Get With The Plan: June 22, 2014

62214Your age at retirement and your family history of longevity — or not — can dictate how long your money will last when you stop working.

That’s the challenge faced by Eddie and Loren. Eddie is 54 and Loren is 61, and they think they will both need to work until they each reach 70 to have a successful retirement. They’re trying to figure out how their age difference will impact their retirement goals.

They are considering retiring down South — they already own a condo out-of-state — but they’re not sure the best way to make their dreams come true.

“We bought the condo thinking we may retire there, but now we’re wondering if we should sell it and use the money to pay down our mortgage or use it elsewhere, like to purchase a car,” Loren says. “We do rent the condo for three months of the year and receive about $6,600, but that only covers half a year of expenses.”

The couple also faces occasional big-ticket assessments for the condo, including one for $8,000 they recently learned about.

The couple, whose names have been changed, have saved $114,300 in 401(k) plans, $231,200 in IRAs, $13,200 in a brokerage account, $25,400 in mutual funds, $22,000 in a money market, $27,000 in savings and $9,000 in checking.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple come up with a plan for success.

For his analysis, Power used an after-tax lifestyle of $84,000 per year, increasing every year for inflation during their working years, based on couple’s budget. He then adjusted this lifestyle down to $66,00 per year after taxes, increasing every year for inflation, during their retirement years.

He assumed they keep their condo through their working years, and that their out-of-pocket carrying costs continue to be paid through cash flow.

He also assumed in retirement, the expense of their New Jersey home would end, but some of those savings would creep back in through higher health insurance premiums and some additional traveling.

Finally, he assumed they’d use the equity in their New Jersey home to pay off the condo’s mortgage, and that they’d invest the rest to generate additional income going forward.

Power considered two retirement scenarios.

The first was that Eddie and Loren both retire at their respective age 70.

“They have a 100 percent probability of success — success being defined as not running out of money prior to age 93 for Loren and age 90 for Eddie — and will most likely see their investment principal grow over time,” Power says. “Seems to me to be too much of a sacrifice.”

The other scenario would be for them both to retire in five years.

In this case, Loren would be near her full retirement age for Social Security and the benefit of retiring together.

“They have a 75 percent probability of success, which is in a comfortable range of success,” Power says. “If they decide to work longer — both or just Eddie — it’s a personal choice and their financial situation will only improve.”

Taking a look at their investments, Power assumed a moderate asset allocation of 50 percent in stocks and 50 percent in bonds during their working years. He then moved their asset projections to a more conservative portfolio in retirement.

They currently have 55 percent in equities, which is close to Power’s recommendation, but they’re lacking in diversification when you dig deeper into the portfolio.

They are too heavily weighted in U.S. large-cap equities at 40 percent, compared to Power’s recommendation of 13 percent. They also have too much in intermediate bonds at 26 percent, versus his suggestion of 7 percent.

“They could be spread more evenly across other asset classes not represented in their portfolio,” he says.

Long-term care insurance is another area they should look at closely.

“I’m particularly concerned about protecting assets in case Loren needed long-term care, which would have to come out of their pockets,” Power says. “Couples that have age differences like Loren and Eddie should be extra careful to plan for the younger spouse to make sure he or she has enough assets to bring them to the end of their lives.”

This couple is especially vulnerable, he says, because neither of them have pensions.

When Eddie takes his Social Security benefits will be an important discussion down the road. Power says.

“Whether he decides to take it as early as age 62 or wait until full retirement age or something in between would depend on how their investments perform from now until they retire,” he says. “If they retire in five years, they will be asking a lot from the portfolio to supplement their lifestyle if Eddie waits until his full retirement age of 66 and 10 months to turn his Social Security benefit on.”

This is also a good time for the couple to review their wills and estate documents to make sure they can both take advantage of the New Jersey state estate tax exemption, which is currently $675,000. To take full advantage, they must each own $675,000 of assets in their individual names, he says. This will be a temporary issue because when they move, they’re planning to go to a state that doesn’t have an estate tax.

“They should also consider having revocable living trusts drawn up to take the place of their wills for the distribution of their major assets like their portfolios and their homes at death,” he says. “This is a document that most people in the state where they’re moving ultimately have because processing an estate through a living trust avoids probate, which can be an expensive proposition in that state.”