Get With The Plan: November 7, 2010

11710Lenny and Deb are a few months away from accomplishing one of their goals: seeing their child graduate from college and saying goodbye to college bills.

With that big-ticket item checked off their money list, they can turn their attention to retirement. They’d like to stop working in 10 years or less, but they’re not sure what they want that retirement to look like.

“We would eventually like to relocate but do not currently have a location in mind,” says Deb. “That will depend on where our son ends up after college; we would like to be close to him.”

Lenny and Deb have saved $464,000 in 401(k) plans, $410,772 in IRAs, $42,327 in a brokerage account, $88,000 in mutual funds, $52,000 in money markets and $500 in checking. They also set aside funds for the remaining college tuition payments.

The Star-Ledger asked Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna, to help the couple determine if they’ll be able to retire on schedule.

“They are both very disciplined in saving for retirement and have done a great job so far,” Meckler says.

Deb is maxing out her 401(k) contributions at $22,000 per year, and Lenny contributes $14,950 a year to his plan. They’re also both maxing out Roth IRAs at $6,000 each — $5,000 plus the $1,000 “catch-up” contribution.

They also have several regular savings plans totaling another $13,100 a year to individual stocks and their money market accounts.

“Based on their current savings levels and assuming a 6 percent rate of return, their assets will grow to $2,004,332 at Lenny’s age 59, when they plan on retiring,” Meckler says.

He noted the value of their home and personal property was not taken into account because they are not planning on selling those for retirement income.

To determine if the couple will meet their retirement needs, Meckler took a close look at today’s expenses and at what would change in the future.

He said their current monthly expenses are approximately $7,300, not including annual income taxes of $16,684. But $3,440 of their monthly expenses goes toward college costs, an expense they no longer will have after this year.

That makes their real monthly costs approximately $4,000 per month, plus approximately
$1,500 per month for income taxes, or $5,500 total, per month.

Meckler assumed they’d aim to retire at Lenny’s age 59 with a need of $7,500 of monthly income in today’s dollars.

“If we assume a 3 percent inflation rate, the current $7,500 need will increase to $9,500 at time of retirement,” Meckler says.

A big bonus for this couple is they won’t have to solely rely on their investments to produce the income they need at retirement.

Lenny will receive projected Social Security benefits of $1,141 per month at age 59, and Deb will receive a projected $2,271 per month at age 62.

In addition to Social Security, Lenny will receive pension worth $1,141 at age 59. That payout is a joint-survivor option that will continue to pay Deb for her lifetime if Lenny dies first.

“The retirement income analysis shows they can easily afford to retire at age 59 with a starting $9,500 monthly future income,” Meckler says.

What does need attention is their asset allocation, he said. The couple says they have a moderate risk tolerance, but their current asset allocation reflects a more aggressive makeup — all but 18 percent of their assets are invested in equities, and of that, 40 percent is in large-cap growth stocks.

“I would recommend further diversification, as this would help reduce their market risk and smooth out their returns,” Meckler says.

Lenny and Deb appear to have sufficient life insurance, Meckler says, but they should consider if the mix of term insurance and permanent insurance still meets their needs. Meckler suggests they consider purchasing long-term care insurance.

“In New Jersey, the cost of long-term care costs an average of $60,000 for an assisted-living facility and could cost over $100,000 per year for nursing-home facilities,” he says. “Without proper protection, the cost of long-term care could significantly deplete their retirement assets.”