Get With The Plan: November 22, 2009

112209Alicia and Nick, both in their early 50s, are looking to retirement, but not exactly as planned. After being unemployed for more than a year, Nick decided to stop the job search and officially retire early. Alicia plans to continue to work as the couple gets used to their new routine.

“Our biggest challenge is to adjust to life with one income,” says Alicia. “We’ve made drastic changes over the past year. Hopefully the economy and high unemployment will not last forever. Saving for retirement and rainy days is important also.

Alicia and Nick, whose names have been changed, have saved $292,039 in 401(k) plans, $66,903 in IRAs, $40,989 in a brokerage account, $1,000 in bonds, $12,000 in Certificates of Deposit, $43,122 in money markets, $3,015 in savings and $1,581 in checking.

The Star-Ledger asked Mike Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights, to help the couple determine how Nick’s retirement will impact their long-term plans.

“The couple is worried about retiring in a high-cost state such as New Jersey,” says Maye. “The story here is really about having pension benefits.”

The couple’s current expenses are approximately $92,000 a year.

It’s Alicia’s future pension and retirement benefits that will make a big difference for this couple. When she retires, she’s eligible for two different pensions which add up to more than $55,000 a year.

Additionally, they’re eligible for retiree health care benefits from Alicia’s employer at age 65, which includes medical, dental and vision care.

“This alleviates the need to purchase Medicare Part D and Medigap coverage,” Maye says. “Not having to fund premiums for these coverages can easily save them $5,000 per year to spend on something else.”

When you add in Social Security benefits, the couple is looking at a retirement income of more than $100,000 a year.

“The news is very good,” Maye says. “The couple is on target to have retiree living spending of $89,000 or 97 percent of their current living expenses, with Alicia retiring at 62.”

Nick and Alicia could up their expectations for success if Alicia decides to work a few years longer until age 65. At that point, Maye says projections show they’d have retirement income to cover 100 percent of their current living expenses, with a larger cushion.

Their outlook could improve even more. Nick and Alicia are considering retiring down south, where they hope they’ll find a lower cost of living. Their first step would be to sell their New Jersey home and move to Pennsylvania. They’d purchase a second home in North Carolina, which they’d rent out until Alicia is ready to retire at age 62.

“If the plan works based on current living expenses and living in New Jersey, then any alternate plan that involved living in a lower cost area or trading their current home for two less expensive homes would work as well,” Maye says.

To maximize their retirement income, Maye says they should both wait until their full retirement ages to collect Social Security.

Alicia’s pension payouts take more consideration.

One of her pensions is a single life annuity, meaning there will be no benefit for Nick after Alicia dies. She has a choice of a higher annual annuity or lower a annual annuity, with a lump sum the couple could invest.

“If she does not have health issues and expects to live 13 years after beginning the pension, she should choose the higher annual annuity,” Maye says.

But in this scenario, Nick could be left in a diminished financial situation if Alicia’s pension benefit wasn’t available to him. To cover that situation, Maye says it would make sense to acquire an additional $500,000 to $750,000 20-year term life insurance policy (a non-work policy) on Alicia’s to replace the lost pension income. The couple should take another look at their asset allocation. They currently have 72 percent of their portfolio invested in equities. Maye says they should lower their equity stake to 60 percent because they’re so close to retirement age, plus they need to further diversify.

“The couple should modify their current portfolio to get broader diversification since 53 percent of their investments are in U.S. large-caps and they have little or no exposure to U.S. bonds, international bonds, emerging markets equities, REITS and natural resources.”