Get With The Plan: Oct. 2, 2011

100211Griffen, 56, and Yolanda, 55, were put in an unexpected financial position when Griffen lost his job. Now living on only Yolanda’s salary, the couple is wondering if they can afford to retire in the next year or so.

“Our biggest financial concern is to be able to sell our primary residence once we have finalized retirement plans, maybe buy a condo,” Yolanda says. “We envision our retirement as residing in our second home, possibly doing some traveling and spending some of the winter months in Florida.”

The couple, whose names have been changed, have saved $345,000 in 401(k) plans, $366,000 in IRAs, $110,000 in a deferred compensation plan, $232,100 in a brokerage account, $63,000 in Certificates of Deposit, $20,700 in savings and $2,000 in checking. Yolanda is expecting a monthly pension of $3,875 when she retires. The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/ RICH Planning Group in Morristown, the help the couple determine if their goal is realistic.

“The couple is fortunate in that Yolanda is a state employee and will enjoy a pension of $3,875 per month for life and will have subsidized health care through the state retirement plan,” D’Agostini says. “They will have to pay in $130 per month, which is considerably less than most retirees would have to pay.”

Health care is the primary concern for most retirees, and with this essentially taken care of for both of them, their budget looks rosy, she says.

Despite Griffen’s job loss, the couple is currently living comfortably off of Yolanda’s salary of $95,000 and they’re managing to save the max, including a catch-up contribution for those over age 50, to Yolanda’s retirement plan.

When they sell their primary residence upon retirement, D’Agostini says the couple should get about $325,000. If they decide to purchase a condo when they permanently move to their second home, they anticipate spending about $200,000, which leaves them an extra $100,000 to dedicate to retirement savings.

D’Agostini says the couple spends about $60,000 a year, and they will have $46,500 of pension income in retirement.

“They will need to supplement the deficit from their savings, as they will not be able to access their Social Security until the age of 62,” she says.

The full retirement ages for both should be in their 66th year, and for each year they delay taking payments, their benefits will increase by about 8 percent a year until age 70.

“Should they live a long life, this could make a considerable difference in income,” she says. “It does look like they will indeed be able to retire as desired at age 57 respectively, but if they do not have much `extra’ built into the budget to travel and enjoy new activities.”

D’Agostini says traditionally, when people retired, they could count on needing 80 percent of their final income, but now baby boomers aren’t sitting around. The norm is often to spend more in the years directly following retirement, traveling, pursuing a hobby, or getting additional education.

“It would be wise for Griffen and Yolanda to critically look at what they envision their retirement to look like and ascribe some dollar amount to those activities, and then to recast their budget with these in mind to be sure that it still makes sense,” she says. “If not, then it might be wise to engage in part-time employment to offset these expenses that are not currently built in.”

The couple describe themselves as conservative investors, but their portfolio should be more moderate in nature, D’Agostini says, in order to reach their goals.

The portfolio is 52 percent in cash, more than 37 percent in large-cap stocks and the balance in bonds, with a current rate of return of 5.16 percent. D’Agostini says their allocation is not well diversified. She recommends they look to reallocate the portfolio to add diversification across more asset classes in an effort to minimize risk in their portfolio and help them to achieve a projected rate of return of 6 percent.

“A proper allocation can help to maximize the rate of return for the level of risk that is undertaken,” she says. “They are too concentrated in relatively few asset categories, with all of their equity exposure in large-cap stocks and none in international, mid- or small- cap stocks.”

She says their bond exposure is also too low. She recommends they up their fixed income stake to 42 percent, and lower their cash to 5 percent. By reallocating, they should be able to over time realize returns greater than today’s portfolio while staying within their risk tolerance.

One big potential problem to the plan is a lack of long-term care insurance.

“They do have medical coverage, which few enjoy in retirement, but this will not cover long-term care, which is the personal assistance needed to live the best quality of life,” D’Agostini says.

Studies say that if you make it to the age of 65, there is over a 70 percent chance of needing long-term care for some portion of your life, D’Agostini says. The national average for a nursing home is over $65,000 a year, but in New Jersey, costs are significantly higher, at over $100,000 a year for a nursing home, she says.

“A good rule would be to see if you would be able to meet these expenses and still maintain the home and living expenses for your spouse,” she says. “If not, then you should look to get some coverage.”