Patricia, 49, and Doreen, 58, are a same-sex couple with a civil union in New Jersey. They said they’ve taken care of the necessary estate planning documents, such as a will, health care proxies and powers of attorney, but they have other concerns about their long-term financial planning.
“We hope that we have enough money to retire in the next couple of years and have our money last well into our 90s,” said Patricia. “We would like to maintain our current lifestyle, and if possible we would like to have extra money to travel.”
The couple is also concerned about health care costs, which are currently covered by Doreen’s employer. After retirement but before Medicare kicks in, their cost of health care will rise significantly.
The Star-Ledger asked Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Fair Lawn, to help the couple assess their retirement prospects.
Viscuso says not all the benefits enjoyed by traditionally married couples are available for those with civil unions, so planning is important for Patricia and Doreen.
But first, the couple doesn’t have much in fast cash — liquid money that can be accessed in the case of an emergency.
Viscuso said for Patricia and Doreen, six months worth of expenses, or roughly $75,000, should be sufficient. Rather than have the money sit in an account that doesn’t earn much interest, she suggests they consider a home equity line of credit, which they use only when needed.
The couple has $348,000 in brokerage accounts, and the rest of their assets are in various tax-deferred retirement accounts. They estimate that their tolerance for investment risk is “moderate,” which Viscuso says implies a balance between income and growth.
“Their brokerage account, though, is heavily invested in individual stocks and mostly in high-tech companies whose shares can be quite volatile,” she says. “Although they are active investors and manage their own portfolio, it may be prudent to have a professional investment adviser review their holdings to ensure proper diversification.”
She says a properly diversified portfolio will invest in several asset classes, such as equities, domestic bonds, international bonds, real estate, natural resources and more, with the allocation based on the investor’s specific risk tolerance
While the couple has ample savings, Viscuso says, they have no defined benefit pension or paid medical benefits in retirement. They will have to purchase individual health insurance to cover the time from when they retire until they qualify for Medicare at age 65.
“Individual health insurance premiums are estimated to be $800 per month per person,” Viscuso says. “This cost has a significant impact on their finances.”
Because of advances in medical science, life expectancies have been increasing and are expected to continue to increase. For this analysis, Viscuso assumed the projected life expectancy for both Patricia and Doreen to be 100 years.
“This poses a financial challenge in retirement years,” she says. “A longer lifespan results in a longer retirement life — possibly as long as their working years. This is especially true when a person retires early — increasing the risk of running out of money to fund that retirement.”
Viscuso says the couple can each start collecting reduced Social Security benefits at age 62, or collect full benefits at full retirement age. Benefits would increase roughly 8 percent per year if they delay taking payments beyond full retirement age, so she says they may want to delay until age 70.
“The benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits,” she says.
Only Doreen has life insurance — a group policy through her employer with a death benefit of $230,000. Viscuso says this type of policy remains in effect as long as she is employed, although some insurance companies allow you to convert from a group policy to an individual policy at retirement. She should ask her human resources department about this portability feature.
Because Doreen is the primary breadwinner, Viscuso took a look to see if additional life insurance would be beneficial if Doreen predeceases Patricia, but she said additional insurance isn’t warranted.
Viscuso ran a Monte Carlo analysis to see how the couple’s assets would fare under all market conditions and different inflation scenarios. Assuming the couple retires in 2015 and starts collecting the Social Security at Doreen’s full retirement age of 66, the analysis showed there is a high probability that the couple will run out of money, with only a 55 percent chance of success.
The couple may want to consider delaying Social Security benefits and their retirement.
A big reason for this is that Social Security for nontraditional couples does not allow for survivor benefit entitlements in the same way as it does for traditional spousal couples.
“This means that if Patricia were to live longer than Doreen, Patricia would not be entitled to any additional money from Social Security,” she says. “For a traditional couple, when one spouse predeceases the other, the remaining spouse retains the greater of their two Social Security payments.”
Another important point to consider is that delaying retirement increases the number of working years and reduces retirement years — and it also reduces the number of years they’d have to pay for higher cost medical insurance.
“Assets available during retirement should be higher because the investor’s portfolio has more time to grow,” she says. “More working years also means more years to save and also fewer years that need to be funded from invested assets.”
The Monte Carlo score increases to 84 percent if they retire in 2019 and delay collecting Social Security until age 70.
Finally, they need to make sure they are each named as the primary beneficiary on all retirement accounts, and that they own their home jointly. They should also fill out HIPAA forms so doctors are able to discuss medical issues with one partner if the other is sick and unable to give permission, Viscuso says.