They’re hoping for retirement in 10 years, but they also have two children, 17 and 14, for whom college is right around the corner.
They want to help pay for college but they haven’t saved anything for that goal, and they’re worried Brad, who has a physically demanding job, won’t be able to work for much more than 10 years.
“While we are concerned about paying for college, we are not opposed to each of them coming out of college with some student loans,” Tina says. “We envision our retirement as modest — enough money to have a small one-floor home and enough not to be a burden to our children.”
Brad and Tina, whose names have been changed, have saved $40,700 in IRAs, $177,000 in annuities, $24,800 in mutual funds, $10,000 in a money market, $2,500 in savings and $2,500 in checking.
They also have a life insurance policy with a cash value of $156,700.
The Star-Ledger asked Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, to help the couple determine if their goals are feasible.
He said retirement for Brad at age 60 or 61 will be a stretch.
“This goal cannot be accomplished without significant additional retirement savings over the next nine to 10 years, which is unlikely, given their existing budget,” Green says. “Therefore, it is recommended that Brad delay his retirement until age 65.”
Green says there are two main culprits that make early retirement difficult for many couples.
First, early retirees must purchase costly private health insurance until they become eligible for Medicare at age 65 and, second, early retirees who cannot afford to postpone Social Security retirement benefits until full retirement age receive a reduced benefit, which decreases the amount of annual income for the rest of their lives.
But all is not lost. Brad and Tina can make changes to improve their retirement outlook.
The couple say in retirement, they’d consider downsizing to a modest one-story home. That would be a good move.
Their current home is worth $600,000. They should downsize to a home that costs half as much — about $300,000. Green says if they buy a $300,000 home, the couple would have approximately $140,000 (in future dollars) to add to their investment portfolio after paying all closing costs and moving.
He says the downsizing benefits are twofold: they are able to tap into the value of their home for retirement, and their new home will have lower real estate taxes and will be less costly to maintain.
“Their current home is their largest asset and is illiquid unless they implement the downsizing recommendation,” he says.
They also need to pay down existing credit card debt and completely avoid accumulating new debt going forward.
Brad and Tina are eligible to receive unreduced Social Security benefits at the full retirement age of 67, but Green thinks it’s unreasonable to recommend postponing Brad’s retirement that long because of the physical demands of his occupation.
Instead, they should start sooner — at age 65 — despite the reduced benefits.
Under the current plan, if Brad and Tina live past age 85, they risk running out of money.
The couple say they’re conservative investors, and Tina jokes that Brad would prefer to bury anything he earns in the backyard.
Their current portfolio is 25 percent in equities, 69 percent in fixed income and 6 percent in cash.
“Their current allocation appears too conservative for the goals they wish to attain,” Green says. “We recommend a slightly more aggressive portfolio allocation, but one that is still considered conservative.”
He suggests 40 percent in equities, 50 percent fixed income and 10 percent cash.
The couple also need to bolster their emergency fund. Green says as a general rule, families should have a minimum of three months of anticipated expenses. That would be $19,000 for Brad and Tina. Green says he’d rather see double that, or six months of expenses.
“Investments that should be considered for an emergency fund include savings accounts, money market accounts and short-term certificates of deposit (CDs),” he says.
As for college savings, the couple’s current budget doesn’t allow for extra savings for this goal. If they find a way to increase income or to lower expenses, they could save the extra in a college fund. Green recommends 529 plans for those savings.
And if they can’t find the money, they can’t find the money.
“Brad and Tina should not pay for their children’s education using their retirement assets,” he says.
Green examined the couple’s insurance coverage. While life insurance is sufficient, there are other concerns.
Neither has disability insurance, and if Brad became disabled, it would put a crimp in their financial plan.
Green recommends he take a look at some plans — which would help replace income if Brad is unable to work — but Green also notes the cost may be prohibitive under their current budget.
They also don’t have long-term care insurance, and while premiums are not cheap, the cost of not having the insurance could be greater in the long term.
Green suggests they review their family health history to help determine the likelihood of requiring long-term care.
Green also recommends a review of estate planning documents.
“Everyone should have a will, power of attorney, living will and health care proxy, regardless of the size of their estate,” he says.