Get With The Plan: July 6, 2008

Bruce, 60 and Sabrina, 58, are preparing for retirement. They travel a lot now, and they’d like to continue seeing the world when they stop working. The big question is when.

‘‘We want to be able to save more so as to have enough income and principal to continue our present lifestyle, or something close, after retirement,’’ Bruce says. ‘‘We seem to fill up the spending vacuum with whatever we earn. A million dollars ain’t what it used to be.’’

The couple, whose names have been changed, have so far set aside $486,467 in IRAs, $768,943 in mutual funds, $256,667 in a brokerage account, $63,398 in bonds and $5,000 in checking. They also have $76,287 in a private investment, and they own their home mortgage-free.

The Star-Ledger asked Michael Maye, a certified financial planner and certified public accountant/personal financial specialist with MJM Financial Advisors in Berkeley Heights, to see how the couple is poised for retirement success.

‘‘The couple should be commended for their saving, however, the key question is whether this is enough to allow them to maintain their current lifestyle in retirement, which is one of their goals,’’ Maye says.

Years ago, the couple both made quality of life decisions regarding their careers, which has led them to lower incomes than they could be earning — plus, they’re not eligible for pensions or health-care benefits in retirement. They also like to financially help their three grown children when the kids could use a hand.

First, the good news. The couple’s current cash flow is positive. They are virtually debt-free entering retirement, which Maye calls excellent.

The first challenge: They save about 5 percent of their income today, and they spend approximately 16 percent of their gross income on travel, as they are passionate travelers. Maye would like the couple to start by saving more — approximately $23,000, or 15 percent of their gross compensation.

‘‘To hit this target, they would need to increase their savings by roughly $15,000 per year,’’ he says. ‘‘Reducing their annual travel spending to $12,000 a year gets them 80 percent of the way there.’’

Maye also says the couple’s short-term emergency fund is minimal, representing slightly more than one month’s expenses. He says he typically likes to see clients have three to six months’ cash reserves.

Maye says next, they need to learn to say no to their adult children, except for true financial emergencies. ‘‘The couple should focus on funding their own retirement first,’’ he says.

The couple’s investment portfolio is approximately 64 percent equities/36 percent fixed income. Maye would recommend a slight adjustment to a 60/40 mix. But within that, they need to further diversify their portfolio. Forty- nine percent is allocated to U.S. large-cap equities, and they also appear to be overweighted in natural resources, with 9 percent of their assets there.

‘‘They should reduce their natural resources stake to 5 percent and take some of their profits,’’ he says. ‘‘The couple’s portfolio has zero or minimal dollars allocated to sev- eral asset classes, which could further diversify their portfolio, such as REITs, international bonds and international equities.

He ran the numbers to see how their portfolio would serve them in retirement, assuming they both live to age 90. Maye also assumed a portfolio return of 9.89 percent, inflation of 4.62 percent and a reduction of expenses by 10 percent when Bruce reaches age 80.

Assuming the couple maintain their current lifestyle and spending and saving habits, their retirement living expenses would be approximately $90,000 per year with a 90 percent success rate of not running out of money.

The saving today vs. spending on travel today is a big ‘‘if’’ for their plan.

‘‘The couple needs to decide whether cutting their current travel expenditures in half now to fund retirement is a trade off they are willing to make,’’ Maye says.

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