Get With The Plan: May 18, 2014

51814When her father died a few years ago, Aggie, 59, came to live with and take care of her mother.

“I lived paycheck to paycheck,” she says, noting that now her expenses are very low and she’s finally able to save more. “I am not sure if I have invested correctly. With the economy having ups and downs, some of my money has gone down with the economy.”

She’s wondering if she’s saved enough to retire to Florida in five to seven years and buy a home there.

“In retirement, I want to be comfortable, have the house paid for and maybe travel and not live Social Security check to Social Security check,” she says.

Aggie, whose name has been changed, has saved $53,700 to her 401(k) plan, $69,600 in IRAs, $60,800 in mutual funds, $17,700 in her employer’s stock, $3,100 in savings and $1,100 in checking.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help Aggie determine when she can retire.

First, Lynch took a look at her budget and saw there’s lots of money that’s not accounted for.

Her budget is about $750 per month not counting taxes or investments. She saves $4,000 per year in her 401(k) and another $6,500 per year in a Roth IRA with a financial adviser.

“Where is the rest of the money going? We are missing around two-thirds of her income,” Lynch says. “It is very difficult to help her budget for retirement, as I really do not have a budget for now.”

He suggests she carry a notebook with her for two months and keep records of every outflow of money. She has to figure out where that money is going.

Next, even though Aggie isn’t paying rent, he recommends she pay rent to herself. Then if her living situation changes, she will have been living below her means.

Lynch took a look at her investments, and he says she should increase her investments to her 401(k) and for now, abandon new contributions to her Roth IRA.

“A Roth works if you end up in a higher tax bracket, not lower or the same,” Lynch says. “Right now, she is barely in the 25 percent tax bracket and she is thinking about potentially retiring to Florida, which does not have a state income tax.”

Lynch also examined her relationship with her financial adviser.

“If you have a lot of money, you can get great advice — that includes top financial planners, CPAs and attorneys,” he says. “If you do not have a lot of money, it is very hard for someone that is educated and well-trained to justify the cost of working with an individual who has less. That is not being a bad person, just being a business owner.”

So for people like Aggie, if the investment options with an employer plan are good ones with low costs, he’d recommend they maximize the use of a 401(k) before looking for other options.

Aggie also isn’t sure what she’s paying in investment fees, but Lynch notes she has “B” and “C” shares, which are often more expensive.

“Think of this as the guy on the corner in New York City, spinning three cups real fast and one cup has a peanut in it. There is always a peanut. You just need to find it,” he says. “Financial services is the same, but you need to ask that person that you are with how much they charge on an annual basis for the services. How do you get value if you do not know what you are paying?”

Aggie’s hopes to retire in five to seven years are at risk, Lynch says, on several levels.

First, at some point she may inherit between $150,000 and $200,000 from her mother, including her share of her mom’s home.

“The problem is that Mom is 84 years old, and at some point she may need care, which can be very expensive,” Lynch says. “Also, if Mom needs care and Aggie has to help, that may impact her ability to make income as well.”

Lynch says he likes the idea of Aggie moving to Florida when she retires because it costs less than living in New Jersey.

Even with lower expenses, Lynch says Aggie needs to delay her retirement age so she can increase her retirement income.

For example, if she retires at age 66, her investment accounts will be worth about $371,000, assuming a 7 percent rate of return. That would give her $14,867 in annual income, assuming a 4 percent drawdown rate. If she instead waits until age 70, her accounts would be worth $531,000, which would yield $21,263 of income.

Lynch cites a 2013 Morningstar study that found that while 4 percent withdrawal rates have been the conventional wisdom to be sure you do not run out of money, a 2.8 percent rate would give an investor a 90 percent chance of success instead of just a 50 percent chance of success.

“What does this mean? People are taking too much income in retirement and have a very good chance of running out of money,” Lynch says. “It is much better to work a few years more in your 60s than looking for a job in your mid-80s.”

Aggie’s decision on when to take Social Security is also vital to her success. Her estimated benefit at age 66 is $21,804 per year, but waiting until age 70 would increase her benefit by about 32 percent.

“Generally, the break even between taking Social Security early or later is around age 78 to 79,” Lynch says. “If your family generally lives longer than that, it makes more sense to push this off.”