Get With The Plan: July 27, 2008

Penny is a saver by nature. At age 50, without financial dependents, she’s starting to get the retirement itch. She wants to stop working and have the freedom to travel out-of-state to visit family members without worrying about breaking the budget.

‘‘My biggest concerns are covering my health-care expenses, knowing when to formally retire and how and when to start drawing from my savings and retirement vehicles to cover living expenses,’’ she says. ‘‘I’ve always been a saver, yet I haven’t deprived myself of having a life, either.’’

Penny, whose name has been changed, has saved $990,111 in IRAs; $10,456 in mutual funds; $97,304 in a brokerage account; $113,170 in certificates of deposit; $11,350 in savings bonds; $6,654 in savings and $40,025 in checking. She recently started a new job, so she’s not yet eligible for the 401(k). When she is, she plans to contribute the maximum.

Penny also owns her home mortgage-free and has no other debt. Upon retirement, she’s expecting to receive a pension, the size of which will depend on when she stops working.

The Star-Ledger asked Jack Oujo, a Wall Township- based certified financial planner and certified public accountant, to see if Penny has saved enough to start her retirement soon.

‘‘Penny is in excellent shape for early retirement,’’ Oujo says. ‘‘She needs to fine-tune her portfolio and protect herself from catastrophic events in order to get closer to insuring her financial security.’’

While Penny has nearly $1 million in her IRA accounts, more than 90 percent of her holdings are in value-oriented investments. That means she needs diversification, and Oujo says she specifically needs much more exposure to bonds and growth stocks. He recommends a 65 percent equity and 35 percent fixed-income portfolio; and within the equities, 20 percent should have international exposure and 7.5 percent should have commodities exposure. The balance should be split between growth funds and value funds, he says.

If Penny wants to retire early, Oujo says she could take early distributions from her IRA without a tax penalty using the rules under Section 72t of the Internal Revenue Code.

‘‘I would advise her to limit these distributions to a maximum of 5 percent if she wants the money to last,’’ he says.

Oujo says Penny could reduce her taxes by using New Jersey tax-free municipal bonds instead of her certificates of deposit.

‘‘Municipal bonds are very attractive right now,’’ Oujo says.

When she starts her 401(k) contributions, she’ll also significantly reduce her taxes, as the contributions come from pre-tax dollars. This will further build her capital base. Additionally, she should contribute maximum amounts to a Roth IRA each year.

Penny is lacking in the area of insurance. Oujo says she needs an umbrella liability policy for at least $1 million, and she also should consider a long-term care insurance policy that would give her a benefit of $100 a day, but she doesn’t need life insurance at all.

Penny also needs to think about health insurance if she retires early. Oujo says she can get a high-deductible medical plan in conjunction with a Health Savings Account until she becomes eligible for Medicare.

Oujo says Penny should take some steps regarding her estate plan to make sure her assets are distributed in a tax-efficient way. Given her asset level, Penny has some exposure to the New Jersey estate tax, so she should meet with an estate planning attorney to discuss her options.

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