Get With The Plan: November 21, 2010

112110Alex, 54, wants to retire in four or five years. That will be a couple of years ahead of the retirement date for Alex’s partner Jim, 47. Alex wants to make sure his half of their financial future is ready for retirement.

“Jim’s employer provides domestic partner health insurance for me when I retire,” Alex says. “For now, my employer provides my health benefits. We may move into our vacation home one day or sell it and purchase a condo in Florida for the winter months.”

Alex, whose name has been changed, has saved $85,551 in 401(k) plans, $90,678 in IRAs, $150,000 in an annuity, $215,288 in mutual funds, $108,916 in a brokerage account, $127,000 in certificates of deposit, $154 in a money market fund and $39,000 in checking. Alex also can expect a $16,000 a year pension from a former employer.

The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help Alex determine his retirement readiness.

Alex is currently contributing $7,200 a year into his 401(k) plan. He could contribute as much as $22,000 a year because he’s older than age 50, therefore eligible for the over-50 catch-up contributions.

“His current income is $90,000 and his annual expenses, including taxes, come to approximately $51,000 per year, so the additional money should be there to contribute the maximum to his 401(k) plan,” Meckler says.

Not counting the value of his home or the shared vacation home, Meckler calculates with a 6 percent rate of return — and with maintaining the current savings level — Alex’s invested assets would be worth $1.08 million when he retires at age 59.

Alex’s current monthly expenses are $3,000, not including annual income taxes. Meckler says when Alex retires, he’ll have a significantly lower tax bill because he won’t be earning a salary, but instead will be receiving a small pension, Social Security and taking withdrawals from his qualified accounts.

For this analysis, Meckler assumed a retirement age of 59 with a need of $4,000 a month in income. Assuming a 3 percent inflation rate, Meckler says the current $4,000 need will increase to $4,637 a month at the time of retirement. He also assumed Alex will begin to receive monthly Social Security benefits of $2,091 at age 62.

“The retirement income analysis shows he can afford to retire at age 59 with a starting $4,637 monthly future income,” Meckler says.

Alex says he has a low risk tolerance, and that’s reflected in his current asset allocation. His portfolio is 63 percent in fixed income and 37 percent in equities. That may be too conservative for his age, Meckler says.

“Since Alex is only 54 and has many years ahead of him, he should consider a moderate to moderately-aggressive portfolio, meaning a minimum of 50 percent equities/50 percent fixed income, or 60 percent equities/40 percent fixed income,” Meckler says. “Inflation is at record lows now but if and when inflation begins to increase, Alex needs to have the ability to keep up with inflation.”

Meckler says there are financial products available that guarantee retirement income while helping to protect assets against market volatility. These products, variable annuities with living benefit riders, would allow Alex to guarantee himself an income of 5 percent for life beginning at age 59½.

“He may want to consider investing a portion of his assets into one of these products to guarantee a portion of his retirement income,” Meckler says.

Even if Alex decides to maintain his current asset allocation, Meckler says he should diversify. For example, the stock of a former employer represents 5.6 percent of his total assets. He also has quite a bit of overlap in his large-cap mutual fund holdings, Meckler says.

“Further diversification would help reduce his market risk and smooth out his returns,” he says.

Meckler recommends Alex consider purchasing long-term care insurance.

In New Jersey, he says, long-term care costs average $60,000 a year for an assisted living facility and could cost more than $100,000 a year for nursing home facilities. A need for care would quickly deplete Alex’s assets.

Alex also needs to take a close look at his estate planning needs.

As far as federal law is concerned, domestic partners are treated the same as strangers, no matter how long they have been together. In New Jersey, though, the law entitles same-sex couples to “certain rights and benefits that are accorded to married couples.”

To make sure Alex and Jim have the documents they need in place, Meckler strongly recommends they meet with an estate planning attorney who specializes in estate planning for domestic partners.

He also suggests they read “New Jersey Domestic Partners — A Legal Guide,” by Stephen Hyland, and also check the website for the latest on the rights of same-sex couples in the state.