“We’re trying to earn income from all the available funds while minimizing risk,” says Brad, 61. “We plain old do not know where to put money, but we’re adverse to more risk after a major loss years ago.”
Brad is currently on disability and is essentially retired, while Janet, 61, plans to retire in the next few years.
The couple, whose names have been changed, have saved $588,300 in 401(k) plans, $299,500 in IRAs, $188,000 in a cash balance plan, $39,500 in annuities, $109,000 in mutual funds, $13,500 in a brokerage account, $65,000 in savings bonds, $149,000 in Certificates of Deposit, $190,000 in savings accounts and $39,000 in checking.
The Star-Ledger asked Sean Keating, a certified financial planner with Patriot Financial Advisors in Eatontown, to help Brad and Janet plan their golden years.
“Brad and Janet have done an excellent job saving for their retirement,” he said. “I do not believe they will have any cash flow shortfalls.”
Taking a look at their savings, current income and expenses, Keating says they have room to maneuver.
“After taking in to consideration which expenses will increase and which will decrease during retirement, I then used 3.75 percent inflation to estimate the growth of their living expense,” he says. “I also included one time expenses such as extra traveling.”
If Janet was to retire at 65, Keating says they would have to use roughly $85,000 per year, which also includes some short-term goals such as purchasing a car and some home updates.
This income level will allow them to still increase their retirement portfolio while taking the distributions, he says.
“By keeping the withdraw rate on the investment accounts at 3 percent, the income will continue to stay ahead of the expenses with a conservative pre-tax rate of return of about 5.22 percent,” he says.
In retirement, their lifestyle changes would include some additional travel and possibly relocating to Florida. If they were to relocate, selling their New Jersey home would easily cover the cost of purchasing in a warmer climate, he says.
“The present spend rate does not include touching the principal in the investment,” he says. “They would be able to withdraw an extra $50,000 per year from their investments and not run out of funds before the age of 95.”
But that doesn’t mean there aren’t changes that would benefit their long-term plan.
Consolidating investment accounts is one place they could use some work.
Keating says there are a large number of different accounts which have similar investment strategies.
For example, he says they may want to consolidate their savings accounts and multiple Certificates of Deposit, which are held at varying institutions. He says consolidating will make it easier to keep track of the accounts, and could even give them better interest rates.
“Given the fact that they have such a large portion of cash equivalent investments, it may be in their best interest to take a little more risk in one of their accounts,” he says. “Knowing that they have substantial assets, this will allow them to invest knowing they can absorb some market downturns without risking their retirement lifestyle or dates.”
Same goes for consolidating their mutual fund holdings.
“One strategy for reducing the management costs would be to purchase exchange-traded funds which replicate some of the funds,” he says. “These can be purchased in the same manner as a regular stock and have lower overall costs.”
Using an S&P fund, for example, Keating says they are paying management and transaction fees, but purchasing an S&P 500 exchange-traded fund would reduce those fees and not increase the amount of risk.
Taking a look at Janet’s cash balance plan, she has an option of taking a lump sum or annuitizing. She’d get better returns by taking the lump sum, Keating says, but because she’s a conservative investor, he says she may be better with the life-only annuity option.
“Given the income stream this generates, in combination with the other guaranteed income streams, there will be little pressure to use the principal of their core investments to maintain their current lifestyle,” Keating says.
Another area of concern is the couple’s lack of long-term care insurance, and because Brad is on disability, it may be difficult for him to qualify.
Keating says the couple should review some annuity products which provide a long-term care benefit rider. These products may increase the payout for up to five years should Brad or Janet require such services, which can range from between $90,000 and $125,000 a year in New Jersey.
“Long-term care costs are the biggest threat I see to their estate at this point,” Keating says. “This will help to protect assets if the need arises and allow for time to properly re-title and move assets as necessary.”
Given that they have no children, Brad and Janet should think about who will benefit from their estate. Some couples agree on a charity to which they may leave a sum of money as a legacy, or they may consider relatives they have had a close relationship with, such as siblings or cousins.
“One very important thing is for these intentions to be documented and people know where to find these documents,” Keating says. “It is hard to lose a family member, but having to try and understand what their final wishes are and avoiding possible family fighting over those intentions, will make it easier on those left behind.”