Get With The Plan: July 26, 2009

72609Mark and Jeannie, both 59, are gearing up for retirement.

“Having worked pretty hard for 40 years, we are really looking forward to relaxing and spending our free time doing things we want to do,” Mark said. “Between savings, Social Security and pension, we hopefully will not have to work at a paying job again, but if we ever had to, we would.”

The couple, whose names have been changed, have saved $175,808 in IRAs, $42,883 in a brokerage account, $77,000 in an annuity, $263,196 in bonds, $275,716 in Certificates of Deposit, $293,545 in money markets and $8,500 in checking. Jeannie can expect an annual pension of $26,000 at age 62, and the couple owns their $1.3 million Essex County home without a mortgage. They’d like to sell their high-end home to retire out West, but they’re hoping the housing market will stabilize first.

The Star-Ledger tapped Doug Buchan, a certified financial planner with Tilson Financial Group in Watchung, to help Mark and Jeannie determine if they’re financially ready for the next phase in their lives.

“They want to know if they have enough to retire,” Buchan said. “In a word, yes! They are in excellent shape, mostly because their expenses are so modest.”

The couple would like to stop working at the end of 2011. At that time, they plan to sell their home and buy a new home for $600,000.

They have a good amount of assets, but what’s keeping them in fine shape is their modest expenses. They plan to spend about $60,000 a year when they retire.

“In fact, given their expense projections, their Social Security income combined with Jeannie’s pension — which, unlike maybe corporate pensions, inflates over time — accounts for over 90 percent of their income needs throughout their life,” Buchan said.

Mark and Jeannie are extremely conservative investors and currently have the lion’s share of their investments in CDs, with the remaining in fixed annuities and high quality bonds.

“I am hard-pressed to ever recommend to any 59-year-old couple a zero percent equity allocation,” Buchan said. “A zero percent equity allocation does provide protection against market risk, but it creates tremendous susceptibility to purchasing power risk, or the risk of long-term inflation.”

At age 59, Mark and Jeannie have a long retirement ahead of them. If they live to a “normal” life expectancy, Buchan said, one of them will need an income 32 years from now. Purchasing power risk is a much greater risk than market risk over a 32-year period.

Buchan said the majority of folks need to take on some relatively short-term market risk to protect themselves from the inevitable purchasing power risk. Market risk declines over time and purchasing power increases. Buchan said what you can buy for $1 today will cost you more than $2.50 in 32 years, assuming trendline inflation of 3 percent.

He said diversified equities have a real return (return over inflation) of about 6 to 8 percent over the last 80 years or so — including the latest market crash — while CDs have a real return of 1 to 2 percent. But, Buchan said Mark and Jeannie can afford to be ultra conservative for several reasons: They’ll have income — through Social Security and the pension — that inflate with the Consumer Price Index (CPI), and that income makes up the bulk of their needs. Additionally, they have significant assets they could draw on for expenses if needed.

“They could even increase their projected expenses by 30 percent and live to age 100 and not run out of money,” Buchan said.

Since a successful retirement appears in the bag regardless of investment strategy, they may want to think about some estate planning and gifting strategies, Buchan said. To avoid giving their hard-earned money away to Uncle Sam, as opposed to their favorite kid (or kids) or charity, there are some steps they should take.

Buchan said it’s probably time for them to sit down with an estate planning attorney to consider planning items such as re-titling some of their assets, possible trusts and annual gifting.