Get With The Plan: November 18, 2012

Stephen, 65, and Melissa, 62, say their retirement outlook is bleak. Though they’re no longer working, they have responsibilities that extend way beyond what they hope for their golden years.

“Our biggest financial concern is how to make our money last through retirement while helping to support our 36-year-old daughter and maintain our 80-year-old house,” Melissa said. “We also help care for my 90-year-old father who lives in assisted living. We take him to all his doctor appointments, church and family holiday gatherings.”

The couple had hoped to downsize and move in retirement — they’re worried their home will need some repairs — but with their daughter’s needs, and the needs of Melissa’s father, they don’t see how they can ever move.

Stephen retired in 2005 and receives an annual pension of $34,692. Both Stephen and Melissa receive Social Security. As for investments, the couple, whose names have been changed, have saved $130,000 in a 401(k) plan, $76,000 in IRAs, $50,000 in a Certificate of Deposit, $64,000 in savings and $3,200 in checking.

The Star-Ledger asked Taylor Thomas, a certified financial planner with RegentAtlantic Capital in Morristown, to help Stephen and Melissa create their own fate in retirement.

“They are the perfect example of a couple in the ‘Sandwich Generation,’ as they are providing care for Melissa’s father in addition to helping their adult daughter,” Thomas says. “The major unknown is the spending that will be required in order to maintain their 80-year-old residence and continue to help their family.”

The couple’s current investment portfolio, while “safe” from loss of principle, is subject to inflation and a loss of purchasing power because of its lack of exposure to growth assets.

The couple’s portfolio has no growth at all, with 66 percent in cash and 34 percent in fixed income investments.

But before reallocating investments, Thomas says the couple should set aside about half a year’s spending — about $25,000 — in a savings account.

For the equity portion of their investments, he says they should invest a minimum of 40 percent of the portfolio in a globally diversified portfolio.

“These would be investments in U.S. and international large and small company stocks, and would also include some emerging and frontier equity exposure,” he says. “The portfolio should also include alternatives investments like hedging strategies and infrastructure.”

Thomas says a portfolio without all these components cannot keep pace with inflation and provides for little to no appreciation potential.

On the fixed-income side, they should include some short-term global bond funds, inflation-indexed bond funds and some bonds that are classified as “opportunistic bonds.”

“Opportunistic bonds are investments which provide the fund manager with the flexibility to buy, sell short, and other strategies which can be successful given the extremely low interest rate environment we currently have,” he says.

A fully diversified portfolio, if used in conjunction with a strategic portfolio rebalance and asset location, can provide excess returns, Thomas says. Asset location is used to place tax-efficient investments in taxable accounts, while keeping those that generate a lot of income and/or capital gain distributions in tax-deferred accounts.

To accomplish this they can roll over Stephen’s employer-sponsored account into an IRA with any well-known brokerage firm such as Fidelity, TD or Schwab. This would give access to the universe of low-cost mutual funds and exchange-traded funds, rather than just the ones that are offered in his plan.

Thomas says the major variable in this plan is spending.

“Given the pension and Social Security incomes, I am not concerned with their ability to satisfy the ‘fixed’ retirement spending of about $43,000,” he says. “The real analysis is to test how much they are able to spend in addition to this amount.”

If Stephen and Melissa migrate their investment portfolio to Thomas’ recommended one, he estimates they could spend between $25,000 and $30,000 above their fixed expenses.

Then, long-term planning issues: insurance.

Melissa has an insurance policy with a $10,000 death benefit, and Thomas says she should keep it in force because it will help pay her final expenses.

Stephen’s insurance situation is more complicated. He has a policy through his former employer with a current death benefit of $265,000. The death benefit is scheduled to decrease by about $15,000 per year for the next five years, and will settle at a final benefit of $186,000 in 2017.

Stephen has the option of buying back the annual reduction in the death benefit.

“The buyback option is very expensive and is not recommended or required due to the following facts: Stephen’s pension has a survivor income benefit equal to 75 percent of the current amount. This means that if Stephen was to pass away this year, Melissa would still receive 75 percent or about $32,000 of income from the pension,” Thomas says.

Additionally, Melissa’s Social Security survivor benefits will bump up to the amount Stephen is currently receiving.

Stephen should consider one optional Social Security strategy.

When he reaches his full retirement age of 66, after considering his medical condition at that time, he may want to suspend his Social Security benefits for one year.

“During that year his benefit will increase by 8 percent,” Thomas says. “The Social Security administration pays 8 percent per year in Delayed Retirement Credits (DRC) if you wait to take your benefit.”

Even though Stephen has already started his benefits, he can still press the pause button for one year. That would increase Stephen’s annual benefit by $1,700 per year.

“To supplement the income for that year, Stephen could set aside money from their savings accounts,” Thomas says. “Where else can you find a guaranteed return of 8 percent?”