Get With The Plan: November 28, 2010

112810Stanley, 63, and Beth, 61, know exactly what they want. Stanley plans to retire at age 68 and work part time, spending the rest of his time with Beth. They own two homes — one in New Jersey and one in Pennsylvania — and they’d like to keep both for their retirement.

But Stanley knows what they want, and what they can afford to do, may be two very different things.

“I do not know if or when I can retire and be able to keep both homes,” he says. “We are both in good health, and we both have good family genes for longevity.”
The couple, whose names have been changed, have saved $676,134 in 401(k) plans, $248,019 in IRAs, $183,909 in annuities, $75,000 in a brokerage account, $135,782 in mutual funds, $14,139 in certificates of deposit, $5,389 in a money market, $50,234 in savings and $22,366 in checking.

Stanley has a pension, which, like so many workers, was frozen a few years back.
He can expect $2,880 per month at age 65 based on his life alone, or $2,620 per month, which would pay him or pay Beth for the rest of her life.

Beth also will receive a $114 monthly pension from her old employer at age 65.
The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to help Stanley and Beth see if the very specific retirement they want is feasible.

“The couple has done a very good job during the accumulation phase of investing,” Marchesi says. “They have invested consistently for a long period of time, resulting in a significant investment base, which will increase as Stanley continues working for another four or five years.”

The focus, Marchesi says, is a new transition toward the inclusion of a distribution strategy — to tap their savings — to be put in place and managed throughout their retirement.

Once assets are consistently tapped to meet expenses after earned income has stopped or reduced significantly, market volatility can be very powerful. He says they must make sure not to count on assets that possess high volatility assignments for near-term distribution needs.

Marchesi says the couple should think of their assets as compartmentalized in four main buckets.

The first bucket meets the projected deficit for the first phase of retirement. Usually, there are many variable start-up costs involved with retirement in addition to regular living expenses.

The couple probably will have reduced taxes in retirement, yet they will need to purchase two new cars right around retirement inception, and will have other prep costs to consider, he says.

“The goal with Bucket No. 1 is to figure out what the annual deficit will be — the difference between the net money coming in, such as pensions, Social Security, dividends and interest, and the money going out for bills, new cars, golf club memberships, etc.,” he says.

Marchesi says the couple’s projected annual deficit should be $48,000 prorated and factored for inflation and taxes.

They need a minimum of $240,000 in Bucket No. 1, for five years of spending. Those funds should be invested in liquid, stable investments.

Marchesi likes to call Bucket No. 1 the SWAN account, for “sleep well at night,” because while Stanley and Beth know the funds are barely keeping up with inflation and taxes, it is a stable pool of assets they will use to fortify their lifestyle.
Bucket No. 2 is for years six to 10, Bucket No. 3 for years 11 to 15, and Bucket No. 4 for 15 years and beyond.

“The longer term the bucket, the higher the ability to include intermediate and long-term assets to the buckets’ asset allocation,” Marchesi says. “At each year-end, as each bucket term is reduced, funds cascade down the bucket structure to make sure upcoming costs will be met and to maintain the appropriate risk controls.”

Marchesi also examined their investments. Approximately 71 percent of their assets are in stocks, and of that, 80 percent are domestic.

“It is undeniable that over the course of the next few market cycles, there will be a handful of non-U.S. economies that will be priced at a premium to ours, which means they need to be increasingly considered for investment purposes,” he says.

Plus, Stanley and Beth need to look at their high equity allocation and debate the importance of potential higher returns versus a higher level of volatility, asking themselves, “How long do we need to target that high of a return to reach our long-term goals?”

The couple have employee-subsidized health care and no real family obligations to consider, so their road to and through retirement should not have too many surprises, Marchesi says.

“As it seems, nothing in life plays out exactly as expected, so it is important to have a flexible game plan and always review the assumptions involved, and make appropriate and non-emotional changes along the way,” Marchesi says. “Keep it down the middle of the fairway and things will go very smooth.”