Get With The Plan: March 11, 2012

Ed and Marcia are looking for leisure.

The couple, ages 66 and 62, want to see their retirement years filled with travel.

“We hope to maintain our current standard of living assuming a lifespan of 80 for Ed and 95 for me,” said Marcia. “We are very concerned about inflation and we would like to know if it is advisable to postpone collecting Social Security to age 70 for Ed.”

The couple, whose names have been changed, have saved $558,600 in 401(k) plans $513,800 in IRAs, $236,000 in mutual funds, $3,000 in bonds, $187,800 in certificates of deposit, $76,000 in money markets, $5,000 in savings and $4,000 in checking.
The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to review the couple’s financial plan.

“Luckily they have amassed a good-sized nest egg, which along with Ed’s pension and Social Security should allow them to live their retirement years in the style they are accustomed to,” Duerr says.

Duerr says part of their success today is because they live within a fairly reasonable budget.

One of their largest annual expenditures is vacations, and they would like that to continue. Ed and Marcia say they’d like to travel extensively — spending $15,000 to $20,000 a year — for the next several years while they are in the early stages of retirement.

“This does not appear to be a problem as they have enough assets and income to cover their expenses,” Duerr says. “The other good thing about this is that even though this is a larger expenditure, it is not one that will last the rest of their lives.”

At some point within the next 10 years, Duerr says they will probably begin to decrease their travel, which will in turn decrease their spending.

Today, the couple spends about $90,000 a year, and Ed’s pension pays an annual $49,000. Neither Ed nor Marcia has started collecting Social Security, and that’s a good thing, Duerr says.

They plan to have Marcia start collecting soon, while Ed will delay his benefits until age 70.

“By doing this, Marcia would be able to collect Social Security spousal benefits of roughly $940 per month,” Duerr says. “Ed would delay starting his benefits until age 70 to maximize the amount he could receive for a monthly benefit payment of $3,199.”

Duerr says this strategy appears to make good sense because they can use Marcia’s current benefit to help pay their annual expenses while they allow Ed’s to grow.

Marcia’s financial security would be stable even if Ed dies prematurely. Were that to happen, she could still collect Ed’s maximum Social Security benefit and she would continue to receive Ed’s pension without a reduction in benefits.

Looking at the couple’s portfolio, Duerr notes they have a significant amount of their assets in cash. One of the reasons, he says, is that they’re using a good portion of these liquid assets to make up for the current shortfall between Ed’s pension and their total annual expenditures.

“They are concerned with the overall volatility in the equity and bond markets,” Duerr says. “They understand they need to invest a portion of their assets in order to have them grow and outpace inflation, yet they are tentative given the overall environment.”

About two-thirds of their cash is in laddered portfolios of certificates of deposit.

“Laddering” allows them to stagger the maturities on these assets, as well as obtain the best available interest rates over several different time periods, Duerr says.
Of their retirement accounts, Duerr says a significant portion is still held in Ed’s 401(k) from his previous employer. Duerr suggests they move these assets into an IRA.

“His investment options in this 401(k) are limited compared to the various choices he would have if the assets were transferred into an IRA,” Duerr says. “I understand his concern about the current economic environment, but I believe he would certainly have better choices that would still fit his overall risk tolerance and help him address his investment objectives.”

Given the couple’s concern about the market, Duerr says they may want to consider an annuity for a portion of the retirement assets.

“The assets sheltered within a fixed annuity can be the assets they are a bit more aggressive with in their overall portfolio,” Duerr says. “They can do this because the overall assets are protected in the contract by the underlying insurance carrier.”

The couple has enough life insurance, but the real concern is long-term care, Duerr says. Ed has had some health concerns, so they may not both be able to get coverage.

“They looked into purchasing a LTC policy several years ago but determined it was too expensive,” he says. “I would suggest that they reconsider purchasing a policy while they are still young.”