Get With The Plan: July 18, 2010

71810This is a forbidding time for Jill and Norm, both in their early 50s. They’ve always been diligent savers and careful with money, but Norm was laid off from his $80,000-a-year job in January 2009. Now their outlook is one of concern for their retirement and other goals.

“We are able to meet current expenses now, but when unemployment stops next month, it will get real scary,” says Jill, 50. “Norm has been unable to obtain employment, so he has started his own business. He has yet to take a salary.”

The couple, whose names have been changed, have saved $244,395 in IRAs, $113,435 in mutual funds, $17,347 in a brokerage account, $25,000 in bonds, $26,000 in CDs, $5,000 in a money market and $3,800 in checking. They’ve also set aside $58,923 in various accounts for their child, 11.

The Star-Ledger tapped James Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown, to help Jill and Norm get through their challenges today without sacrificing their financial future.

“The couple is concerned about their near-term financial situation and the implication it will have on college funding for their child and their future retirement,” Sonneborn says.

Although Jill is looking for full-time work and Norm is trying to generate income from his new business, the money isn’t flowing in just yet. They have been prudent savers and lead a relatively modest lifestyle — something that will help them through these leaner times.

It’s the future that’s in question.

“Their current investment portfolio should provide them with some comfort,” Sonneborn says. “However, given the uncertainty in their current income level, our simulation analysis focused on the minimum annual income the family will need to be able to retire at age 67 and achieve their financial goals.”

Sonneborn ran the numbers based on several assumptions: Norm earns $45,000 a year from his business and Jill earns $10,000 a year from part-time employment.

He also assumed Jill’s disability benefits end. Also, projections excluded $30,000 of cash and equivalents from their portfolio, as these should be held in reserve as an emergency fund.

Sonneborn says this scenario reveals that if the couple continue their current lifestyle, a total income level of $55,000 would enable them to reach their long-term goals.


Under an alternate scenario that assumes Norm earns only $35,000 a year and Jill the same $10,000, retirement before age 67 wouldn’t be an option without the couple risking running out of money before Jill reaches age 90.

“When Norm was earning $80,000 annually, their overall financial picture was sound, especially considering their modest lifestyle,” Sonneborn says. “If the couple can collectively hit that target annual salary of approximately $55,000, they will be on the road to financial freedom. Anything above that threshold will put them in an even better position.”

Turning to college funding, Sonneborn says they can cut back their current savings of $7,200 a year to $6,760 per year, assuming the present cost of college is approximately $30,000 a year.

Sonneborn says the couple’s college savings should be combined — they currently have a 529 plan, mutual funds and individual stocks — into an age-based, diversified 529 plan where the portfolio can grow tax-free.

Norm’s and Jill’s portfolio also needs some more adjusting. Sonneborn says their current portfolio is about 80 percent growth, which should be reduced somewhat as the couple approach retirement.

“This level of risk is not necessary to generate sufficient returns to meet their financial goals,” he says.


Additionally, the couple is not nearly as diversified as they think they are.

“The majority of the portfolio is global large-cap equities spread across 25 mutual funds, which only provides the illusion of diversification,” he says.

“The number of funds can be reduced and the portfolio holdings should be expanded to include some additional emerging markets, hedging strategies and small-cap stocks, both domestic and international.”

He also suggests they consider selling off their stock holdings and buying mutual funds because it’s tough to build a well-diversified portfolio with individual stocks.

Also, many of their bond holdings are primarily long-term in maturity, and these have a higher level of volatility without a commensurate increase in return.

Given the expectation of higher interest rates going forward, Sonneborn suggests selling all bond holdings with maturities beyond 2012 and purchasing short-term bonds and short-term bond funds instead.

The couple also should keep at least $30,000 in cash/CDs and money markets as an emergency fund to meet six months of living needs.

Jill and Norm each have life insurance policies with a total death benefit of $150,000 on each of their lives.

Assuming Norm will remain the primary income provider for the family, Sonneborn ran a simulation analysis testing for the appropriate level of insurance that would be needed on Norm’s life to ensure his family’s continued well-being.

The analysis showed he needs an additional $500,000 to ensure the family’s lifestyle doesn’t have to change should he die prematurely. Term insurance for a period of 15 or 20 years should do the trick.