Get With The Plan: July 8, 2012

Ed, 56, and Sabrina, 57, recently moved to New Jersey for their jobs, but they’re thinking about retiring soon. They’re in their final year of education expenses for their child and they’re trying to plan ahead.

“We would like to retire in the next two to five years and we’d like to maintain a home in the Northeast and one in the South,” Ed says. “The biggest financial concerns for us are market volatility and preservation of existing assets.”

The couple, whose names have been changed, have saved $261,900 in 401(k) plans, $809,000 in IRAs, $800,000 in a brokerage account, $150,000 in money markets, $50,000 in savings and $20,000 in checking.

Sabrina is also expected to receive a pension at retirement. Exactly how much will depend on her retirement date.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help Ed and Sabrina determine when they can retire and see if their goals are realistic.

“They are in great financial shape as they approach retirement,” Pallitto says.

But that doesn’t mean they can’t further improve their situation. Based on the couple’s salaries and their expenses, Pallitto says they can sock away another $200,000 between now and a projected retirement date of two years from now.

At that time, when Sabrina is 59, she’d be eligible for a pension of $45,000 a year. In addition to that income, Pallitto says the couple would have to draw down about $65,000 a year to meet their expenses.

A few years later, when Sabrina is 62, she can receive about $24,000 a year in Social Security benefits, and a year later, Ed would receive $19,000 a year in Social Security benefits.

Put it all together, Pallitto says, and the couple would need to tap about $195,000 from their savings for the first three years of retirement, $45,000 in the fourth year and $25,000 thereafter — excluding inflation.

“On a very simplistic level, the additional savings over the next two years will cover the retirement spending deficiency during the first three years, which means if the current assets earn at least 2 percent, they will cover their retirement spending needs without invading principal,” Pallitto says.

Within their brokerage account, Ed and Sabrina own three variable annuities that will guarantee them a stream of income even in retirement, even though Pallitto says it doesn’t look like they will need it.

“I like to use variable annuities with guaranteed withdrawal or income benefits to create ‘pension-like’ payments for couples that do not have a pension, or that cannot meet two-thirds or more of their retirement spending with Social Security and pension income,” Pallitto says.

He says based on current spending, this couple’s Social Security and pension income will cover about 85 percent of their retirement spending — a terrific accomplishment. But for other retirees who fear they will outlive their assets, Pallitto says paying the additional fees for a variable annuity is well worth it to create a stream of income for the rest of their lives.

But for this couple, the annuities will be costing them more than necessary because Ed and Sabrina don’t need the benefit.

For that reason, Pallitto suggests they consider divesting themselves of the annuities when and if the account values are equal to their income or death benefits.

“If the account values are so much lower than their respective benefit bases, then they should keep them to pass the wealth from their higher death benefit to their children or grandchildren,” he says.

Pallitto says the couple can do better on their mortgage. The current rate is 4.875 percent and they are paying $767 a month in principal and interest, plus an additional $300 a month toward principal.

“Since they are paying $1,067 per month, their 30-year mortgage would be paid off in another 198 months,” he says. “If they refinance their current balance plus fees to a 15-year fixed mortgage at 3.25 percent, their payment would be $998 and paid off in 180 months or by age 72.”

Finally, the couple’s recent move to New Jersey could have an enormous impact on their estates should they die while living in the state.

The federal estate tax exemption is currently $5.12 million, but it’s set to drop to $1 million in 2013 unless legislators make changes. For New Jersey, the estate tax exemption is only $675,000. While they wouldn’t owe federal estate taxes if they died this year, they would owe in New Jersey, and if legislators don’t make any changes, they’d owe federal estate taxes if they died in 2013.