Their oldest child, 18, is finishing a first year of college, and their youngest is 14. Once that child is out of high school, the couple wants out of New Jersey.
They want to make sure they do it right.
“We need advice on what to do with a lump sum of money received upon Greg’s retirement and paying for college for our children,” Gana says.
The couple, whose names have been changed, plan to move down South and travel a few times a year. So far they’ve saved $13,500 in 401(k) plans, $9,700 in IRAs, $4,700 in a brokerage account, $25,300 in mutual funds, $10,000 in bonds, $98,000 in a money market, $11,500 in savings and $500 in checking.
The Star-Ledger asked Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Fair Lawn, to help the couple see if their early retirement dreams are feasible.
For this illustration, Viscuso estimated college education expenses to be $24,000 per year per child in today’s dollars.
“Greg and Gana have some education savings totaling just over $30,000,” Viscuso says. “This is not enough to pay college expenses for two children so they will need to augment the savings by funding the costs through their recurring income and existing savings.”
A starting point is the substantial money they have in cash.
Viscuso says because the family has an immediate need to fund the children’s education goals, she suggests they keep that money in very low risk investments, even though they’re only earning a very low rate of interest in this environment.
They currently own two homes — the primary residence and a vacation home.
The primary home would be sold when the couple retires, and their vacation home would become their primary residence.
After paying off the mortgage and assuming an 8 percent selling/moving expense, Viscuso says the rest of the funds — $200,000 to $250,000 — have been earmarked to pay for college.
“They may decide to invest these funds at that time and use education loans to in part or completely fund their children’s educational costs, which may make sense if the cost of interest for the educational loans is less than how much they may earn by investing the funds,” she says.
The vacation home, though, is currently under water, meaning Greg and Gana owe more on the home than it’s worth. That doesn’t worry Viscuso.
“Assuming that the real estate market eventually comes back — which history shows it will — they should be okay,” she says. “They have no plans right now to sell this home so this is not of major consequence right now.”
Turning to retirement, the couple can start collecting reduced Social Security benefits at age 62 or collect full benefits at age 67, which is their full retirement age.
Viscuso says Social Security payments will increase roughly 8 percent per year if they delay taking payment beyond full retirement age until age 70, at which time the benefit would no longer increase.
Viscuso says assuming they start collecting Social Security at full retirement age, her projections show they will be able to meet their goals of retirement and educational obligations.
Depending on their health and financial situations at
the time, they may want to
delay benefits until age 70 to reap the higher monthly payments.
But given that they have 20 years to wait, it’s too soon to make a definitive decision today.
Even though the couple has a very small portfolio, they have the benefit of Greg’s pension, which provides high recurring income.
“Greg is one of the privileged county employees who will be able to benefit from a significant pension payout and fully paid lifetime medical benefits,” she says. “Without his large monthly pension and paid medical benefits, the couple would have difficulty meeting their early retirement goal and paying for their children’s education.”
Greg selected the 50 percent survivor option for his pension, which means Gana would receive half of his monthly payment should he die prematurely.
“It appears that she will have adequate income to maintain her lifestyle when the payout for his existing insurance is included,” Viscuso says.
That means the couple needs less life insurance than non-pensioned couples do. Today the couple seems to have enough with $585,000 of coverage on Greg’s life and $400,000 on Gana’s, Viscuso says.
Without the pension, they would need approximately $1.5 million to $2 million of additional coverage to protect Gana should Greg predecease her.
If their expenses stay stable or rise by the cost of inflation, they have enough life insurance to cover each other even if one dies immediately. To make sure this amount continues to be enough, Viscuso recommends they monitor their expenses very carefully and consider saving 10 percent of their recurring income each year.
“Though they have a lot of recurring income, not having much in invested assets means that they could be subject to a decrease in lifestyle if we hit a period of high inflation,” she says. “His pension is not fully adjusted for inflation. Though they can retire very soon, they may also want to consider working an additional three to five years and completely save the additional income so they do build up some invested assets.”