Get With The Plan: May 12, 2013

51213Mike and Alice have a plan. They just want to make sure it will work.

“My two main goals are to pay 85 percent of my 16-year-old’s college education and I would love to retire at 60 years old,” says Mike, 53. “I will work part-time if I can retire at 60. Alice will work until 60 or 62.”

The couple also want to help their oldest child pay for grad school and take a couple of exotic vacations each year when they stop working.

Their path to retirement is in for a sharp turn, though. Mike’s current job will end in October. He will receive a $445,000 severance package over two years, and he doesn’t have a new job lined up.

But Mike and Alice, 52, are still planning ahead. During retirement, they say they’d like to downsize to a 55-and-older community, and perhaps buy a small condo in Florida and become snowbirds.

The couple, whose names have been changed, have saved $992,000 in 401(k) plans, $75,000 in a brokerage account. $3,000 in mutual funds, $37,000 in savings and $5,000 in checking. They also have $50,000 set aside for college.

Both will receive pensions: Mike will get $7,400 per month at age 60, and Alice will receive a monthly payment of $2,000.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help Mike and Alice review their retirement outlook.

Pallitto says Mike’s large severance package is like receiving his full salary for two more years after his job ends.

“He hopes to find another job next year making a comparable salary but I discussed planning for his retirement goals assuming that he finds a job earning half of his current salary,” Pallitto says.

He says the couple is very fortunate to have worked for employers who provide a pension in addition to employer retirement savings plans.

“In eight years when they are both 60, they will be receiving over $9,400 a month, or $112,800 per year, which means they would only have to take out about $80,000 from their (employer retirement plans) for a year-and-a-half until Mike turns 62,” Pallitto says.

At that time, Mike can collect $2,200 a month from Social Security and six months later, Alice could collect $2,000, which means they would only have to draw $30,000 a year from their retirement savings plans.

“The income appears to be in place to make their retirement dreams reality,” he says.

Pallitto says he used a lower $12,500 per month budget because after talking to the couple, there were some duplications in their submitted budget.

“Their monthly expenses include $2,300 for mortgage and taxes plus an additional $1,000 of education expenses,” he says. “I believe that once they retire they will continue to spend about $150,000 a year but rather than mortgage, taxes and education, it will be spent on vacations and leisure.”

Given that the couple thinks they will downsize their home in a time frame between when their youngest child starts college and when they actually retire, Pallitto says a mortgage refinance could be a smart strategy.

Their current loan is at 4.5 percent interest. They could refinance to a seven-year adjustable mortgage with an interest rate of about 3 percent, which would reduce their monthly mortgage and tax payments from $2,300 to $1,700 per month.

The couple has accumulated retirement assets of nearly $1 million. Alice adds $11,000 to her account and Mike plans to add $15,000 this year.

“Assuming a 5 percent growth rate over the next seven years and the additional contributions, they should have about $1.6 million in retirement assets when they retire,” Pallitto says. “If they need to withdraw $6,500 a month to cover living expenses from age 60 to 62 … they would not dip into principal and once they start collecting Social Security they would have more discretionary income.”

Based on the current and projected spending, current income and their assets, they should be able to retire as planned, Pallitto says.

“They have the assets needed to meet their goals and although they say their risk tolerance is aggressive, I would suggest a more prudent approach,” he says. “They have seen a significant market run-up and it is time to take the profits.”

The couple’s current allocation consists of 70 to 75 percent equities and 25 to 30 percent bonds. Pallitto recommends a near flip-flop of 30 to 35 percent equities and 65 to 70 percent in fixed income.

“There is no need to gamble with their retirement savings,” he says. “The downside risk to this market is far greater than the upside potential.”

Pallitto says if their retirement assets drop 15 percent, it could derail their retirement plans.

Of their brokerage account, nearly 100 percent is invested in one stock. He recommends they reallocate into a more balanced strategy.

The $50,000 they have set aside in a 529 college savings plan is not enough to cover the entire cost of their child’s education, but their current budget does include $1,000 or education costs, he says. They are unsure of where their child will go to college, Pallitto says, but there are items in their budget that are estimated on the higher side, so college should not be an issue.