Get With The Plan: November 6, 2011

Jon, 67, and Winnie, 64, are planning for full retirement in two years. Jon has already left the workforce, and Winnie isn’t far behind.

The couple has many questions.

“Will we have enough money once my wife retires in two years to last our lifetime? Do we need long-term insurance? To do things for our three grandchildren?” Jon asks.

Jon and Winnie, whose names have been changed, have saved $231,600 in IRAs, $360,200 in mutual funds, $246,500 in a brokerage account, $175,000 in certificates of deposit, $165,900 in savings and $37,400 in checking. Winnie also has a 457 Plan worth $107,300, from which she can start taking monthly annuity payments of $434 later this year.

The Star-Ledger asked James Sonneborn, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple determine their retirement prospects.

“Jon and Winnie are about to embark toward a milestone that most of us see as the long-awaited greener pasture which embodies the American dream: retirement,” Sonneborn says.

The couple expects to receive a total of $72,100 per year in today’s dollars from Social Security and Winnie’s pension.

Sonneborn ran several scenarios that reflected Jon’s and Winnie’s desired retirement goals without changing their current 40 percent stock and 60 percent bond asset allocation.

For all scenarios, Sonneborn inflated their $42,000 annual expenditure by 25 percent to reflect an increase in spending from dining out, traveling and vacations, and he assumed that these expenses would last until age 90 for both of them.

The second and third scenario took into consideration the impact a $500,000 shore home after Winnie retires would have on their ability to sustain the same retirement income until age 90, and whether or not they’d have to sell their primary home and relocate to fulfill that goal.

Additionally, Sonneborn added contributions toward their grandchildren’s college cost based upon the year they would start school (2021, 2022 and 2027) and an inflated by 5 percent-a-year cost to attend a public university in New Jersey ($20,340).

Finally, the analysis also took into consideration purchasing a 10-year joint long-term care policy with an annual premium of $8,000.

There’s good news for the couple, and there are also areas that could use some improvement.

“With no reported liabilities or debt and a budget modest to their means — their lifestyle decisions have potentially afforded them the opportunity to live out their retirement comfortably,” Sonneborn says.

Sonneborn’s analysis projects that Jon and Winnie have a 99 percent chance of being able to purchase a $500,000 vacation home without the need to sell their primary home and permanently relocate. They can afford to spend $52,500 a year, gift the full amount of their three grandchildren’s college costs and afford long-term care insurance policy premiums of $8,000 annually.

While Jon and Winnie have done a great job saving for retirement, one of the areas for improvement is that their assets need to have greater coordination, and they’d benefit from account consolidation.

Jon and Winnie have their assets spread out over 20 different accounts and investment vehicles.

Increasing the amount of buckets in which your assets are held can make investing more difficult to manage, but it can also reduce the amount of tax-efficiency and cost-efficiency.

While the portfolio diversification isn’t awful, it could be better, too.

“With consolidated assets, a broader view on diversification and greater asset location coordination, the couple may be able to achieve higher risk-adjusted returns,” Sonneborn says.

Another area that needs improvement is asset protection: insurance.

Jon and Winnie have several small life insurance policies and they currently pay a little over $1,100 in premiums per year. Their dollars may be better spent on long-term care insurance, he says.

Individuals with little to no assets cannot afford to purchase a long-term care plan, so they will be cared for through Medicaid, while the wealthy can afford the costs of care and self-insure without long-term care insurance, and without sacrificing their lifestyle.

Those in the middle — like Jon and Winnie — would not qualify for Medicaid or be able to self-insure without great sacrifices to their lifestyle, he says.

Sonneborn says the statewide average annual cost for home care for eight hours a day in New Jersey is $61,320.

“The impact of either Jon or Winnie bound to home care eight hours a day for 10 years can wipe out their entire life savings completely,” Sonneborn says.

Given the couple’s cash flow and investment assets, they can self-insure for the short term.

“By increasing the elimination period before the insurance begins, the couple may be able to reduce the cost of the premium,” Sonneborn says.

“Furthermore, purchasing a joint long-term care plan can cover both spouses at a discount for a longer time horizon in comparison to two separate plans.”

If one of spouse was to use the policy for a longer time-frame than they had with two separate policies, a joint plan would allow the flexibility for one of the spouses to “tap” into the other spouse’s plan.

Sonneborn says the couple also doesn’t have an umbrella liability insurance policy.

The good news, he says, is that such policies are cheap and can provide an added layer of protection on top of other liability coverage.

“Because the couple is dependent on their investment assets to provide a stream of retirement income for the rest of their lives along with fulfilling other retirement goals, adding an umbrella policy at least equal to their net worth can provide peace of mind and protection against liabilities that may come along,” Sonneborn says.