The single man is the co-owner of a business, which he hopes to sell when he’s 58 — his goal age for retirement. Rich expects to net $500,000 from the sale, which he would add to his nest egg. He’d consider part-time work in a another profession, but he hopes it wouldn’t be a requirement for his success.
He wants to be sure he makes the correct financial decisions now.
“I wonder if I should pay off the mortgage in one lump sum or continue to pay the monthly amount, given that fact that I have a low interest rate,” he says. “I also have a rental property I plan to sell so I can use the money to buy a vacation home in Florida.”
He’d like to spend the winter months in a warmer climate, and stay in New Jersey for the summer months.
Rich, whose name has been changed, has saved $669,000 in 401(k) plans, $924,000 in mutual funds and $5,000 in checking.
The Star-Ledger asked Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, to help Rich make sure he places his assets properly so an early retirement can come true.
Green says Rich’s current financial plan shows he should be able to reach most of his financial goals, but he only has a 64 percent probability of not running out of money.
That’s a bit risky, so Green has some suggestions to increase the probability of success. If Rich follows the recommendations, the probability moves up to a solid 90 percent.
There were many variables, but working longer is an important one. If he delays retirement by just one year, he increases the plan’s probability of success by 17 percent. That’s without any other adjustments.
Green says the performance of Rich’s investments is an important factor in the success of the plan.
“A well-diversified portfolio reduces the risk of having all your eggs in one basket,” Green says. “A proper asset allocation helps maximize your rate of return for the level of risk that is within your comfort zone.”
Rich’s current asset allocation is 54 percent equities, 45 percent fixed income and one percent cash.
“Rich is still young and has several years until retirement, therefore, he can afford to take a moderate to moderately high degree of risk in his investment portfolio,” Green says. “The rate of return received from investments will impact the plan significantly.”
He says for all the years Rich has to grow his assets, the power of compounding can work in his favor and improve the chance of the plan succeeding, increasing the plan’s chance of success by 6 percent.
Green recommends Rich consider rebalancing his investment portfolio to achieve a fully-invested target of 59 percent equities, 36 percent fixed income and 5 percent cash and cash equivalents. If he’s not comfortable monitoring his own investments and making adjustments when necessary, Green recommends he consider working with a financial planner.
He recommends Rich proceed with his financial goals of retiring and selling his business and rental property, and purchasing the vacation home in Florida.
“Because of his desire to split time living in New Jersey and Florida, Rich should consider making Florida his legal state of residence,” Green says. “There are significant income and estate tax benefits for Florida residents.”
To avoid New Jersey taxation as a resident, Rich must establish Florida residence and prove he spent 183 days or more each year living in Florida, Green says.
In the years until he retires, Rich should continue maximizing contributions to his employer-sponsored 401(k) plan, Green says.
“This will allow maximum tax-deferred savings as well as the maximum employer matching contribution,” he says. “In addition, all surplus saving funds should be invested in a diversified portfolio — not in bank savings or checking accounts.”
That’s because it’s important to the plan that these assets have the potential to grow at a rate greater than inflation.
At whatever age Rich retires, Green says it’s to his advantage to take Social Security benefits as early as possible, which would be age 62.
“We looked at the potential benefit of waiting until full retirement age — age 66 and 10 months — to begin receiving unreduced Social Security retirement benefits, and the gross effect on the plan’s ending net worth was less than a 1 percent increase,” Green says.
Before he actually takes the benefit, he should recheck with an advisor to make sure that’s the right course of action.
Green says Rich doesn’t have a large enough emergency fund. He needs to have between three and six months of expenses in a cash account, which would be betweem $37,000 and $74,000. Right now he’s only at 13 percent of the lower goal.
When he rebalances his portfolio, Rich should transfer six months of expenses into a cash account.
Green applauds that Rich has a long-term care insurance policy, but Green recommends he periodically review the benefits to make sure they’re sufficient for Rich.
“Long-term care insurance can be an effective strategy to help maintain control and preserve assets,” he says. “Unfortunately, there are many variables that are impossible to predict, such as when long-term care could begin and how long will it last.”
That’s why a check-up is always a smart move.