Get With The Plan: June 24, 2012

Sid, 63, and Grace, 65, are in a commuter marriage.

Sid still works and lives in Mercer County, while Grace is retired and lives in a different state. The couple plan to stay separate until 2015, at which time Sid can retire with a pension and subsidized medical benefits. They’d then sell the New Jersey home and settle down together in Grace’s current home.

“When we are both retired and living together we want to travel while we are physically able, do volunteer work and attend more music and dance festivals,” Grace says.

They’re concerned about preserving their assets so they have enough money when they retire.

Sid and Grace, whose names have been changed, have saved $390,700 in 401(k) plans, $167,500 in IRAs, $239,200 in a brokerage account, $100,700 in mutual funds, $1,200 in a Certificate of Deposit, $4,400 in money markets and $37,300 in checking.

In 2015, Sid will be eligible for a $37,440 annual pension from his current employer, and he’ll also start to receive an additional $3,300 per year pension from a previous employer.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial

Advisors in Montville, to help the couple see what lies ahead for their finances.

“Sid and Grace are looking forward to a long retirement together,” Duerr says. “Prior to this happening there are several things they need to do, including fixing up Sid’s home to be sold upon his retirement.”

Duerr says while living apart is difficult and more expensive than managing only one home, the couple has made the correct decision so they can provide a better retirement for each other.

Duerr says the couple have several good income sources to support them in retirement. The $37,440 annual pension Sid is expecting would continue for Grace should Sid die prematurely.

“Given their reasonable living expenses upon consolidating to one home in retirement, Sid’s pensions, Grace’s Social Security and the earnings from their investments should be able to cover their annual expenses,” he says.

Plus, Sid does not intend to collect Social Security until age 70, which will only increase their income when he reaches that age, Duerr says.

They don’t plan to withdraw any funds from their retirement accounts unless necessary until they are required to at age 70½. That gives their money more time to grow, but still, Sid and Grace have concerns about their asset allocation given their risk tolerance and their stage in life.

They say they’re moderate investors, but despite the current market environment they have not made any allocation changes to their assets.

Their current portfolio is about 73 percent in equities and 27 percent in fixed income. Of the equity portion of the portfolio, 36 percent is held in the stock of just eight companies, with the majority in just two of those stocks.

“They are most likely taking on more risk than moderate investors at their age should,” he says. “With a few modifications to their overall investment portfolio they should be able to improve their overall asset allocation, and, hopefully, their investment return, without taking on any significant investment risk.”

Sid and Grace had concerns about selling the shares to rebalance and better diversify their holdings.

They wanted to know if they should sell today or if they should wait until they retire and are in a lower tax bracket.

While waiting to be in a lower tax bracket normally is the correct decision, Duerr says, they need to think about several other items, such as if they’re willing to continue to have the additional risk in their portfolio.

The other big “if” is the future of tax rates.

“Given the lack of guidance on where tax rates are going, and even though their income will be less in retirement, it is possible that capital gains taxes could be significantly higher than they currently are today,” Duerr says. “No one knows where tax rates will go but it may be a good idea for them to trim back certain positions prior to reaching retirement.”

He says they could use the funds generated from the sales to better allocate their overall portfolio.

While the couple has enough life insurance, they should seriously consider purchasing long-term care insurance to protect their assets and lifestyle.

“Should either of them require any long-term care this would significantly impact their savings,” Duerr says. “I would suggest that they consider purchasing a policy while they are still young.”

Even though long-term care insurance is a costly expense, Duerr says it should be considered a necessity. He says Sid and Grace should have sufficient assets available to pay for this coverage.

Sid also mentioned he expects to someday receive an inheritance of $200,000 to $300,000 from a relative.

While this will only help supplement their savings, Duerr says it’s not wise to count on it until it actually happens because the relative could need some or all of the funds to pay for care or other expenses.

If the money does come, they can consider it gravy.