Get With The Plan: July 20, 2014

72014Bill, 64, and Barb, 52, say they want a “no anxiety” retirement.

Heck, don’t we all?

The couple has had some recent financial setbacks, and they’re not sure exactly what they can reasonably afford going forward. Bill was out of work for more than two years a few years ago, so that stopped their savings plan.

“We would both like to retire in the next five to six years, but we don’t know if that is reasonable,” Barb says. “We would like to defer taking Social Security until age 70.”

Ideally, she says, it would be great if Bill could retire in the next two years, but Barb is ready to work for the next five or six years.

They own a home out-of-state where they’d like to retire to, but the home needs $150,000 in renovations. They’re just not sure what they can afford anymore.

Bill and Barb, whose names have been changed, have saved $330,600 in 401(k) plans, $412,500 in IRAs, $147,000 in an annuity, $16,000 in a brokerage account, $327,000 in mutual funds, $50,000 in savings and $45,000 in checking.

The Star-Ledger asked Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield, to help the couple see how far Bill’s unemployment put the couple back, if at all.

Papetti did a Monte Carlo analysis on the numbers, which takes into account the results of 1,000 simulations with random market returns.

It found Bill and Barb had an 88 percent chance of success, which means not running out of money during their life expectancies.

“Although we do not feel the risk of capital exhaustion is high, we do believe that building a safety margin into the plan reduces the probability of not meeting their retirement income objectives,” he says.

That means they have several options to increase their chances of success.

First, they could delay Bill’s retirement for at least one more year, if not two, to have time to save more money in their retirement accounts.

“The positive in delaying retirement would be additional years of portfolio accumulation and fewer demands on the portfolio to produce necessary retirement income,” Papetti says. “The negative is Bill working longer than he desires and the frustration that may go along with that.”

Another option is to reduce the amount they plan to spend on the renovation on their future retirement home. Papetti says if they reduce the costs, they will have more in their long-term portfolio to support their retirement income needs. But of course, that means they may not have the residence improved the way they want, and they could regret not doing the more expensive renovation.

Or, they could cut their overall living expenses by 10 percent in retirement.

“The positive of reducing living expenses is less stress on the portfolio to meet their income needs,” he says. “The negative is in retirement they may have to eliminate certain discretionary expenses and change their desired lifestyle.”

Papetti also took a look at how the couple’s 12-year age difference could have an impact on their long-term money choices.

“The age gap presents challenges that include providing capital for Barb for potentially an additional 10-plus years assuming life expectancy of age 90,” he said, adding that the health conditions of the older spouse could hinder the quality of life and enjoyment as a married couple.

It also means some Social Security strategies are not available to maximize benefits for this couple.

“Bill cannot implement a file-and-suspend strategy until Barb is age 62, and at that time he will be age 74 and collecting his full retirement benefit,” Papetti says. “Due to the magnitude of each individual’s (benefit), spousal benefit strategies are also not appropriate.”

Papetti says postponing taking benefits until age 70 produces the greatest income in retirement, as it will allow each spouse to increase his or her benefit by 8 percent a year until age 70.

Bill and Barb say their risk tolerance is moderate, and their portfolio of 54 percent equities, 33 percent fixed income, 3 percent non-traditional and 10 percent cash is in line with that, Papetti says.

But, Papetti says, they have multiple funds that have the same objective. So he recommends some changes.

“Consolidate among the current actively managed funds, such as selecting the best large-cap growth fund from the four or five funds that are used,” he says.

He also recommends they increase the non-traditional allocation to include more “liquid alternatives” by adding asset classes such as market neutral, long/short equity and managed futures. He says bringing this portion of the portfolio to 7 to 10 percent should be viewed as a downside buffer and volatility control.

When they retire, they should look again at their overall portfolio and decide if they should roll the 401(k)s into IRAs.

“The benefits of rolling over to a self-directed IRA include the investment options are broader and possibly create guaranteed income through the use of an annuity,” he says.

Bill and Barb have some variable life insurance policies with cash values. Papetti suggests they review the in-force illustrations, and if they’re healthy, consider surrendering the policies so they can invest the cash value. They can then buy term insurance to meet their insurance needs.

“Depending on the economics of this strategy, if they were to surrender the policies, they should order a taxable gain report from the insurance company to make sure any income tax consequences are considered,” he says.

Bill and Barb also have long-term care insurance, which Papetti says is an important part of their plan.

“Nearly 40 percent of people receiving long-term care are between the ages of 18 and 64,” he says. “It appears they have sufficient coverage to protect approximately four years of nursing home care based upon 2014 average costs of $85,000 per year.”

Plus, their policies will also provide assisted living benefits and home health care.