Get With The Plan: May 15, 2011

51511Carrie, 47, knows what she wants after working hard her entire career — less work, more play.

The question is when, or if, she can stop working.

“I would like to know when I can move from my current job into a part-time or approximately $30,000 per year job, relax a bit, and still have more than enough money for retirement,” Carrie said.

After she leaves her full-time job, she’d like to work part time for four more years, and then move to a warmer climate and live on the water, traveling a few times a year and volunteering instead of needing to work.

Carrie, whose name has been changed, has stashed away $342,500 in 401(k) plans, $82,200 in IRAs, $160,000 in a cash balance pension, $62,300 in mutual funds, $17,700 in a money market and $25,500 in checking.

The Star-Ledger asked Reed Fraasa, a certified financial planner with Highland Financial Advisors in Riverdale, to help Carrie determine if an early retirement, or a part-time retirement, could work for her.

Fraasa says Carrie’s good salary and healthy savings habits of maximizing her 401(k), and saving in IRAs and mutual funds have given her a nice nest egg. But there’s lots of risk to her financial plan as it stands.

“Her investment portfolio is currently a high-risk profile,” Fraasa said. “We examined her current allocation and see that an estimated 90 to 95 percent of her portfolio is allocated to equities (stocks) which is overly aggressive considering her risk tolerance and financial capacity to tolerate risk.”

Fraasa recommends she shift to a moderate to aggressive allocation of 80 percent equities and 20 percent fixed income for the next few years, until she reaches retirement.

At that time, she can pull back to an allocation of 70 percent equities and 30 percent fixed income.

But the problem is more than just the stock-bond breakdown, Fraasa said.

Carrie’s current allocation is highly overweighted in large-cap domestic equities, specifically growth equities.

Fraasa says a more diversified portfolio across all asset classes would be a better strategy to help Carrie reach her target return with less risk.

“Between these two adjustments to the portfolio, she should be able to maintain a similar return with about one-third less risk,” Fraasa said.

Considering Carrie’s current goal of retiring at an early age, Fraasa said, she should be maximizing every opportunity to build wealth using the current surplus of cash she has every month.

Based on Carrie’s budget, she should have between $2,000 and $2,500 a month in positive cash flow.

Fraasa said she should set up a Roth IRA and fund the maximum each year (currently $5,000 in 2011) and she could use the balance of about $15,000 to $20,000 to build up her after-tax diversified portfolio.

Next, Fraasa analyzed Carrie’s specific goals. The ideal goal of retiring in three years, then working part time for four years at $30,000 and maintaining her current lifestyle is a real possibility. If Carrie changes her asset allocation and saves every spare penny, Fraasa said, she has a 90 percent chance of success.

Then she wants to move south in seven to 10 years, selling her New Jersey home and buying a new one for about $450,000. Fraasa found this plan also had a 90 percent probability of success.

“In fact, she could make the move in three years and work part time in those areas for the four years,” he said. “The only consideration is whether she could earn the $30,000 a year in those regions.”

But even earning $20,000 a year for the four years still has a very high probability of success, Fraasa said.

The cost of private health insurance would be an enormous change to the outlook of Carrie’s plan.

She’s eligible for retiree health benefits from her current employer, but whether these benefits would change, or how they could change, before she retires is unknown.

“The time period from when she retires in 2014 (age 50) to when she receives Medicare in 2029 (age 65) is of concern,” Fraasa said.

He ran the numbers, assuming she’d have to pay the full cost of individual coverage until age 65, with a cost of $800 per month until 2018, and then $700 a month while she lives in the South from 2019 to 2029, which is when she’d qualify for Medicare.

He also inflated the cost of medical premiums.

With those expenses, if Carrie implements Fraasa’s other recommendations, she has a probability of success of 79 percent, and only a 55 percent chance of success if she doesn’t implement the recommendations.

As for long-term care insurance, which would cover nursing home and other care should Carrie need it, Fraasa says she probably doesn’t need it.

“Since she has no one depending on her for survivorship needs, she has no children and she has enough assets to support herself, in our opinion, the premium for LTC would not be recommended,” he said. “LTC is not appropriate for everyone.”