Get With The Plan: May 18, 2008

Michelle hasn’t had the easiest financial life. The 45-year-old single woman lost her job last year and, without family to depend on, she had to live off early withdrawals from her 401(k). She depleted her $30,000 in savings, but now she has a job and is starting fresh, looking toward retirement.

‘‘I want to be able to purchase a modest home in an older retirement community when I’m 55,’’ Michelle says.

She plans to work until age 67 or 70, and then she hopes to retire, living off her 401(k), Social Security, income from a future reverse mortgage and, if necessary, some part-time work. She also would like to take a vacation, which she says she hasn’t done in 15 years.

Michelle, whose name has been changed, has $6,200 in her 401(k) plan and $2,000 in checking, which she calls her emergency fund.

The Star-Ledger asked Michael Pirrello, a certified financial planner with Summit Asset Management in Florham Park, to help Michelle plan for the future.

‘‘Michelle is having a difficult time financially and is having a tough time just making ends meet,’’ Pirrello says. ‘‘A common financial goal like saving for retirement seems unattainable, but for Michelle, there is light at the end of this tunnel.’’

First, Pirrello says Michelle has to address the fact she hasn’t had a vacation in 15 years. He says most weeks, she works seven days a week and she certainly deserves a vacation. Michelle’s budget is tight, so Pirrello says she needs to manage her vacation expectations and begin budgeting.

He suggests she create a separate vacation account and save $50 per week, which will accumulate $2,600 on a yearly basis. Then, she should try to take an underbudget vacation, and then use the extra to roll into the following year’s vacation budget. This would allow her to cut back on the $50 savings each week. If this is truly a priority, as it should be, Pirrello says, then Michelle can make sacrifices in other areas, such as eating out.

Next, Michelle’s emergency fund. She has $2,000 in her checking account for unforeseen expenses. A proper emergency fund for Michelle would be $28,000, or six months’ worth of expenses. Because Michelle’s budget won’t allow for that kind of savings, Pirrello recommends an equity line on her home. He says discipline is vital here, and the equity line is strictly for emergency purposes.

Retirement is Michelle’s biggest challenge. After depleting her entire 401(k) plan when she was out of work, Michelle is back in the savings game. Pirrello says the key not only rests with her, but also with her company’s very generous matching policy. Michelle’s company matches 125 percent of her contributions up to 6 percent of her salary. For example, if Michelle saves 6 percent, or $3,360, her employer will contribute $4,200. That match will make a huge difference in her bottom line for retirement.

Additionally, because Michelle is getting a late start with her retirement savings, she needs to be aggressive. If she can at the very least increase her contributions to 7 percent of salary, along with her employer match and a rate of return of 8 percent a year, Michelle will be able to retire comfortably at age 69 on 70 percent of her last working year of income, which would equate to $77,365 in her first year of retirement, Pirrello says.

Michelle’s goal is to downsize into a retirement community at age 55 and continue working until 67 to 70. Pirrello says when she purchases her new home at age 55, she should be able to afford a significant down payment from the proceeds of the sale of her previous home. The remaining balance can be financed with a 15-year mort- gage so the home will be paid off when Michelle reaches age 70.

‘‘Having a home fully paid in retirement will be a benefit to Michelle as it will provide a resource from the standpoint of a home equity line or reverse mortgage if necessary,’’ Pirrello says.