Get With The Plan: November 8, 2009

11809If we’ve ever featured the Superman and Wonder Woman of savings, this couple might be it. Yes, they earn a large income, but their expenses are lower than many earning a quarter of their salaries, and their savings strategies are impressive.

“Our main goal is to retire at the same time as soon as possible while maintaining our current lifestyle,” says Rajiv, 49. “Our back-up plan is to wait until I’m 61 and Priya is 55 so Priya will have access to a better pension.”

If they wait until Priya is 55, they’d also be eligible for discounted medical plans from her employer.

Rajiv and Priya, whose names have been changed, have set aside $546,282 in 401(k) plans, $87,711 in IRAs, $642,420 in mutual funds (to which they contribute about half of Priya’s annual salary each year), $28,981 in stock options, $165,335 in savings and $4,745 in checking. They’ll both be getting a pension. Rajiv’s will be worth $15,972 a year at age 65, and if Priya holds out to age 55, her pension will be worth $86,776 a year.

The Star-Ledger asked Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester, to help these super-savers reach their retirement dreams.

“Rajiv and Priya are doing an exceptional job at living within their means and setting up their next stage of life in quality fashion,” says Marchesi. “These are two consumers who did not get overleveraged in recent years.”

Being disciplined savers and investors throughout their successful professional careers has afforded the couple the possibility of an early retirement.

After maxing out their 401(k) contributions and making IRA contributions, they have free cash flow of approximately $10,000 per month, much of which is going to supplemental retirement investments.

With a current investment base (excluding their home and property) of almost $1.5 million, along with their pension benefits, the couple can seriously consider targeting a retirement date in the near future.

Marchesi says they need to weigh the pros of working for another 10 years, however, as their benefits, including medical coverage, will be more valuable and their target rate of portfolio return will reduce substantially. If they retire 10 years later, they will require a lower return on their assets to meet their lifestyle needs throughout retirement, which reduces expected volatility of their portfolio.

Marchesi first looked at a moderate asset allocation of 45 percent stocks and 55 percent bonds on an asset base of $1.5 million. He calculates they could maintain a withdrawal rate of 4.5 percent, with an initial monthly withdrawal of approximately $4,200, net of estimated taxes and inflation, over a 35 year period.

Over a 45-year period, the same portfolio could maintain a withdrawal rate of 4 percent, or $3,700 monthly, resulting in approximately $6,000 less cash flow annually. Factor in the couple’s projected pensions and expected Social Security benefits and their modest lifestyle expenses, either of these scenarios is achievable, with some ‘cushion’ built in for longevity, higher inflation or a tax rate increase.

“These projections should always come with warning labels,” says Marchesi. “While the software utilized does create multiple simulated “time paths,” withdrawal strategies over long periods of time need a certain amount of flexibility.”

Specifically, he says, asset allocation will have to change at times beyond the initial projections. Also, as the latter stages of retirement are reached, the withdrawal rate could be challenged as the desire to increase allocation to shorter-term assets increases. Finally, he says other factors need to be built into general cash flow projections, such as variable (one-time) costs, medical costs (including long-term care) and material change in income streams (eg., Social Security).

“Having said all that, the couple deserves to sit down and put the initial details on a cash flow plan that allows them to confirm the feasibility of retiring sooner than 10 years,” Marchesi says.

Given their current expense structure and anticipated income streams, they could afford to give up the additional benefits from continued work to retire in the very near future, provided the core assumptions – their spending needs – remain intact, Marchesi says.

He says their overall asset allocation – not counting cash because those amounts have been earmarked for other expenses – is a growth income model with 61 percent stocks, 33 percent bonds and 6 percent cash. The couple can further consider changes to their allocation depending on the target retirement date they set.

“The couple has a nice problem to have – retire early and live comfortably driven by an attainable investment policy/distribution strategy, or work for a while longer and retire with a higher achievable lifestyle or a more conservative (less bumpy) investment policy/distribution strategy,” Marchesi says.