Get With The Plan: November 10, 2013

111013The clock is ticking for Dan and Vicki. Dan, 61, is already retired and collecting a small pension. Vicki hopes to stop working in two or three years.

The couple wants to know if they’ve saved enough, and how much money they can spend each year without worrying about running out of money.

“We want to downsize our home and move to a more retirement-friendly state nearby,” Dan says. “We currently have our investments in 60 percent stocks and 40 percent bonds, but we will feel more comfortable in a 50/50 asset ratio when Vicki retires.”

Dan and Vicki, whose names have been changed, have saved $905,900 in IRAs, much of which came from a rollover from Dan’s 401(k) plan, $348,800 in mutual funds, $2,000 in savings and $5,000 in checking. Vicki will also have a small pension she when retires.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help Dan and Vicki plan a long and affordable retirement.

“The only change to their lifestyle that they anticipate is selling their New Jersey home and moving to (another state),” D’Agostini says.

In retirement, the couple says most of their traveling will be by car, so they expect future costs to be within their current vacation budget of $500 a month. They will capture anywhere from $50,000 to $100,000 from the downsize of their primary residence, and anticipate another $120,000 from the sale of land they own out of state.

They currently spend $7,800 a month, but their medical expenses are subsidized by Vicki’s company.

“Depending upon their income in retirement, it would behoove them to budget more for medical expenses as they pay $510 per month right now,” D’Agostini says. “If Vicki retires at age 62, she will still need to find coverage, but Dan should be close to Medicare eligibility. “

Because medical costs can be a large part of the budget, it would be best to shop for coverage before retirement to know how much would be dedicated to this, D’Agostini says.

“When shopping for health insurance, whether on the exchanges or in the individual market, consider what providers you are using, and what medications you are taking to maximize the plan you subscribe to so that you pay less out of pocket,” she says. “Because of the advent of the Affordable Care Act, many people who were postponing retirement due to the fear of inadequate medical coverage, or high premiums, may now be able to find an affordable plan, perhaps motivating more earlier retirements.”

D’Agostini says the couple’s investments are not as diversified as they could be.

Overall, they are 60 percent in stocks and 40 percent in bonds, but 55 percent of the stock allocation is in large-cap mutual funds, which means they’re taking on more risk than their risk tolerance indicates they should.

D’Agostini says when markets perform well, all portfolios will rise, but if you can avoid losing as much in down markets, you can achieve better results over time. Behavioral investing has shown that individuals have a stronger negative emotion when they lose money than the corresponding joy of making money in an “up” market, she says.

“In fact, particularly in retirement, when you are no longer generating income, it becomes more difficult to watch turbulent markets,” she says. “One way around this would be to have all of your fixed costs in retirement met with fixed sources of income … such as Social Security, pensions and annuities.”

Once the fixed costs are met, D’Agostini says the balance should be invested for growth as a strategy to overcome inflation in retirement.

To maximize their success, Dan and Vicki must be willing to forgo discretionary expenses in years when the markets are down, and can spend more in years when the markets are favorable. If they are willing to control behavior, they are more likely to have a successful retirement, D’Agostini says.

Looking further at their cash flow, D’Agostini says they appear to have more than $14,000 in surplus cash flow. Neither is currently saving in a retirement plan, so D’Agostini recommends they each put $6,500 into their respective IRAs until they are both fully retired.

“For this couple, those contributions are tax-deductible, which will reduce their tax burden currently, and will put more into their tax-preferred retirement accounts, which grow income-tax-free until they are used later on,” she says.

The longer they delay Vicki’s retirement, the more their respective Social Security benefits would accrue, D’Agostini says. They both have their full retirement ages at 66, and D’Agostini says her analysis shows that if they live to age 76, then it would be better to wait until age 66 before collecting. If they both live until age 81, then the best strategy would be to wait to age 70 before collecting, which gives them the maximal benefit.

“Each year that they hold off collecting between ages 66 and 70 gives them an additional 8 percent per year,” she says. “If they are in reasonably good health, and come from families with longevity, then it is worth considering the delay in taking the benefit.”

Based on the analysis, D’Agostini says Vicki can retire in two or three years, and in fact could even consider an earlier retirement at their respective ages of 61 and 59. If they wait a few years, they will be able to retire with 130 percent of their retirement expenses covered, D’Agostini says.

Still, there are a few items of concern for D’Agostini, including the cost for activities for Vicki once she’s no longer working, the cost of out-of-pocket medical costs and the fact that they don’t have long-term care insurance.

D’Agostini recommends they look at long-term care policies to increase their changes of financial success over a long retirement.