Get With The Plan: June 27, 2010

62710Diana, 59, and Steve, 61, are halfway to retirement. Steve already has stopped working, and the couple are trying to determine when Diana should retire. A public employee, Diana was planning to work a few extra years, but she’s not sure how state budget issues may affect her choices.

They currently own their primary residence and a vacation home in New Jersey, but they’re thinking of changes for retirement.

“We’d like to be close to our family, with one house in New Jersey for six months and the other six months in a warmer climate,” Diana says. “We’re wondering which house to sell, or keep both and rent in a warm climate for fewer months.”

The couple, whose names have been changed, have saved $243,210 in Diana’s retirement plan, $99,609 in IRAs, $6,096 in mutual funds, $70,044 in savings and $17,667 in checking. Steve receives a pension, and Diana expects one when she leaves work.

The Star-Ledger asked Howard Hook, a certified financial planner and certified public accountant with Access Wealth Planning in Roseland, to help the couple explore their options.

“Based on the financial information that they provided, Diana should be able to retire and not worry about the financial impact retiring will have on their lives,” Hook says. “Our analysis shows that they can keep both their homes, continue to maintain their current lifestyle and be okay.”

The good news is in large part due to the positive cash flow they will have in retirement. In 2011 — Diana’s first full year of retirement — they should have a positive $24,000 of cash flow. This will increase once she turns age 62 and begins collecting Social Security, Hook said.

It is uncertain what the long-term cost of staying at work would mean for Diana. Much has been speculated as to what types of cuts to benefits would be made for her state job. She could face higher health care costs, frozen pension benefits or even rollbacks, or modifications to the calculation of the pension formula.

But because of the positive cash flow the couple will have, none of these would have a major effect on their long-term plan, Hook says.

But, there may be a cost to staying that’s far more devastating. Right now, Diana has life insurance worth 3.5 times her salary for a total of $371,000.

“It seems that if she were to die while working, Steve would receive this amount of insurance but not receive any pension benefits in the future,” he says. “If she retires now, her insurance will be reduced substantially.”

Hook recommends Diana select the 100 percent Joint and Survivor Pension option, which would pay her the approximately $63,000 a year for as long as she and Steve are both alive. This option provides the smallest amount of pension but provides the same benefit to spouses if the pensioner dies first. Given their positive cash flow, Hook says there is no reason to speculate on a higher amount and provide less to Steve in the event Diana dies first. The incremental benefit is not worth the additional risk to Steve.

“In other words, the lump sum of $318,000 could not adequately replace the $63,000 a year in pension Steve would receive,” Hook says.

When Diana does retire, Hook suggests she roll her 403(b) into an IRA. She will find more investment options and possibly lower expenses with that move.

They also could reallocate some of their savings. Right now, 84 percent of their retirement accounts are in cash, earning a 3 percent interest rate.

“While 3 percent is a good interest rate at the moment, they can do better in equities over a long period of time,” he says.

And because the couple won’t need to withdraw funds for a long time, they have time to take on more risk. The likelihood, Hook says, is they’ll be forced to take money out at age 70½ (required by the IRS) instead of needing to take out cash. Given that, he recommends an overall portfolio mix of 50 percent equities and 50 percent fixed income and cash.

The couple does not need to sell either of their New Jersey houses if they don’t want to, Hook says, thanks to that positive cash flow.

There are other insurance areas that are lacking for the couple. They indicated they do not have a homeowners policy on one of their homes. Hook says for approximately $2,000 a year — well within their means — they can get the protection they need.

“There is a huge risk associated with no personal liability insurance on the home if someone were to hurt themselves on the premises and sue you,” he says. “This could impact you financially. Also, having to fix damage done to the home or having to sell a home that has been damaged and not fixed could impact you financially.”

Additionally, the couple should consider long-term insurance, which would provide financial help to pay for care should either spouse need it. At their ages, and assuming their health is good, they should be able to afford a decent policy.