Get With The Plan: June 19, 2011

Brian and Maya are in their mid 60s, but they’re not yet ready for retirement. After a failed business in the mid-1990s that ate into their savings and their financial security, the couple has been playing catch-up.

“We’d like a comfortable retirement with vacations,” says Brian, 67. “We also want to reduce college debt — debt reduction in general.”

Brian and Maya, whose names have been changed, have saved $351,900 in 401(k) plans, $84,900 in IRAs, $16,000 in a brokerage account, $118,400 in mutual funds, $183,500 in a money market, $26,000 in savings and $5,500 in checking.

Outside of their mortgage, their only debt is outstanding college loans for their grown children. Brian hopes to retire when he’s 75, and Maya, now 66, hopes to retire at 70.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help Brian and Maya calculate when they’ll be ready to retire.

“First and foremost, many of us over the past three years have experienced financial issues,” Lynch says. “This can be from a loss of a job, loss of income or as a business owner having to write checks to the business to keep it afloat.”

Since Brian’s business went under, the couple have done a great job getting back on track and taking control of their financial future. They are currently saving about a third of their income, and Lynch says their target retirement dates are very realistic.

One big area of concern that’s common for many couples is college education costs for children. Lynch says everyone wants the best for their kids, especially when it comes to education and preparing them to become adults. However, you always need to prioritize and be mindful of your resources, he says.

“I can borrow money for college, but no bank in the U.S. will lend me money to retire,” he says. “Just like when you are on a plane and the flight attendant runs through their safety check, they always say, in the event of an emergency always put your mask on first and then help your kids. Same thing here.”

Brian and Maya took college loans for their kids, but Lynch says he would have rather seen the children take the loans in their own names. Later, the parents could pay the loans if such payments would not push back their own retirement plans.

In this couple’s case, their three children are financially secure and could afford to pay off their own college loans.

“This is something that is extremely personal to many people, so even if my logic is very rational, many people still will tell me that they want to pay this expense, and that is fine, too,” he says. “It is all about choices.”

While Brian and Maya seem to be on the right path to reach their retirement goals, there are several items that could throw them off: not receiving the targeted rates of return of 6 percent because of another market collapse; an illness or injury that prevents one of them from working, or savings being needed to pay for long-term care.

The couple should look at their investments. They have about a third of their money in cash, which is safe but not a good long-term option, Lynch says. If they don’t need that much money in cash — probably earning less than 1 percent — they need to develop a strategy to keep ahead of inflation.

For example, dividend stocks such as AT&T are paying a dividend rate of about 5.5 percent, he says, far more than what money market accounts are paying. Equally important, he says, qualified dividends are taxed at either zero percent or 15 percent.

The couple should consider other options that make sense based on their risk tolerance, time frame, returns and tax benefits.

Lynch isn’t happy with the couple’s mutual fund portfolio, which he says was recommended by a “financial salesperson.” The adviser sold the couple a portfolio of mutual funds that are all from the same fund family.

“The funds selected have done worse than almost 75 percent of similar funds over the past five years and almost 90 percent of the funds over the past 10 years,” he says.
“Anytime any adviser suggests that all or a majority of your funds be with one fund company, run as fast as you can.”

Lynch says no one company is great at everything, and a good plan has diversification not just with regard to assets, but also with the fund companies.

“This advisor is an example of what is wrong with the financial services industry,” he says. “Financial advisors are not held to a fiduciary standard where certified financial planners are. What this means to the consumer is if the investor specifically told me to do this exact same portfolio for them, I legally could not. It would simply be not acting in the best interest of the client and if I did this, I could be sued (and probably lose) or I would possibly lose my CFP designation.”

To strengthen their plan, the couple should also think about long-term care insurance.

The cost of such care — and long-term care insurance — is only going higher, Lynch says, so they need to consider their possible future needs and the cost and risk of self-insuring.