Get With The Plan: March 21, 2010

32110Ryan, 59, and Katie, 52, finally have an empty nest. The Union County couple raised five children, who are all on their own now. It’s time for Ryan and Katie to concentrate on their own futures — which to them means a dream cottage on a beach in Florida.

‘‘Saving for retirement is our biggest challenge right now, where to put the money and how much do we have to save to get there,’’ Katie says. ‘‘Our youngest child has left home about one year ago, and after raising and supporting five children, I finally said to myself, ‘We have to think about us now!’ ’’

The couple, whose names have been changed, have saved $168,000 in 401(k) plans, $71,186 in IRAs, $4,935 in mutual funds, $55,000 in certificates of deposit, $27,000 in savings and $10,000 in checking.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to assess if the couple’s dream to move to a beach in a warmer climate is a realistic one.

‘‘The couple has done a very good job budgeting and monitoring expenses, which will help them stay disciplined during retirement,’’ Marchesi says.
He said if they focus on saving and investing until retirement, Ryan and Katie have the ability to further build their retirement asset base. Today, they’re saving more than $17,000 a year for retirement, counting Ryan’s employer match.

They have the ability to save even more. They have free cash flow of about $2,700 a month after paying expenses. Those dollars could be earmarked for investments, and in 26 months, that amount will increase by 40 percent when their mortgage is paid off.
But the mortgage and their car loan are both at high interest rates. Marchesi says the may want to consider using money from their CDs, which mature this month, to pay the loans early, because the short-term interest rates they’d get by rolling over the CD would be far lower than what they’re paying in interest. Alternatively, he said if the couple set up a low-interest home-equity line of credit with no closing costs, they could pay off the mortgage and car loan while reducing interest payments by more than $100 per month.

‘‘With an interest-only line of credit payment, the couple could make the appropriate payment toward loan principal to stay on track to pay off the loan in two years,’’ he said. ‘‘If interest rates rise dramatically, they should pay off the loan sooner.’’


Ryan and Katie are thinking about moving to Florida, where they already have purchased land for their dream cottage. Marchesi said before they make the transition, costs must be figured and accounted for.

‘‘Selling a home, moving belongings and building a new residence is a very involved scenario that usually stresses all assumptions involved — euphemism for ‘it might cost more than you think,’ ” Marchesi says.

If they stay on track with savings and investments, their asset base — projected to be more than $600,000 at retirement — and Social Security benefits should be able to meet their expense level with a reasonable long-term target rate of return, Marchesi says, largely due to their hard-lined spending habits.

When their debts are paid off in a couple of years, the expense hurdle would become much lower, Marchesi says.

With a target return of 5.5 percent on assets, the couple’s investments are projected to provide $2,175 per month, net of inflation and taxes, over a 30-year period. Add in their combined Social Security benefit estimates and they should be able to maintain their anticipated lifestyle, he said. If Katie works a few extra years after Ryan retires, that will lower the distributions from their investments and make their savings last longer.

On investments, like most savers, their plan was compromised during the upheaval of the recession. They used to be aggressive investors, but now their outlook is more moderate, they say.

‘‘Many investors had a gut check regarding their tolerance for volatility beyond the norm,’’ Marchesi says. ‘‘Pre-retirees need to comprehend this issue and make sure they keep their long-term assets, which are prone to be the most volatile, in the bucket that is needed down the road, and not needed tomorrow.’’

Their asset allocation is 33 percent short-term assets, 18 percent fixed income and 49 percent equities. Marchesi says while this mix of investments should in the long run produce a target rate of return that will enable them to meet their needs and goals, the couple’s investment policy needs to be contested periodically.

‘‘The couple needs to maintain their conservative stance on short-term assets, yet can diversify the holdings in that space to increase current yield,’’ he says.

Marchesi says a few revisions to their equity allocation should be considered. Of their stock investments, 93 percent is in U.S. investments. They should think about deploying some of those dollars to other markets tied to foreign economic output, including emerging economies.