Get With The Plan: May 1, 2011

Retirement is not a slam dunk for Jon, 62, and Devon, 58. Jon’s currently out of work, and that’s making for a tighter budget. Still, Devon continues to save in her 401(k) plan, and they hope it will be enough to afford retirement.

“Our main goals are retirement at Devon’s age 66 and travel,” says Jon, who hopes to find another job.

The couple, whose names have been changed, have set aside $167,500 in 401(k) plans, $96,300 in IRAs, $119,600 in an annuity, $26,700 in a brokerage account, $263,000 in Certificates of Deposit, $78,500 in money markets, $10,600 in savings and $5,500 in checking.

The Star-Ledger tapped Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help Jon and Devon plan a successful retirement.

“Devon is contributing 25 percent to her 401(k) plan and her employer is matching 6 percent,” Meckler says. “Jon is currently unemployed and is seeking work, but in today’s economy he is not having much luck.”

Jon says if he finds a job, he would continue to work until age 66 and possibly part-time after that. While things are looking up for some job seekers, there are no promises of future employment and Jon could be looking at an early retirement.

Meckler says their current assets, not including their home, are worth about $767,000. Based on their current savings levels and assuming their investments — given today’s asset allocation — perform at historical rates of return, they’d have some $1.29 million when Devon reaches age 66.

Based on their current monthly expenses, including Devon’s 401(k) contributions, something doesn’t add up. The budget indicates the couple is spending about $800 more per month than Devon brings home.

“If Jon does not find a job they will have to dip into their savings to supplement the difference,” Meckler says.

Perhaps a closer examination of their budget, including tracking expenses for a few months, would help the couple come to terms with this apparent shortfall.

For the couple’s retirement analysis, Meckler assumed they’d be retired when Devon is 66, with a monthly income of $6,000 in today’s dollars.

“If we assume a 3 percent inflation rate the current $6,000 need will increase to $7,600 at time of retirement,” he said.

Meckler also assumed Jon and Devon would each begin to collect Social Security benefits at age 66, with a projected benefit of $1,941 per month for Jon and $1,957 for Devon.

Instead of assuming a constant rate of return on their assets, Meckler used a Monte Carlo simulation to evaluate the outcome of their portfolio over time.

“By varying the rates of return and inflation to simulate the fluctuations that can be experienced in the marketplace, a more accurate reflection of the real life ups and downs of the investment environment is presented,” he said.

For the Monte Carlo simulation model, historical performance of the securities market must be analyzed without using historical data for any specific securities. It uses the historical data for broad asset classes such as “small-cap equities,” “long-term bonds” and the like.

“The modeling involves the movement of yields through time and then layers on various equity risk to derive returns,” he says. “This gives a much more accurate analysis as to whether their portfolio will perform as expected.”

For Jon and Devon, the Monte Carlo analysis shows that even at their current asset allocation, there is a 95 percent probability Devon and Jon can retire at Devon’s age 66 and have a monthly income of $6,000 in today’s dollars until her age 91, inflated at 3 percent per year. There was also an 80 percent probability the income will last past age 100.

Still, Meckler recommends the couple reallocate their portfolio. They say they’re moderate investors, but their portfolio indicates a very conservative strategy with about half of their assets in cash equivalents. The retirement accounts, brokerage account and variable annuities are moderate to moderately aggressive.

He recommends they rebalance the entire portfolio to reflect a moderate allocation of 50 percent equities and 50 percent fixed income.

“This would help reduce market risk and smooth out their returns,” he says. “They should definitely keep six months of living expenses in their money market account but should invest the remainder in a well-balanced diversified portfolio.” On the insurance front, Jon and Devon each have approximately $150,000 of life insurance. Meckler says they may want to consider purchasing more — another $250,000 each — for the next eight years until they retire. A 10-year term policy would fit their needs, he said.

Meckler also says they should consider long-term care insurance, because the cost of a care facility could significantly deplete their assets in a short period of time.