“We want to retire when Skip is 65 and we want to have enough money until we’re 90 years old,” says Robin. “We think we’d move to a retirement community in the Virginia area, have long weekends traveling within the U.S.A. and continue our hobbies of golf and crafts.”
The couple, whose names have been changed, have set aside $78,100 in 401(k) plans, $181,800 in IRAs, $6,700 in savings and $2,000 in checking.
The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Skip and Robin devise a plan to reach their retirement goals.
“Skip and Robin are concerned about having enough assets to last through retirement,” he said. “This is not an uncommon concern among individuals preparing for retirement.”
Duerr said while the couple would like to retire earlier, they plan to wait until age 65 because they realize how expensive it would be to purchase health insurance. They’ll wait until they’re eligible for Medicare instead.
That leaves the couple 11 years to prepare.
In the next five years, the couple plans to have both their mortgage and their home equity loan paid off, which would give them additional cash flow to save for retirement.
“Having these items paid before retiring is a significant advantage that will help them conserve assets to last a longer period of time,” Duerr said.
Looking at retirement savings, while Skip contributes 10 percent of his salary to his 401(k) and receives a 6 percent employer match, Robin doesn’t have a plan. She will receive a pension of about $440 per month at age 60, and that pension will only last for her lifetime without an option for a survivor benefit.
Duerr says after reviewing the couple’s budget, they should have funds available to increase Skip’s 401(k) savings or contribute to an IRA for Robin.
“I would suggest they do this in order to increase their retirement accounts as well as save on current taxes if they opened a traditional IRA,” Duerr says. “Once Robin is receiving her pension at age 60 I would suggest they maximize her IRA since they both will still be working, their loans will be paid off and they now will have additional funds from the monthly pension.”
If Skip continues to contribute the same amount to his 401(k) and if he still receives the same matching funds, and if the savings earn an average rate of return of 6 percent, they’d have $754,340 when Skip is 65.
If Skip could instead max out his 401(k) with contributions of $16,500, plus the catch-up contribution of $5,500 available to those over age 50, he’d have about $856,000 at age 65.
If the matching funds continue and Skip maxes out his plan, his retirement account would grow to approximately $941,000.
“Contributing the maximum amounts may be a bit too much right now for them, but they should consider increasing his current contribution now so the additional assets have more time to potentially grow,” Duerr says.
Skip and Robin consider themselves aggressive investors with a high tolerance for risk. As such, they currently have less than 10 percent of their assets in bonds and fixed income investments.
“This is a very aggressive asset allocation given their ages,” Duerr says. “I would suggest they readdress this allocation and consider some additional fixed income.”
Duerr says because they do have a high tolerance for risk and they have over 10 years until retirement, they can choose to be more aggressive than most individuals their age.
Still, Duerr cautions them to revisit their asset allocation annually — at the very least — and consider moving more of their assets to more traditionally stable investments as they get closer to retirement.
The couple’s cash accounts should also be reconsidered. Skip and Robin have $7,700 in liquid accounts, which wouldn’t cover their expenses for very long if Skip or Robin lost their jobs.
Duerr recommends they try to contribute some additional funds to their savings account for emergencies.
“Something could always arise and they could need funds for an illness or an unplanned home repair,” he said. “Having three to six months of living expenses set aside for just such an emergency would be a good idea.”
He says this should come before boosting contributions to retirement accounts.
Duerr says the couple has enough life insurance in the event of a premature death, but they should take a look at long-term care insurance, which would cover much of the cost of care should they need it.
“This is an expense that could force them to go through their assets extremely fast should one of them need significant care in retirement,” Duerr says. “I would highly suggest they consider purchasing a long-term care policy prior to retirement.
Overall, Duerr says the couple has done a good job in keeping their expenses low and saving for retirement.
“They still have a good amount of time ahead of them prior to actually retiring,” he says. “If they continue to pay down their loans as well as possibly save some additional funds, they should be able to enjoy a long and comfortable retirement.”