Get With The Plan: July 4, 2010

7410Robert, 57, and Bindy, 55, are self-employed, and they’re feeling the shaky economy.

‘‘The current economic slowdown has affected my business, so my biggest concern is getting to retirement without tapping too much into my current savings and IRA accounts,’’ Robert says. ‘‘At age 57, my highest earning years were in my early 50s and now I just need to make a living until age 66, and hopefully I will be able to retire then.’’

The couple, whose names have been changed, hope to keep their vacation home on the Jersey Shore and downsize their primary residence to a townhouse.

They’re also currently trying to sell a rental property in which they own a 50 percent stake.

Robert and Bindy have set aside $333,350 in IRAs, $359,768 in an IRA annuity, $70,000 in money markets, $40,000 in savings and $10,000 in checking. They’re also in the process of receiving a $300,000 lump sum pension from Robert’s former employer.

The Star-Ledger asked J. Charles Pawlik, a certified financial planner with Lassus Wherley in New Providence, to help the couple plan for their retirement lifestyle.

‘‘To ensure the best chance of being able to meet their needs in retirement, it is important to keep retirement assets and liquid savings intact, as well as to continue to dedicate savings to retirement accounts,’’ Pawlik says.

The largest challenge is reducing expenses to a level that is line with their current income.

At today’s income and expense levels, the couple appear to be running substantial deficits and will be forced to tap into liquid savings, and potentially retirement savings, to cover expenses.

Their business is relatively new so their income will probably be variable for some time. That, along with the business challenges of the recession, means it’s especially important for Robert and Bindy to maintain the liquid cash reserves they have accumulated as an emergency fund.

Pawlik’s cash flow projection indicates the couple will have a negative cash flow in 2010 and in the years to come, based on the income and expense information submitted.

The projections show the deficits may require the couple to draw from retirement accounts and liquid accounts to meet expenses.

‘‘If income and expenses remain unchanged, this deficit may cause them to deplete their accumulated assets by the year 2027, at which point Robert would be 74 and Bindy would be 72,’’ he said.

If everything remains the same, it’s unlikely Robert and Bindy could retire at 66 and maintain their current lifestyle throughout retirement.

The primary reason for the annual shortfall is the debt payments on their real estate. Substantially reducing this liability could be the single most important factor in their ability to retire, he said.

If they’re able to sell their rental property, Robert and Bindy could free up roughly $25,000 in net annual cash flow (given a marginal tax bracket of 25 percent, and taking into account the tax deductions they’d no longer receive from related expenses).

‘‘Eliminating these expenses could increase the probability that their assets would last an additional nine to 13 years in retirement,’’ he said.

Pawlik notes that even though this is not a good housing market for sellers, taking a loss on the property now could improve their chances of meeting expenses in retirement. If their overall income does not improve in two or three years, they may also want to sell their vacation home.

‘‘The reduction in expenses that would occur as a result of the sale of both the rental property and vacation home may allow them to meet expenses throughout retirement, and have assets remaining at age 100,’’ Pawlik says.

When income begins to outpace expenses, Pawlik recommends they set up a retirement plan at the company so they can begin tax-deductible contributions.

Either a SEP-IRA or a Solo 401(k) may be appropriate, he says, as a cost-effective means for self-employed individuals
to save for retirement with low administrative costs while allowing for significant contributions.

Robert and Bindy describe themselves as moderate investors, and their current holdings include several “loaded” mutual funds.

Domestic equity makes up 48 percent of their asset allocation, and they have no exposure to alternative investments such as hedge strategies.

‘‘This overweight in domestic stocks subjects them to unnecessary risk when compared to a more balanced portfolio,’’ he says, recommending a more diversified asset mix that includes 65 percent in equities and 35 percent in fixed income.

They should also reconsider their high-cost mutual funds, which have not only 12b-1 fees but also front-end loads that range from 3.75 to 5.75 percent — which translates to a 3.75 to 5.75 percent loss on the initial investment and a drag on long-term performance.

Bindy even has one fund of Class C shares, which have an added annual load.

Pawlik says they should look at low-cost, no-load mutual funds that will carry no initial, deferred or on-going sales loads. They can find these through mutual fund marketplaces such as Charles Schwab, TD Ameritrade or Fidelity.

He suggests they couple also examine the fee structure of Robert’s annuity, and consider moving the funds if they’re out of the surrender charge period, then investing in a low-cost investment option that works with their overall asset allocation.