Get With The Plan: November 20, 2011

Joseph, 56, and Mary, 53, have three grown children and only one more semester of college tuition to pay. They have their eyes set on retiring when Joseph is 62.

“We’d work part time and spend five months in warmer weather during the winter,” Joseph says. “We’d like to sell our New Jersey house and have an apartment or condo here, and one in the South.”

The couple, whose names have been changed, have saved $42,000 in a 401(k) plan, $672,000 in IRAs, $10,900 in a brokerage account, $141,100 in mutual funds, $8,000 in savings and $500 in checking.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Consulting in Fairfield, to help the couple see if their assets and retirement income will support their lifestyle.

“I think they are doing well, but the main issue is that they really do not have a retirement plan or target — just a concept,” Lynch says. “They need to know the details or what things cost in order to see if it is realistic. ‘Hope’ is not a plan.”

First, the good. The couple has no debt except a small car loan and they have solid income and good savings rates. They also have a home equity line of credit, which is a great back-up plan should they ever have a sudden need for cash.

Then, the problems that should be addressed. First, Joseph has income of $170,000 and some disability insurance, but only enough to cover half of his income. Lynch says he should purchase more coverage, which is available through his employer.

Now the big question of a retirement budget.

It’s time for the couple to sit down and discuss what they’d like to accomplish when they stop working. They need to set priorities and estimate the costs for fulfilling their dreams.

Lynch spoke to the couple about their expectations, and it seems there were more questions than answers.

“They only knew their Social Security benefits after I asked them to go onto the Social Security website,” he says. “They have no target for income or no idea of what their costs will be. Especially with two homes, this is a huge issue.”

To get a better handle on their expected expenses, Lynch says Joseph and Mary should look at the cost of the types of homes they’re considering in both locations, as well as items such as taxes and maintenance.

“What does it cost to get back and forth each year? What does it cost to live?” Lynch says. “How much for inflation, medical care, etc. Many websites can help them break out their expenses to see if what they are thinking is realistic.”

They should check out the Retirement Planner on and the Retirement Savings Calculator at as good starting points.

Also, Lynch says in owning two homes, the couple will lock up a lot of money in assets that are generally not liquid.

Without knowing exactly what the couple’s expenses will be in retirement, it’s hard to say whether they’ve accumulated enough assets to support the lifestyle they want.

“Generally we use a 4 percent drawdown rate on a lump sum to determine how much you can spend and reasonably not run out of money,” he says. “For example, a lump sum of $1 million would generally give you $40,000 annually. It may go higher if the individual is older.”

Once the couple can anticipate expenses, they can do more projections with their retirement assets and potential drawdown rates. Working part time will help make their assets last longer.

Joseph and Mary describe themselves as moderate to conservative investors, but their current asset allocation, with 60 percent in stocks, fits the moderate profile.

The couple has retirement assets at three different institutions.

“Generally if you have funds in three places, there is a very good chance that you are not as diversified as you think as the assets can be invested in the same stocks,” Lynch says.

With this couple’s portfolio, they own six mutual funds with stakes in Exxon Mobil, five funds that own Chevron and eight funds that own JPMorgan Chase.

Additionally, there’s potential trouble in the fixed income part of their portfolio. About 25 percent of their bonds are long duration bonds, Lynch says.

“People invest in bonds for safety, however, the longer the duration, the greater the risk,” he says. “

For example, on 30-year Treasurys, a .6 percent increase in interest rates would cause most of these bonds to decrease in value by almost 10 percent.”

This is a time to stay short on bonds, Lynch says.

“The bottom line is they need to sit down and start working on a plan and not just focusing on investments,” Lynch says. “They need to get a realistic idea of what it will cost for them to retire, maintain two homes and do the things that they want to do in retirement. Right now it is just a concept.”