Get With The Plan: March 23, 2014

32314Thomas, 51, and Marisa, 49, have some big-ticket items on their agenda. Before they sell their home and retire, traveling the country in an RV, they want to position their finances to reach all of their goals.

“The biggest concern is the possible loss of my job in the next two years — nothing definite, just paranoia in these times — and paying off my mortgage before that happens,” Thomas says.

They also want to help with their 16-year-old’s college education, and have enough money to enjoy themselves before retirement.

“I do not want to be a slave to my retirement plan if at all possible,” he says.

The couple, whose names have been changed, have saved $826,000 in 401(k) plans, $54,500 in a brokerage account, $200 in bonds, $49,000 in a money market and $3,900 in checking. They also have set aside $9,700 in a 529 Plan for their 16-year-old child, and Thomas expects a monthly pension of about $2,500 at age 65.

The Star-Ledger asked John Zeltmann, a certified financial planner with RegentAtlantic Capital in Morristown, to help Thomas and Marisa set their finances up for long-term success.

He found the couple can actually spend more than they plan in retirement.

“At a projected retirement spend rate of $50,000 per year, their retirement income will more than cover their living needs, resulting in a 99 percent chance that they will have assets remaining at the end of their lives,” Zeltmann says.

They could spend $75,000 a year before their plan begins to enter lower confidence zones, he says. He assumed an asset allocation of 70 percent equities and 30 percent fixed income, with an average annual return of 7.4 percent.

While their 65-and-over years will be comfortable, they may face a problem bridging the gap until age 59½ because the majority of their assets are tied up in retirement accounts.

“Funds taken from retirement plans prior to 59½ will be penalized an additional 10 percent on top of the ordinary taxes incurred due upon withdrawal,” he says.

So going against conventional wisdom, which suggests one should steer savings into tax-deferred retirement plans as much as possible, Zeltmann recommends they build up their after-tax savings. To do this, they can redirect a portion of what they’re currently contributing to their 401(k)s towards a taxable savings account.

Paying off the mortgage is an important goal for Thomas and Marisa, even though many financial pros have told them to consider it “good debt” and be in no rush to pay it off.

“And on the face of it, I completely agree with their advice,” he says. “But my conversation with Thomas helped me revisit the distinction between financial advisers as calculators or textbooks and financial advisers operating with discretion when making recommendations.”

For this couple, Zeltmann says the textbook would tell you that their current interest rate and mortgage balance would suggest they keep plugging payments toward the loan and begin saving toward other goals, such as college or an after-tax savings pot. But given how anti-debt Thomas is, Zeltmann agrees with the mortgage paydown plan, he says.

While the couple has time before needing to make decisions about Social Security, Zeltmann says it will be an important part of their plan.

At 67, Thomas will receive $2,662 per month while Marisa will receive $1,597.

Zeltmann recommends they plan on a “claim now, claim more later” strategy. They will wait until Marisa is age 67, at which point Thomas, then 69, will file and suspend collection of his own benefit. Thomas’ act of filing and suspending will allow Marisa to file what’s called a restricted application, which will allow her to begin collecting her spousal benefit off Thomas’ record until age 70.

Fast forward one year, when Thomas reaches 70, he would “unsuspend” his benefit and begin collecting off of his own record. By delaying until age 70, what was a monthly benefit of $2,662 will increase to $3,321.

Then when Marisa turns 70, she would switch over to collecting her own benefit, which increased from $1,597 to $1,980 during the three years she delayed.

“By pursuing this ‘claim now, claim more later’ strategy, Thomas and Marisa collect $1.49 million of cumulative Social Security retirement benefits,” he says. “If they were to collect upon retirement — assumed 65 for Thomas and 63 for Marisa — the cumulative benefit collected would be $1.02 million, a difference of $470,000.”

Turning to college planning, Zeltmann says the couple will have to pay for tuition out of their cash flow and student loans because they haven’t saved much.

But given how much Thomas hates debt, one might ask why they’d be willing to trade off a mortgage with a 4.25 percent rate with a student loan that may have a higher rate and that isn’t favorable for a tax return.

“Both Thomas and Marisa so vehemently stated how important to them it was to pay off their mortgage that it made sense to pursue that avenue,” Zeltmann says.

The college loan idea remains for another reason. Thomas and Marisa want their child to have some student debt to help him learn to make more responsible financial decisions. With the unspoken intention to eventually help the child pay those loans down, Zeltmann says he agrees with the money lesson plan.

Zeltmann recommends the couple consider long-term care insurance, though he says they can wait until they’re closer to age 60 — when he says the premiums start to increase significantly and more people are denied because of health concerns.

The couple has used an estate planning document preparation service they have through an employer. Zeltmann says that’s fine for living wills, health care directives and durable powers of attorney, but they may want to meet with an estate planning attorney to consider trusts or other strategies.