Get With The Plan: June 14, 2009

61409At age 50, Jacob and Sadie are looking to the next stage in their life together. They’ve raised two children and paid for their college educations. Now, it’s time to focus on themselves.

“Our main goal is to reduce our debt and figure out how many more years we need to work before being able to retire,” Sadie said.

The couple, whose names have been changed, have set aside $243,426 in an IRA, $18,748 in a 401(k) and $2,953 in checking. Sadie expects to receive a pension worth $555 a year when she retires. In addition to their Monmouth County home, they own an out-of-state property they use for vacations and hope to move to when they retire.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple determine when they can retire.

“They have almost no liquid savings,” Lynch said. “They have no disability income benefits, so if one of them gets hurt or loses their job, everything in their plan falls apart.”

Lynch said their “liquidity” right now consists of a small home-equity line of credit (HELOC). This is risky, he said, because many banks are reducing limits on HELOCs and other home loans.

The couple’s priority should be a liquid emergency fund of about $42,000 — or six months of expenses — especially because they’re maintaining two homes.

Jacob and Sadie need to realize they’ll have many, many years of retirement to fund, with the average life expectancy in the 80s.

“My point is that it is extremely difficult for someone without a pension plan to be retired for a third of their adult life without running out of money,” Lynch said.

The couple hoped to retire at 55, but they’ve now moved that back to age 59½, when they can start withdrawing from retirement accounts without penalty. Lynch said they’d need their current plan to support $50,000 of investment income for 19 to 31 years. Based on today’s assets, Lynch said, that’s not a viable option.

Their biggest retirement asset is an equity indexed annuity — an investment they thought was an IRA until Lynch explained otherwise.

“This has about 92 percent of their retirement income and they did not understand the basic mechanics of the program, how it makes money, how they can access their money or even that it was an annuity,” he said.

Equity indexed annuities are fixed annuities that credit interest based upon certain indexes such as the S&P 500. In a down year, Lynch said, you won’t lose money, and in an up year, you’ll participate in the gain of the index up to certain limits.

Lynch said these products can work and it’s great that it hasn’t lost money in a down market, but he said it’s “crazy for any individual to put all their money into one product, especially one that imposes substantial fees to access their money.”

When the surrender period is over, the couple may want to move their money elsewhere, he suggested.

Refinancing both properties could free up cash. Combining their primary home loan and HELOC with a 30-year fixed mortgage at 4.75 percent would reduce their payments by $2,500 per year. For the second home, a 30-year fixed-rate loan at 4.75 percent would save them about $1,800 annually. The couple isn’t sure they’re willing to rent the property, but rentals of a few weeks a year will give them income and tax benefits.

Lynch ran several projections to see at what age the couple could retire and count on their assets lasting. It’s not what they want to hear, but age 70 is the safest bet. If they’re drawing 4 percent of assets annually for income at 55, 59½ , 62 or even 67, they’d simply run out of money too soon.

“At age 70, they have the equivalent of $50,000 annually in income, and inflation will reduce that annually,” Lynch said. “They will need that additional money for the future. They simply do not have the assets to pull off what they are trying to do.”