns a higher salary over time.
Juan and Carla have 529 plans for each of their two children, to which they save $75 per month for each child. That amount by itself wouldn’t be enough to fund college costs, Maye says, but they have an opportunity to give those accounts a turbo-boost.
Juan’s dad passed away last year, and he’s expecting to inherit about $125,000 when the estate settles.
At current college savings levels they’re behind, but Maye says if they direct the inheritance to college savings, it quickly gets them where they need to be.
“If they take existing 529 assets plus $62,500 per kid, they will have funded a large portion of the average cost of a New Jersey state school,” he says. “An additional $24,000 lump sum would almost fully fund college costs.”
Normally, an inheritance such as this would be set aside for retirement planning, Maye says, but because the couple has already positioned themselves well for that goal, he says the inheritance can be earmarked for college.
Juan and Carla describe themselves as aggressive investors, and their asset allocation backs up that claim. They currently have 79 percent of their portfolio in equities, but it’s not a diverse portfolio.
U.S. large-cap stocks make up 72 percent of the portfolio.
“Non-U.S. markets now account for roughly 50 percent of the world’s equity market capitalization so the couple’s 6 percent allocation to international equities underweights the opportunities in the rest of the world,” Maye says.
Being invested internationally can give the couple exposure to faster-growing emerging market economies, Maye says, and it can also potentially provide a hedge against a falling U.S. dollar.
Even within the couple’s U.S. equity investments, more diversification is needed. The couple has nothing allocated to U.S. mid- and small-cap equities.
“Historically, U.S. mid- and small-caps provide a higher return, albeit with more risk,” Maye says. “Adding an allocation is likely to increase return without significantly increasing the portfolio’s overall risk.”
Additionally, the couple has little or no exposure to international equities, emerging markets, Real Estate Investment Trusts (REITS) or natural resources.
Maye recommends that they dip their toes into these alternatives because the asset classes are typically less correlated to the other assets in the portfolio.
On the fixed income side, Maye says the couple has zero allocation to world bonds. Adding a world bond allocation can provide protection against a declining dollar while providing yield at the local market interest rates, he says.
If Juan and Carla follow Maye’s moves, they’d have a slightly higher than average projected return with lower overall volatility.