Get With The Plan: March 9, 2014

3914Mike, 46, was diagnosed with a potentially fatal illness last summer. While he’s undergone treatment and is doing significantly better, the future is uncertain for him and his wife, Donna, 47.

“It has changed my outlook on life and has impacted my life in terms of eating, sleeping and working,” said Mike, who isn’t sure he’ll be able to continue in his current job because of his health.

“I want to ensure I am doing everything I can to maximize my savings to ensure if something happens, we can cover our bills for the next 12 to 18 months,” he said.

Also, he says, if his illness returns, he wants to make sure Donna will have enough money to maintain her lifestyle.

The couple would like to retire when Mike is 55, and they hope to spend winters down south and summers in New Jersey. They already own a vacation home, and they want to know if they can cover all the bills, even with health and employment uncertainty.

Mike and Donna, whose names have been changed, have saved $623,800 in 401(k) plans, $45,500 in IRAs, $110,400 in a brokerage account, $190,600 in mutual funds, $15,000 in bonds, $259,000 in savings and $9,000 in checking. Mike also has $53,000 worth of stock options. 

The Star-Ledger asked Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany, to help Mike and Donna analyze how their finances can support their goals.

Green says his analysis shows Mike and Donna should be able to accomplish their goals.

“Foremost, they should be able to retire at their desired ages of 55 for Mike and 56 for Donna,” he says. “In both the current scenario and the proposed scenario, their retirement assets are projected to never be fully depleted.”

But there is a big difference in their projected probability of success.

The couple’s current plan gives them a 57 percent chance of not running out of funds in their lifetimes. Not bad, but not a slam dunk.

But, if the couple take Green’s investment and other recommendations, their chance of success rises to 76 percent — a much better shot.

“We prefer the probability of success to be in at least the 80 to 90 percent range,” Green said. “If you postpone retirement, each additional year Mike and Donna both work is estimated to increase the probability of success by 3 to 4 percent.”

An important factor in the success of the plan is investment performance.

Green says the couple’s current asset allocation is 95 percent equities and 5 percent fixed income.

A well-diversified portfolio reduces the risk of having all your eggs in one basket, he says, so a proper asset allocation helps maximize one’s rate of return for the level of risk that is within their comfort zone.

Mike and Donna are both still young, he says, and they have several years until retirement, so they can afford to take a moderately high degree of risk in their investment portfolio.

“The rate of return received from investments will impact the plan significantly,” Green says. “Because Mike and Donna have so many years to grow their assets, the power of compounding can work for them and improve the chance of the plan succeeding.”

He suggests they rebalance their investment portfolio to achieve a fully invested target of 89 percent equities, 7 percent fixed income and 4 percent cash and cash equivalents.

The next big deal is where the couple call their legal residence in retirement. Green says it’s important for the success of their financial plan to be sure that Florida, and not New Jersey, is their legal state of residence.

“There are significant income and estate tax benefits for Florida residents,” he says. “To avoid New Jersey taxation as a resident, Mike and Donna must establish Florida residence and prove they spent 183 days or more each year living in Florida. Changing their residence to Florida from New Jersey is estimated to add approximately $500,000 to their lifetime net worth accumulation.”

But while they’re still working, Green recommends Mike maximize his employee deferral contribution to his employer-sponsored 401(k) plan. This will allow maximum tax-deferred savings as well as the maximum employer matching contribution, he says.

In addition, all surplus saving funds should be invested in a diversified portfolio rather than in bank savings or checking accounts.

“It’s important to the plan that these assets have the potential to grow at a rate greater than inflation,” Green says.

He also looked at the possibility of completing a Roth IRA conversion for both of them. But, the result when doing the conversion did not improve the probability of the plan succeeding, or the total net worth at the end of the plan. Therefore, a Roth IRA conversion is not recommended at this time, Green says.

Green also recommends both Mike and Donna defer taking Social Security benefits until age 67 — their full retirement age.

“The total net worth at the end of the plan is projected to increase by approximately $530,000 if they wait to receive unreduced Social Security benefits,” he says.

Mike has $875,000 of life insurance coverage through his employer, and his illness might make it hard to get any additional life insurance.

Green says that Donna, who only has $25,000 of coverage, should look into getting additional life insurance. He recommends a 20-year term life policy with a benefit of $285,000, which would help bridge the gap between now and the time Social Security benefits start.