Get With The Plan: June 13, 2010

61310George and Josie, both in their early 50s, are almost done funding college educations for their two children, 22 and 19. They’re looking ahead to the next stage in their lives. “Our biggest financial concern is having enough money for a comfortable retirement in New Jersey,” George says. “How long do we both have to work to reach that stage?”

The couple, whose names have been changed, have set aside $686,000 in 401(k) accounts, $5,000 in IRAs, $179,000 in mutual funds, $76,000 in a brokerage account and $60,000 in liquid accounts. They also have $99,000 ready to pay for college bills. They each expect a small pension upon retirement, which will add up to $31,200 of income a year.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple assess retirement age and savings strategies so they never have to worry about outliving their money.

“They want to know if they have enough money to retire at $5,000 monthly income after taxes — approximately $6,000 pre-tax, or $72,000 per year — and the answer is definitely yes,” Lynch says.

George and Josie are big savers, and that’s what put them in such a good position. They save close to 25 percent of their income (including the company match) and they live well below their means. Lynch says anyone who saves that much, even if they are making little mistakes, will be financially successful over the long term.

Lynch had suggestions to correct those mistakes.

First, they have a managed account, meaning there’s an adviser who chooses investments for them. That adviser is doing absolutely nothing for the fees he or she is being paid, Lynch says. For example, the account holds exactly the same funds and basically the same allocation as other accounts the couple holds, with no differentiation among the investments in the tax-deferred and the taxable accounts

“Taxable accounts should focus on funds that have lower turnover, longer holding periods and using more tax-efficient holding tanks like tax-free money market accounts,” Lynch says.

He recommends more diversification.

Next, the couple desperately need some tax advice. Based on their managed account, Lynch says, it appears the adviser has no clue they’re in the 35 percent marginal tax rate, which would go up to 38 percent next year with the repeal of the Bush tax cuts.

“How can you manage taxable accounts without having a clue of the tax impact of the investments that you are selecting for your client?,” he says. “The adviser has no tax strategy and is totally unaware that the investor will lose 35 percent (38 percent next year) of every additional dollar that they earn.”

Lynch says they need to consolidate their investment accounts. Right now their assets are spread all over, making it very hard to keep track of their overall portfolio.

While George and Josie have been very successful 401(k) savers, Lynch says it might be time to pare back their contributions so they invest enough for the company match but not much more.

“If they keep putting away the amount that they are, they will have too much in the account,” he says. “Generally you will not want to take distributions from this account in retirement as you have to then pay taxes, so this will continue to grow until the year following 70½ when you are required to take a minimum distribution or you get hit with a 50 percent penalty plus income taxes.”

Instead, he recommends converting part of their 401(k)s with former employers into Roths after retirement because Roths don’t have required minimum distributions. They also can take the money they had been contributing to the 401(k)s and add those funds to taxable accounts, which will give them more spending flexibility in their early retirement years.

Next, they need to review their estate plans, which haven’t been updated in a long time. It appears they’ll have far more cash flow than they’ll need in retirement, and that means they need to make plans for the money.

It would make sense to meet with an estate planning attorney to discuss setting up a trust to make sure assets they want to go to their children will be set up correctly.

“Using a trust may provide for better benefits such as divorce protection and just making sure that they are spending the money wisely,” Lynch says.

The couple also need to look at all the beneficiaries listed on their accounts because they say they never established contingent beneficiaries on many accounts. IRAs, for example, will not pass through a will, so the proper beneficiary designations is essential.

They need to make sure they have proper medical directives and related paperwork.

While they’re in a good position now, Lynch warns them not to make any big mistakes.

He says there’s no need for them to be overly aggressive with their retirement investments in order for them to have a comfortable retirement. A big loss from riskier investments could have a big impact on their outlook, while a big gain would do little to change their lifestyle.