Get With The Plan: March 13, 2011

31311Alexandra, 47, and David, 54, have no heirs to leave their savings to someday. They plan to give whatever is left of their estate to animal charities, but in the meantime, they want to make sure their assets can support their future lifestyle.

“Our biggest financial concern is making sure that we have enough to live on and that I can retire comfortably in 13 years,” Alexandra says. “We are also concerned about possible future medical expenses for David as he has many chronic health care problems and is currently on SSD (Social Security Disability), and we do not want to have to deplete our financial resources, but rather we wish to protect our assets.”

The couple wants to spend half the year in New Jersey and the other half in warmer weather when Alexandra retires at age 60.

The couple, whose names have been changed, have set aside $91,547 in 401(k) plans, $135,163 in IRAs, $302,774 in mutual funds, $70,167 in savings and $1,000 in checking.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Alexandra and David plan their financial future.

Duerr says while their goal of having enough money for retirement is common, their situation is rare because of David’s disability, which makes him unable to work.

“Alexandra is and will continue to be the only one of the two of them working until she retires,” Duerr says. “As a result, she is the only one who will be able to contribute to retirement plans.”

Before even discussing retirement, though, Duerr says there are several issues the couple must address.

“Alexandra does not have any disability insurance. This is a critical item that needs to be addressed as soon as possible,” Duerr says. “Should Alexandra become disabled, the couple would not have an income earner in the family.”

Such an income loss would be significant now and in the long run, so Duerr suggests she buy a disability insurance policy.

Then there’s life insurance. They have none. If Alexandra died prematurely, David might have a difficult time maintaining his standard of living. Duerr recommends Alexandra consider purchasing a term life insurance policy to at least cover them while she is working.

Health insurance, once Alexandra retires, could be an enormous expense because she wouldn’t yet qualify for Medicare.

When she leaves work, she may be able to continue her company health benefits under COBRA, but she’d have to pay the premiums and it wouldn’t take her all the way to Medicare.

Alexandra says she has considered working part time in order to pay for or qualify for medical benefits.

“This is not what she would like to do, but if she had to pay for her 100 percent out of pocket, it would significantly decrease the assets she needs for retirement,” Duerr says.

As they approach retirement, they should budget for private insurance policy costs.

The couple has saved regularly for retirement, and now they have only contributions going to Alexandra’s 401(k) plan and also an IRA. They’re fortunate that they haven’t had to tap retirement assets to pay for David’s care.

“They need to attain a reasonable return on these investments while protecting the principal,” Duerr says. “Luckily, they still have at least 10 years to invest these assets prior to using them.”

In addition to Alexandra’s current 401(k), the couple have several old employer plans and several IRAs. Duerr recommends David roll his old company plans into his IRA, which will give him more flexibility in investment selection.

The couple’s overall retirement goal is to live six months a year in New Jersey and six months in a warmer climate. That means they will be faced with the costs of maintaining two households, which can be a significant cost.

To prepare, the couple has been paying additional principal toward their mortgage each month, and the loan should be paid off around the time Alexandra would like to retire,

“This will help them achieve their goal since once their mortgage is paid off their monthly expenses will decrease significantly,” Duerr says. “However, their retirement income will also be less than what they currently earn.”

Duerr says given their finances, Alexandra and David should consider renting a home in a warmer spot for several months instead of owning. He says this will reduce mortgage and maintenance expenses, and they wouldn’t need to tap their savings for a down payment.

Duerr says the couple would increase their chances of success if Alexandra is willing to work a few more years. This will eliminate or reduce the health care cost issue.

“She should have a 25- to 30-year retirement and as a result, she needs her assets to last that long,” he says. “By working an additional few years, she can save some more for retirement, as well as not use her retirement assets, thus enabling them to last longer.”