“My wife and I maintain simple lifestyle,” Ling said. “My goals are to pay off the mortgage as soon as possible, save enough for retirement and fully fund my kids’ college education.” Ling said.
The couple is also interested in another investment property, and when they retire someday — Ling hopes at age 60 — they’re thinking about a warmer climate.
The couple, whose names have changed, have saved $274,000 in 401(k) plans, $122,000 in IRAs, $155,000 in a cash balance plan, $58,000 in a brokerage account, $143,000 in a money market, $18,000 in savings and $6,000 in checking. They’ve also set aside $59,000 for college.
The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help the couple make the most of their resources.
“Anyone who saves more than 30 percent of their income is going to do just fine,” Lynch says. “They have done very well saving and are definitely going in the right direction.”
There are several items working in their favor.
First, Ling has a stable income and he doesn’t expect that to change for at least the next few years. Tanya’s job is less stable, but she’s working, so that’s good.
Ling’s potential pension is also important. He can take monthly payments or a lump sum upon retirement — something many of Lynch’s clients who retire younger than age 65 have in common.
“This is a great benefit to have; however, I would expect that it may change over time as most companies hate the liability associated with them,” he says. “Any benefit that you have accrued is guaranteed under ERISA — the law that governs retirement plans — and if the company goes insolvent, the benefit is guaranteed by the Pension Benefit Guarantee Corp up to certain limits.”
The couple is also very focused on saving and investing, which Lynch says is critical to any good financial plan. They’re saving 30 percent of their income for retirement, college and other savings accounts.
They also live below their means, and they have no credit card debt.
Still, there are items that the couple could improve.
They have a will, but it could be better, Lynch says. Importantly, they don’t have other critical estate planning documents such as living wills, powers of attorney and medical directives. They should see an estate planning professional to make sure they have all the documents they may need for any contingency.
The couple also needs to re-examine the beneficiaries named in their accounts.
“Minors cannot own assets so it is critical that you establish a trust that can accept the life insurance and IRAs,” he says. “Even if they could, at age 18 either they, or one of their crazy friends, will talk them into doing something stupid.”
Lynch says most major assets — retirement plans and insurance policies — do not go through a will unless you direct the assets to do that. It’s essential to set up the beneficiary designations correctly.
Looking at Ling’s and Tanya’s investments, they own a lot of individual securities and have a lot of cash.
“Ling indicated that he was looking to get out of individual stocks and move more into Exchange Traded Funds — ETFs — and move his cash ‘at the right time,’ indicating that he thinks he can time the market,” Lynch says. “I have not seen anyone who can successfully do that on a regular basis. It is not about timing the market, but rather time in the market.”
Lynch also took a look at their tax situation. The couple is in the marginal 33 percent federal tax bracket and around 6 percent for New Jersey.
“The marginal rate is what happens to every additional dollar that you add into your plan,” he says. “Each additional dollar gets taxed at 39 percent from the Feds and state of New Jersey.”
Additionally, Ling and Tanya are subject to the new health care tax on income of over $200,000 for single and $250,000 for family — when you count in Ling’s bonus. Lynch says this adds an additional .9 percent on earned income and an additional 4.4 percent on investment income such as interest, rental income and capital gains. This raises the marginal tax rate on investment income to around 44 percent, Lynch says.
“With a tax rate this high, they need to be aware of the tax implications of every investment that they do,” he says. “They also have an issue with the alternative minimum tax which impacts his ability to deduct certain things.”
Ling and Tanya are considering the purchase of more investment real estate.
But Lynch says their consideration of buying a 10-family rental property — compared to the current condo they rent out — is like “moving from investing in an index fund to trading derivatives — extremely different.”
Lynch says multi-family properties may require local and state inspections, and subject the couple to a host of regulations that they are not subject to with a single condo unit.
The location of this property is another issue. They’re considering two different areas, but both are far from their home.
“They are thinking about hiring a management company to help them, but I would say closer is preferable,” Lynch says. “Every once in a while you have to drop everything to deal with a problem and driving three hours each way, is really a lot of time.”
He recommends they build a stable of advisers, including a certified public accountant, a real estate attorney, a certified financial planner, lenders, realtors and insurance specialists — before they make a purchase so they can understand all the issues.