Joseph, 65, and Bella, 61, hope to retire in two or three years, but they have some large expenses in the near future. They want to help with college costs for one of their two children, and while there are no wedding rings yet, they want to pay for two pretty extravagant weddings at a cost of $75,000 each.
“We want to help our children, but we want to see that we have sufficient money to last our retirement,” Joseph said. “We envision modest living with travel within and outside the country.”
Joseph and Bella, whose names have been changed, have saved $96,000 in a 401(k) plan, $780,000 in a thrift savings retirement plan, $315,800 in IRAs, $10,200 in Certificates of Deposit, $62,800 in money markets, $111,000 in savings and $5,000 in checking. There is also $36,000 in a 529 Plan for college costs.
The Star-Ledger asked Anthony Vignier, a Kearny-based certified financial planner, to help this couple weigh their big-ticket costs with their long-term retirement plans.
He says their goal of retiring in two to three years is achievable.
“They have to be congratulated for being debt-free, accumulating significant savings and maintaining control of expenses,” Vignier says. “This family is the perfect example that the best plan can be the simplest plan, which involves avoiding debt, living within your means and saving.”
He says Social Security and income from their investments will cover most of their retirement expenses, which will be lower than current expenses because commuting and other work-related costs will be eliminated.
Upon retirement, they have several main goals: travel in retirement, assist one child with education and help both their children with wedding expenses when they arise. Vignier estimates those costs will total $250,000 to $300,000, which they can handle because their regular expenses will be covered.
But there are other areas where the couple can do better.
They have no wills, powers of attorney or health care directives, and they haven’t taken any steps to address potential estate taxes.
“Unfortunately, this is the norm for many people in all walks of life,” he says. “Proper estate planning will guarantee that a person’s wishes are followed on their passing, and it becomes critical if you have small children.”
Also, Vignier says, estate planning helps a family avoid protracted, expensive legal battles. Money does strange things to people, and he’s seen many a close family be torn apart by feuding family members fighting for the spoils of an estate.
First, they need a will, which will direct how they want their assets to be divided and it makes probate easier, he said.
“Probate is the term for the legal procedure that ensures all your debts and taxes are paid and all your assets are divided at your death,” he says.
Another document this couple should consider is a power of attorney for each of them, which could appoint the spouse or one of their children as the agent. Vignier says granting someone a power of attorney will authorize that person to take care of financial matters if you become incapacitated or otherwise incapable of making decisions. It can also be written so that it is effective regardless of incapacity, he says.
“In the event of a spouse’s incapacity, a power of attorney can save a family thousands of dollars in legal fees on guardianship proceedings to appoint an individual as another’s guardian,” he says. “A power of attorney can be as narrow or as broad as you want it to be.”
Also, a person can also limit the powers to the handling of routine finances or to handle all your finances including the purchase and sale of real estate.
The other necessary document is a health care directive, which sets out their individual wishes for medical care and will allow them to appoint another person to make health care decisions for each if one is unable to do so.
The consideration of estate taxes is important for this couple because their retirement analysis shows their assets could grow to $6 million by Joseph’s life expectancy age of 86, and $10 million by Bella’s age 90, Vignier says.
The federal estate tax exclusion amount for 2014 is at $5.34 million, meaning that generally, unless your estate is over that amount, federal estate taxes are not an issue.
But, Vignier says, New Jersey collects both an inheritance tax and an estate tax. An estate valued at more than $675,000 is subject to the New Jersey estate tax.
They should sit with an estate planning attorney to consider strategies to minimize the possible estate taxes.
Another major concern is long-term care.
“The expense associated with long-term care is tremendous and can easily wipe out a family’s savings,” Vignier says. “One hour of home-health-aide care can cost about $20, while the average private nursing home room can cost from $48,000 to $90,000 per year. Neither employer-based medical insurance nor Medicare will pay for this.”
He suggests they look at policies to protect their assets should they need care.
Joseph and Bella have been very conservative with their investments, and they weren’t sure how the thrift savings plan was invested. Vignier says it’s important they know how the money is managed, and upon retirement, they should move it to an IRA.
“When that rollover takes place, they should put in place a true diversified asset allocation strategy that they will be comfortable with,” he said.
Right now, their total exposure to stocks is about 21 percent, which Vignier says they should increase to 30 percent by using a dollar-cost-averaging strategy in which they buy small portions of an investment each month rather than a lump sum.
They have a large stake of their savings in cash, which Vignier says in a low-interest rate environment carries the risk of losing purchasing power because of inflation.
“Increasing exposure to stocks can help offset the loss of purchasing power,” he says. “The easiest way to see the impact of inflation is to compare your food bill from five years ago to what you are spending today to get a good idea of the inflation concept. One hundred dollars will not fill your basket in the same way that it could five years ago.”