Get With The Plan: June 17, 2012

At age 57, Peter is worried about longevity.

The single man has a history of family members on both sides of his family who live well into their 90s, so he wants to make sure he won’t run out of money.

“I want sufficient assets to retire at age 62, conservatively assuming I will live to age 95,” he says. “I have no debt at all, however, I do spend a lot of money monthly on entertainment and trips, so I hope that my assets will last me.”

In addition to vacations, Peter spends much of his leisure time taking ballroom dancing lessons — an expensive hobby.

He’s wondering how much he can spend in his retirement years.

Given his asset level and longevity concerns, he wants to know if he can use a drawdown rate on his assets of more than 4 percent — the standard recommended by financial advisers.

Peter, whose name has been changed, has been an aggressive saver.

He’s set aside $807,300 in 401(k) plans, $513,000 in IRAs, $90,000 in an annuity, $227,000 in a brokerage account, $403,500 in mutual funds, $327,000 in bonds, $5,000 in certificates of deposit, $99,000 in money markets, $15,000 in savings and $40,000 in checking.

The Star-Ledger asked Christopher Cordaro, a certified financial planner with RegentAtlantic Capital in Morristown, to see how long Peter’s money will last him.

“Peter is right on the cusp of being able to retire and has some very interesting tradeoffs in front of him,” Cordaro says.

For Peter to retire in five years at age 62, Cordaro performed an analysis that shows a confidence level, expressed as a percentage, to show the likelihood that Peter’s money will last his lifetime.

Cordaro doesn’t recommend anyone retire with a confidence level that’s less than 75 percent.

Peter’s confidence level was 70 percent.

Cordaro says there are several strategies Peter can use to increase his confidence level.

First, he could take his chances and see how his portfolio performs over the next five years.

Another option is Peter could work an extra two years and retire at 64.

He could also increase his savings level during the next five years, or he could consider annuitizing a portion of his savings to receive a guaranteed monthly payment — like a self-created pension — in retirement.

A big part of his decision will depend on how much he wants to spend on additional ballroom dancing lessons.

“He may choose to work longer to continue to fund the ballroom habit,” Cordaro says. “It’s a classic retirement trade-off — work a little longer at a job you’re not completely in love with to spend more time at your passion.”

Cordaro says an immediate annuity — in which Peter would pay a lump sum to an insurance company and the company would pay him a monthly sum for life — would be a great option for Peter.

“He has no children and no great motivation to leave an estate,” Cordaro says. “By converting assets into a lifetime income stream, Peter would be hedging longevity risk — the risk that he outlives his assets.”

This would improve his confidence level of not running out of money, Cordaro says.

The annuity purchase is a decision that Peter should make when he is in retirement, Cordaro says.

This works well given today’s very low interest rate environment. Interest rates play a huge factor in how much monthly income one would receive from an annuity, he says.

“Currently, insurance companies are projecting out today’s low rate environment over one’s life expectancy to calculate the payment amount,” he says. “If you buy an immediate annuity today, you are locking in today’s low rates for your lifetime. If you can, wait to purchase until rates start rising.”

Cordaro says it’s a good strategy to dollar-cost-average your lifetime income over a number of years.

For example, Peter may want to purchase 10 percent of his income need when he retires, and then purchase another 10 percent of the income needed each year over the next 10 years.

Each annual purchase should cost less to replace the same amount of income because Peter’s life expectancy would be reduced by one

“Dollar-cost-averaging into immediate annuities spreads out the interest rate risk of buying everything in one year and rates rising in the future,” he says. “It also takes advantage of the fact that the older you are, the less an annuity will cost for the same level of income.”

Peter’s asset allocation is 60 percent stocks and 40 percent fixed income, which Cordaro says is appropriate.

The projections show that a higher stock allocation would lower his confidence level, as would a lower stock percentage.

If Peter decides to go with an immediate annuity, it would count as part of his fixed income allocation, he says.

“Peter has done well with his diversification, but he would do better to include more emerging markets and international small stocks,” Cordaro says, noting Peter should consider rolling over some of his old 401(k) plans to an IRA so he has a greater investment selection.