Get With The Plan: May 27, 2012

Vinny, 53, and Jen, 56, aren’t looking for a lavish retirement. The couple is getting married soon and they’re starting to merge their finances and their goals. They want to buy a modest vacation home and spend time with their children and grandchildren.

“Where do we invest in addition to 401(k)s to ensure we have enough to retire?” Vinny asks. “Also, what age makes the most financial sense for me to retire? I’d like to retire at 63.”

Vinny and Jen, whose names have been changed, have set aside $243,000 in 401(k) plans, $280,400 in IRAs, $6,000 in a brokerage account, $5,000 in savings and $8,000 in checking. They own their home outright and have no other debt, and Vinny will receive a small pension upon retirement.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help Vinny and Jen assess their retirement options.

“They are at a critical age in retirement planning,” Duerr says.

The immediate concern is to adjust their new budget to having only expenses for one primary household. Plus, Jen is in the process of selling her home, which will give the couple an additional $100,000 of assets.

“There overall goal is to use these additional funds to purchase a vacation home,” Duerr says. “While this is a reasonable goal that should be attainable, they need to ensure they stay within their budget of $100,000.”

When they do make a purchase, their budget will need to change once again. Duerr says they will need to factor in the annual expenses related to owning a vacation home – something that many people underestimate until it’s too late.

Both Vinny and Jen contribute 20 percent of their salaries to their respective 401(k) plans. Duerr says they should boost this amount to the maximum. Vinny is close, but Jen has a long way to go.

“This was not feasible prior to them getting married but once they combine households, it makes sense to contribute as much as possible to her retirement account,” he says.

Increasing contributions will do a lot to grow their nest eggs. For example, increasing Jen’s contribution by $5,000 a year, if it earns 5 percent, they’d have an additional $65,000 in 10 years. A $10,000 per year increase in contributions would add $130,000 to the pot over the same time frame.

Given their target retirement age, Duerr says they should stay with an asset allocation of approximately 70 percent equities and 30 percent fixed income, and if they’re feeling more conservative, a 60/40 split would be appropriate. As they near their retirement years, they should re-evaluate their allocation to make sure it’s still within their tolerance level and time frame.

Vinny and Jen each have two children from previous relationships, and they each currently list their children as their beneficiaries on their insurance policies. They plan to change the beneficiaries to each other once they are married.

“It is critical that they address their estates and how they would like to plan for each other as well as their children,” Duerr says.

He recommends they meet with an estate planning attorney to update their wills, powers of attorney, living wills and other documents. They also need to change the beneficiaries listed on their retirement accounts and IRAs.

Vinny has a pension with a former employer. He needs to decide by the end of 2012 whether to take a lump sum distribution of about $30,000 or elect to receive an annuity payment of $300 per month. Duerr says several items need to be addressed in making this decision.

Duerr says Vinny needs to ask himself if he invested the funds on his own, would he be able to get a comparable return that would eventually get him a similar monthly benefit to the pension in retirement.

He also needs to ask whether the pension’s monthly benefit would continue for Jen should he die prematurely.

“There is no right or wrong answer to these questions,” Duerr says. “Vinny needs to determine what are the most important items and accordingly make the appropriate choice.”

Duerr says if the couple continues to focus on saving and if they remain diligent and keep expenses in check, it’s realistic for Vinny to retire at age 63. Still, this is something the couple will need to re-evaluate as they get closer to their target date.

“They can always work an extra year or two if they need to at that time,” Duerr says. “It is certainly more prudent to do this than be forced to attempt to find employment later in life.”

Finally, the couple had concerns about health insurance upon their retirement because they won’t yet be eligible for Medicare. Private policies are costly, and if Vinny’s employer doesn’t provide retiree health care, the couple will have to pay out-of-pocket for coverage.

“Given the state of flux in health insurance currently in the U.S., this is an item that cannot be truly covered at the current time,” Duerr says.