“We want to retire early enough so we can enjoy our time together, given our age differences,” said Jill. “We want to be as comfortable as possible, and retire or lower our incomes within the next five to eight years.”
Michael is eight years younger than Jill. Their retirement plan is to move to a warmer
climate with a lower cost of living — as soon as they can afford to.
The couple, whose names have been changed, have saved $20,000 in a 401(k), $138,000 in IRAs, $2,000 in a money market, $5,000 in savings and $2,000 in checking.
They’ve been funding the education bills with their home equity line of credit.
They expect $40,000 more in expenses, but their home equity line, on which they only pay interest, has only $27,000 available.
The Star-Ledger asked Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights, to help the couple balance their two large financial goals.
“Early retirement is more difficult for the following reasons: 1) neither is entitled to a pension; 2) neither is entitled to retiree health benefits pre-Medicare eligibility; and 3) there’s a modest amount saved for retirement,” Maye says.
College costs are eating into the couple’s budget, and the interest-only setup could be problematic.
“It’s obviously not an ideal situation as the principal is not being paid down,” Maye says. “However, they are paying close to $20,000 for college out of cash flow — $13,000 plus $6,600 they labeled as child support, which ends when their youngest finishes college.”
Maye says even with the HELOC fully tapped plus the first mortgage, they do still have equity in their home.
When they retire they could theoretically move to a warmer climate and buy a condo for $138,000 while simultaneously wiping out their mortgage and home equity line of credit, he says.
Either way, the first mortgage will be fully paid off in eight years, which is when they’d like to retire, so Maye says in retirement, even if they don’t sell, the debt should be manageable.
The couple’s cash flow is currently just about at a break-even level. Once college is paid off in 2013, the couple should have an additional $10,000 freed up to fund retirement.
That’s one of many moves Maye determined the couple would have to make if they want to retire at the same time: when Jill is 66 and Michael is 58.
Maye made several assumptions for his calculations: In addition to their $10,000 per year additional investment after 2013, Michael would need to continue to max out his 401(k) each year and Jill would need to save $6,000 in her self-employed retirement plan.
Maye says it would be great if the couple could find more money to fund a solo 401(k) for Jill, but that would involve some sacrifice.
“They could cut their entertainment/vacation expenses of $830 per month and/or some portion of their $550 dining out per month and redirect that to additional retirement savings,” Maye says. “They should take a look at expenses and figure out where to pare back.”
The couple does plan to cut spending in the future, they say, but starting sooner will help them meet their goal of retiring in eight years.
Additionally, Michael would need to work part-time from age 58 to 66, earning approximately $40,000 per year. Health insurance would be a large cost, with an assumption of $5,000 per year until Michael’s age 66. And excluding college costs, Maye assumed the couple would spend $75,000 per year after taxes in retirement.
Maye also assumed their gross return on investments would be 9.33 percent, including an inflation rate of 4.38 percent per year. He also assumed Jill would receive Social Security at age 70 and Michael at age 67.
The projections show with historical returns, their portfolio would be worth about $800,000 at retirement. Under that scenario, they wouldn’t run out of money until Jill is 93.
The plan still includes a lot of “ifs.”
“The couple’s asset allocation is extremely aggressive for a couple that describes themselves as having a moderate risk tolerance,” he says.
Their current portfolio has more than 83 percent invested in equities and, of that, 42 percent is over-concentrated in growth stocks. Their allocation of mid-cap equities is 18 percent, which Maye says is too much.
“They’re underweighted in international equities at 6 percent and have no allocation to emerging market equities,” Maye says. “I would recommend a more balanced, broadly diversified portfolio.”