Get With The Plan: May 11, 2008

Justin, 56, and Cara, 55, are putting their financial resources toward retirement. They hope they can stop work when Justin is 65. Their three children will soon be out of college — one has graduated, another is graduating this spring and a third has one more year to go.

‘‘It’s like a light at the end of the tunnel,’’ Justin says about the coming end of college bills. ‘‘Now, we’re making sure that we have enough in the retirement accounts to last us.’’

The Warren County couple, whose names have been changed, have saved $475,545 in 401(k) plans, $120,574 in IRAs, $14,015 in college savings accounts, $8,000 in a savings account and $2,500 in checking. While they still have a mortgage on their primary home, they own their vacation property debt-free.

The Star-Ledger asked Greg Plechner, a certified financial planner with Greenbaum and Orecchio in Old Tappan, to help the couple assess their financial situation.

‘‘Because we are forecasting to a retirement age of 65 for Justin and 66 for Cara, cash flow deficits begin in 2018,’’ Plechner says. ‘‘Based on current saving strategies, their ‘level of wealth,’ or the size of invested assets, does not appear sufficient to ensure the long-term viability of their financial plan.’’

Here’s the breakdown. Based on the couple’s anticipated spending, they will have annual cash flow surpluses for the next nine years. But in 2018, the couple would be living off their investment income and Social Security — but that won’t be enough. The cash flow deficits will have to be satisfied by withdrawals from principal.

But nothing is a done deal. This outlook, Plechner says, depends on the couple’s budget and by estimates of taxes, inflation and a 6 percent average rate of return, plus the expense of a new auto purchase for $30,000 every five years beginning in 2013. Using a Monte Carlo simula- tion, a computer-generated analysis that compares the couple’s situation hundreds of times under different variables, their chance of success is only 16 percent.

There are steps the couple can take to improve the forecast, starting with maximizing Justin’s 401(k) with catch-up contributions. He’s saving 10 percent of his salary with a 3 percent employer match. For 2008, he is eligible to contribute $15,500 and an extra $5,000 catch-up contribution for those over 50.

Plechner says the couple should also save more cash in a tax-efficient taxable account. This is partly because they’re not eligible for a Roth IRA because of their income level and they can’t deduct a traditional IRA.

‘‘This approach will help build wealth separate from the qualified and IRA account types,’’ Plechner says. ‘‘This will allow for future withdrawals to be taxed at long- term capital gains rates, which is more beneficial for retirement spending than ordinary income rates.’’

These changes would increase the couple’s chances for success to 62 percent — a big improvement, but Plechner would like to see them take additional steps to improve the success rate of the financial plan. This could be done by working part time in retirement, reducing expenses or selling the vacation property, he says.

Plechner also has recommendations for their investments. They hold several Fidelity Freedom funds, which invest in other Fidelity funds. Plechner says this creates overlap within the holdings.

A close look at the current overall portfolio shows 64 percent equities, 19 percent bonds, 9 percent cash and 7 percent classified as other. Plechner says the couple could reach a similar allocation by simply investing in the Fidelity Freedom 2025.

Plechner says exposure to different areas of the stock and bond market reduces risk, so the couple should consider alternative asset classes.

If the couple start saving in taxable accounts, he has some additional suggestions for portfolio allocation. They should try to locate tax-inefficient asset classes (such as inflation-protected bonds or real estate) in retirement accounts so that current income taxes are deferred.

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