Get With The Plan: June 21, 2009

62109Jan, a 55-year-old Baby Boomer, would like to retire in the next 10 to 12 years.

She’s worried she won’t be able to remain where she lives because of high taxes, and she’s feeling the sting from the market’s downturn.

“I do not feel comfortable taking risks,” the Monmouth County resident said. “I am cautious, conservative, and I worry about the future, as I am self-invested, single and have no pension plan with my employer.”

Jan, whose name has been changed, has set aside $14,000 in a 401(k) plan, $29,000 in IRAs, $79,000 in mutual funds, $73,600 in a brokerage account, $249,000 in Certificates of Deposit, $5,000 in bonds, $2,500 in savings and $500 in checking.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Asset Management in Chester, to make sure Jan’s golden years shine.

“Jan wants an abbreviated work responsibility in 10 to 12 years, affording time to spend doing volunteer work and other interests,” Marchesi said. “While she has done a good job keeping expenses and debts in check relative to her income, more figuring needs to be done before Jan can plan on reducing her dependency on earned income.”

Jan plans to stay active when she retires, which includes some income-producing activities, but they first key is to analyze and understand her anticipated expense level in retirement.

Marchesi said if her investment base stays the same, taking into account inflation and taxes over the next 11 years and through retirement, she’d have enough to provide between 15 and 20 years of expenses when added to her estimated Social Security payments.

This means there needs to be an additional savings element as she remains in the work force. Instead of fully retiring in 10 years, Jan needs to consider maintaining a level of pre-retirement earned income to help offset costs and keep her asset base intact for a longer period.

Before moving forward, Jan needs to compare her asset base, her potential savings rate until retirement and her expected retirement expenses to determine the rate of return she’ll need to reach her goals. That will show Jan if her full retirement age should be delayed a few more years, or if her lifestyle expenses will need to be significantly reduced.

Jan needs to determine the appropriate allocation between shorter-term, low-volatility assets and longer-term, higher-volatility assets. Marchesi said there will be times when long-term assets are attractive, and other times when long-term assets have less appeal than short-term ones.

While her retirement accounts felt the brunt of last year’s market downdraft because they were mainly in stock-related investments, Jan migrated much of her other money into short-term CDs as the market deteriorated. Now, she’s somewhat risk-averse and her overall portfolio has a low-volatility profile, but that may not be the correct strategy, given her long-term needs and where we are in the market cycle, Marchesi said.

“The risk of outliving her money needs to be factored into the decision-making process when building an investment policy,” Marchesi said.

Jan said she’s willing to downsize in the future, which would reduce her expenses. With that, Marchesi said there’s approximately $300,000 in her current home which could result in a helpful surplus. Refinancing her mortgage could result in annual savings of more than $1,300, yet Jan should confirm how long she will remain in the house to determine if a long-term loan is the best deal. If she develops a surplus, she should consider a long-term care insurance policy to protect her independence in the future.