Get With The Plan: July 19, 2009

71909Brad, 64, and Cynthia, 58, are already retired.

They feel comfortable with their income and expenses, but want to save on their tax bill.

“My biggest concern is finding a good tax-free investment,” Brad said. “We are thinking of donating a substantial sum of money to local charities each month to increase our deductions. As long as the State of New Jersey continues to honor their obligation to their pensioners, my wife and I will be in fine financial condition.”

Brad and Cynthia, whose names have been changed, have $50,000 in an IRA, $2,000 in checking and $31,000 in a money market account. They receive their income from pensions and Brad’s Social Security.

The Star-Ledger asked Andy Tupler, a certified financial planner with Tupler Financial in Raritan, to help the couple consider how tax savings and more charitable contributions could fit into their long-term financial plan.

“They are in excellent shape as long as they both live long lives, but if either dies in the near term, the surviving spouse could be in trouble,” Tupler said, so this should take priority over charity and tax concerns.

Brad and Cynthia have managed their finances well, Tupler said. He said their generous pensions will increase with inflation, and they receive subsidized medical benefits from former employers.

“This covers two of the most important concerns for retirees,” he said. “Most people would love to be in their position: being in retirement and living on less than your income.”

The couple will have even more income in four years, when Cynthia starts to collect Social Security, and again in seven years, when their mortgage is paid off. Tupler said if they both live long and healthy lives, they will have more than enough income to provide them with a comfortable retirement.

But because they both chose to take their pensions with the largest benefit during each of their lives, but with only half that benefit for the surviving spouse, a problem arises if either of them passes away in the next 10 years.

Tupler said if Brad dies in the near term, Cynthia will run a small deficit over the short term, which would force her to further reduce her standard of living or borrow against the home. Financially, it would be more devastating to Brad’s retirement if Cynthia died over the next 10 years, as he’d run a large deficit.

“In order to protect Brad’s retirement, they should purchase a 10-year term policy on Cynthia’s life with a death benefit of $250,000,” Tupler said. “This would give Brad the additional money he would need to offset the 50 percent loss of Cynthia’s pension.”

Either way, Tupler said they should focus on saving as much as they can to build up additional liquid money. The couple have almost six months’ worth of living expenses in money markets, so the future savings should go into short-term, tax-free bond funds, which currently pay higher dividends than money markets but won’t be as volatile as the stock market, he said. The couple said one of their primary concerns was to reduce taxes, and tax-free bond funds will help.

Brad and Cynthia also want to give more to charity — as much as $500 per month — but Tupler said it would be wise to delay that until the mortgage is paid off.

Tupler said the potential need for long-term care for either Brad or Cynthia should be addressed.

“The cost to receive long-term care services could be all of their income or more, which wouldn’t leave anything for the healthy spouse to live on,” he said. “They should consider purchasing long-term care insurance to ensure that the ailing spouse gets the best care possible and the healthy spouse still has enough income to live comfortably.”