Dan and Perri, both 53, have raised three children from babyhood through college, and now they’re planning for retirement. They’d like to stop working in a few years, but they want to make sure there will be enough money to maintain their current standard of living.
“We would like to downsize our current home locally, and obtain a small home or condominium down south without a huge mortgage,” Perri says. “Our goal is to spend the colder months down south and the warmer months up north.”
They’re also focused on paying down their mortgage.
The Mercer County couple, whose names have been changed, have saved $280,000 in 401(k) plans, $6,500 in IRAs, $22,700 in a brokerage account, $49,000 in a savings account and $9,600 in checking.
The big nut is their anticipated pensions. At age 55, Dan will be eligible for an $86,800 per year pension from New Jersey that includes retiree health benefits. After that, he plans to work part time earning $35,000 to $40,000 a year. Perri will earn two small pensions from former employers at age 62, which have a value of $67,000 today. She’s unsure of the monthly benefits.
The Star-Ledger asked Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights, to help the couple evaluate their retirement income options.
“Given the State of New Jersey’s finances, the biggest risk to the couple’s retirement is what happens to Dan’s pension,” Maye says.
Maye ran several projections to see how different scenarios would affect the couple’s ability to retire and maintain their current standard of living.
First, Maye assumed Dan’s pension would be paid with an inflation adjustment starting after 24 months. Next, he ran the same scenario without the inflation adjustment. And finally, he looked at what would happen if Dan worked part time from 2013 through 2018.
Overall, the news was good.
“Assuming no changes are made to Dan’s pension benefits, the couple is on target to maintain their current lifestyle during retirement,” Maye says. “Assuming Dan’s pension is not inflation-adjusted, the couple’s projected after-tax retiree spending is projected to be 90 percent of their current after-tax spending, which is very good.”
And if Dan decides to work part time for a few years after his retirement, they will probably be able to maintain their pre-retirement lifestyle, he says. His additional income would make up for the potential lost inflation adjustment for the future pension.
Paying off the mortgage is a main concern for Dan and Perri, but Maye says Dan’s pension means the couple will have strong cash flow to make their mortgage payments in retirement.
“I do not recommend the couple accelerate the payment of their mortgage given their cash flow and the mortgage’s relatively low rate of 4.375 percent,” he says.
If Dan and Perri decide to trade down to a smaller home in New Jersey and purchase a winter home, they just have to closely monitor their spending levels.
If they can make the purchases and spend no more than $85,908 per year, Maye says they should be able to afford it.
The couple currently has roughly eight months of expenses set aside in their liquid bank accounts. The couple should add to this reserve, Maye says. All of their excess cash flow should go to this reserve account to cover future expenses when Dan retires.
Maye also took a look at the couple’s insurance needs.
The possibility of Dan’s premature death is a big risk for the stability of Perri’s finances. She’ll still receive Dan’s pension benefit for life, but if he dies before age 65, Perri will no longer have health insurance through her husband. That means she’d have to buy costly private health coverage until she’s eligible for Medicare at age 65.
She’ll also have to pay the mortgage.
Dan has sufficient life insurance now, but once he retires, his life insurance coverage will drop to $113,000. Maye says because Perri would still have a mortgage and the cost of private health care, Dan should buy a term policy with a $200,000 benefit to help Perri pay those bills should be die prematurely.
The couple’s current asset allocation is roughly 56 percent equities and 44 percent fixed income. That’s close to where they should be, but Maye would like to see an even 50-50 split.
Additionally, they need more diversification with alternative asset classes, such as international bonds, REITs and natural resources.
Maye also recommends Perri make one more move. She currently contributes $16,500 a year to her employer retirement plan, but now that she’s over age 50, she can save an extra $5,500 a year.