Get With The Plan: March 22, 2009

Couples on the verge of retirement have been hit especially hard by the stock market’s fall, and Dave and Maggie are no exception. Maggie, 63, has already stopped working, and Dave is ready to make the move, but the economy is making him nervous.

‘‘Retiring from my work after 36 years and relying upon the returns of the present and future markets is a scary proposition,’’ says Dave, 58.

The couple would like to sell their New Jersey home and move to Florida for their golden years.

Dave and Maggie, whose names have been changed, have so far saved $1,065,150 in 401(k) plans, $88,400 in IRAs, $152,800 in mutual funds, $38,200 in a brokerage account, $211,600 in Certificates of Deposit, $3,000 in savings and $4,000 in checking.

Dave also has a pension worth $2,750 a month for life, or a lump sum of $450,000.

The Star-Ledger asked James Marchesi, certified financial planner with Mill Ridge Wealth Management in Chester, to help the couple see if they’re ready for retirement.

‘‘Dave and Maggie have a long retirement to be excited about, yet they need to ensure the proper checks and balances are in place to mitigate one of the biggest risks retirees face: outliving your asset base,’’ Marchesi says.

At first glance, it seems the couple can stash all their money in what Marchesi calls SWAN (sleep well at night) investments. But given the projected length of their retirement, they need to stay ahead of taxes and inflation, which means they’ll need some equity exposure. It will be critical to manage the highly volatile markets in the near term, he says.

‘‘The couple needs to develop an unemotional diversification strategy to reduce the concentration of their portfolio represented by Dave’s company stock,’’ he says.

First, if the stock market declines, they should dramat- ically reduce shares and diversify into other quality, liquid companies that are paying stable dividends. Second, if the market rises, they should focus on selling company stock and buy intermediate, fixed-income investments such as investment-grade corporate bonds, Marchesi says.

One of the biggest decisions they face is whether to take Dave’s pension in a lump sum or as an annuitized payout: a $450,000 rollover or a $2,750 per month payment for life with a survivor benefit.

From an actuarial perspective, the longer you live beyond your life expectancy, the better the annuity payment looks, Marchesi says.

‘‘Yet, remember the inflation monster,’’ he says. ‘‘If there is no cost-of-living increase (inflation-adjustment) to the annuity, assuming a high inflation rate of 5 percent, the payout gets cut in half after 14 years.’’

When factoring in either an annuity or a lump sum, Marchesi says the couple look to be in very good shape, providing they can keep their costs in line over the long term. They can target a moderate-to-conservative rate of return for their portfolio to maintain their desired lifestyle with a withdrawal rate of three to four percent.

‘‘An annuity payment removes much of the hassle of how to manage retirement assets,’’ he says. ‘‘In low interest rate environments, however, pension projections require a bigger lump sum equivalent, making it worthwhile to request a confirmation on the lump sum distribution amount.’’

On their intended move to Florida, Marchesi says Dave and Maggie have done a good job of itemizing their expected expenses. He recommends they plan for extra costs that are impossible to pinpoint now, such as increased medical premiums, and they should consider a line of credit as a safeguard.

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