Chris and Bev both work for the state of New Jersey, and they plan to take retirement in 2011. They’d like to move to Florida, where they already own a house, but they have lots of questions about their pensions and their savings plans.
‘‘We’re thinking of converting our employer plans to Roth IRAs over the next 10 years once we retire, with the intention we would not expend these monies and eventually use them as a tax- free inheritance to family and organizations,’’ said Bev, 50.
The couple, whose names have been changed, hope they can pay living expenses from their cash savings, pensions and, eventually, Social Security. They’ve saved $500,000 in deferred compensation plans, $75,000 in 403(b) plans, $325,000 in annuities, $275,000 in Certificates of Deposit, $150,000 in a money market and $25,000 in checking.
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 see if their resources will meet their retirement needs.
‘‘Chris and Bev have put themselves in a great position for having a financially secure retirement,’’ he said. ‘‘Their pensions and Social Security benefits are easily projected to cover their retiree living expenses.’’
In addition to their pensions, their future success also will be helped by their state retiree health benefits. They also have long-term care insurance, which will go a long way for the couple’s budget should either of them need it.
The big choice facing the couple is a decision about pension payout options. If they both chose the 100 percent survivor option, which would continue to pay 100 percent to the surviving spouse, they’d have annual income of $69,600 with both pensions. Added to Social Security at age 62, Chris and Bev would have excess cash flow of $38,400 a year.
If they instead chose the 50 percent survivor benefit option, which would pay the survivor 50 percent of the deceased partner’s pension upon death, the annual income at retirement would be $78,000. That would be even more extra cash to set aside.
‘‘The couple should consider opting for the 50 percent survivor benefit since if they both lived to their life expectancies, the 50 percent option would yield approximately an $80,000 better result on an net present value basis,’’ Maye said.
To do better with the 100 percent option, Chris would need to outlive Bev by 10 years, assuming Bev lived to her life expectancy. Or Bev would need to outlive Chris by roughly 11 years, assuming Chris lived to his life expectancy.
Maye said they should also review all of the other pension distribution options — besides the 100 percent and the 50 percent survivor options — because the state usually offers eight or nine choices.
They also should consider deferring Social Security benefits until their full retirement ages in order to get higher benefits, given that they will have sufficient cash flow to cover their expenses, he said.
Chris and Bev describe themselves as conservative investors, and their liquid investments bear this out, Maye said.
All of their taxable assets are in cash equivalents. The rest of their asset allocation is also conservative: They have a guaranteed annuity and their deferred compensation plans are invested in the stable value funds. That puts 94 percent of their assets in cash, fixed income or guaranteed funds.
‘‘The couple has a very conservative asset allocation which protects them from equity market risk,’’ Maye said. ‘‘However, their portfolio is subject to the credit risk of the insurance company on their deferred annuity and both interest rate/credit risk on the stable value fund in their deferred compensation plan.’’
Typically, Maye said such a conservative allocation would not be good for a pre-retiree because of the effect of inflation, but because this couple’s pensions are inflation-adjusted and they live below their means, this does not appear to be an issue.
‘‘Many retirees without inflation-adjusted pensions will be forced to allocate a higher percentage of their investment assets to help maintain their standard of living,’’ he said.
Chris and Bev have saved well in tax-deferred vehicles, but they could be subject to potentially higher tax rates when they drawdown or if convert these assets to Roth IRAs, Maye said.
They say they’re interested in seeking a higher yield for their money market and CD assets, and they’re considering Treasury Inflation Protected Securities (TIPS) or a total bond market fund.
Not so fast, Maye said. Given the couple’s conservative investing style and the likelihood of rising interest rates, they shouldn’t move all their assets at once, but consider a gradual move.