Get With The Plan: June 8, 2014

6814Rob and Jane, in their late 50s, managed to send their two kids to college without any student loans.

But then last year, they had a big hiccup. Jane lost her job and was only able to find one that paid half her previous salary.

With that big change in cash flow, they’re wondering if their hopes of retiring at age 62 are realistic.

“We hope our retirement is comfortable,” says Jane, 57. “We are simple people and don’t need a lot, but would like to have enough money to pay bills.”

The couple, whose names have been changed, have saved $282,800 in 401(k) plans, $13,000 in IRAs, $35,000 in savings and $30,000 in checking. They also own half a business and half a commercial building.

The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help the couple plan for the day they can stop working.

Power says the couple need to think very, very long term.

“Their main goal is to cover their bills in retirement, but they do have to be concerned that their assets and income support a long time frame because Jane’s mother is still alive at age 91.”

Longevity can be costly.

Both would like to retire at age 62 and are OK to work part-time jobs. They live a very modest lifestyle.

For his analysis, Power used an after-tax retirement lifestyle spending plan of $50,000 per year, which assumes they have paid off the mortgage and home equity line. The plan would increase every year for inflation and is based on the budget the couple worked up.

“Because they lived within their means during their working years and have a nice rental income from a commercial building they partially own, they now have the ability to retire at age 62 or earlier with a very high probability of success, living until age 90,” Power says.

While Rob and Jane say they’d be willing to work part time in retirement, Power says they won’t have to.

But if they wanted to work part time, they could leave their current jobs before age 62 without jeopardizing their financial success in retirement.

They’d first need to make sure that post-retirement working income is a sure thing.

“I would recommend not counting too heavily on having post-retirement income from a job unless the person has a very clear idea on what they are going to do and that there are good job prospects in that field, prior to retiring,” he says. “The last thing you want to do is retire thinking you’ll find another job and you can’t or are unable to work — possibly for health reasons — and eat into your life savings more than the portfolio can handle.”

Rob and Jane say they have a moderate risk tolerance when you blend Jane’s conservative nature and Rob’s aggressive ways.

Power generally recommends a 50 percent stock and 45 percent fixed income portfolio, with 5 percent in a cash position for his moderate clients. He went even more conservatively for this couple.

Assuming a 35 percent stock and 65 percent bonds/cash portfolio, Power says, their plan is successful.

“They do not need to take a lot of risk with investments in retirement because of rental income,” he says. “They can keep investments safe in case some big unexpected expenditure arises.”

While Rob and Jane have accumulated a nice nest egg, they don’t have enough to be self-insured should a lengthy long-term illness come along.

“One of them needing care could easily wipe out their investment assets, leaving the survivor in a precarious financial situation and possibly requiring their house to be sold to support the survivor,” he says. “The good news is that if they address this issue now through purchasing long-term care insurance, at their current ages, long-term care insurance is quite affordable.”

Power said they could afford the premiums. To be sure, he ran a plan in which they spent $85,000 after taxes, which is $3,000 per month more than the current plan. The probability of success was still high, so he says they can feel comfortable paying for a long-term care policy.

Power also says their funds are plentiful enough that they could consider annual gifts to future grandchildren’s college funds.

Power had some other suggestions to augment their plan, starting with their mortgage, which Power says they could pay off with the cash they have in the bank.

“The cash in the bank is not generating enough interest to offset the interest expense on the mortgage,” he says. “Once paid off, they can re-direct mortgage payments to aggressively pay down HELOC and go into retirement debt-free.”

One of the couple’s questions was whether they should rent out the commercial building or sell it.

Power says the rate of return from the rental income would be difficult to duplicate if the building is sold and proceeds are put into marketable securities. So, keeping it may be the best choice.

He recommends they 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.

“Along with that, they should equalize the ownership of non-retirement account assets to be able to fully take advantage of the exemption,” he says. “Because much of the assets in Rob’s name are his partial ownership of a business and a commercial building, they may want to consider putting their home into Jane’s name to balance off assets.”