Get with the plan : October 12, 2014

Sixty is the magic number for Tony and Linda.

The couple will both celebrate their 60th birthdays in two years, and with their three kids grown and done with college — without lingering college loans — Tony and Linda want retirement to come fast.

“It’s all about retirement at age 60,” Tony said. “This will require us to consolidate two houses into one.”

Tony and Linda, whose names have been changed, have saved $625,000 in an annuity, $70,000 in a 401(k) plan, $3,800 in IRAs, $83,300 in mutual funds, $170,000 in money markets, $19,000 in savings and $1,000 in checking. At age 60, they will each receive pensions: $3,000 per month for Tony, and $2,800 per month for Linda.

The Star-Ledger asked Greg Plechner, a certified financial planner with Modera Wealth Management in Westwood, to help the couple determine if their early retirement goal is realistic.

“They have cash outflows of about $160,000 per year, including property and income taxes,” Plechner says. “Assuming an average inflation rate of 2.1 percnet, an expected rate of return of 4 percent and a life expectancy of 95, initial analysis of Tony’s and Linda’s financial plan indicates success, even with their early retirement goal.

There are several factors that contribute to the projected success of their plan.

First, Tony and Linda plan to sell their primary residence within the next three years and consolidate by making their vacation home their primary residence.

“Credit goes to them for acknowledging their need to downsize in retirement – a fact that so many retirees do not take into account,” Plechner says. “With the extra property taxes and other carrying costs associated with the second home, Tony’s and Linda’s plan would face long-term funding challenges.”

Second, Plechner says the couple has a healthy balance sheet. Their only outstanding debt is the mortgage on their primary residence, which they intend to pay off when they sell their home.

“With no other credit card debt, car loans, or mortgages to strain their financial plan in retirement, their investment assets are positioned to grow and produce income, unencumbered,” he says.

Lastly, they have several healthy sources of retirement income, especially each of their pensions and Tony’s annuity, together replacing 40 percent of their pre-retirement income. This doesn’t include Social Security benefits and investment income from their other assets.

Plechner says although an initial analysis suggests success, a time frame of 35 years is hard to project accurately. Factors such as increased inflation, lower expected returns or unforeseen emergency expenses could critically affect the long-term success of a financial plan.

Therefore, Plechner says there are some items for Tony and Linda to consider in order to make their plan stronger as they enter into an early retirement.

With $190,000 in a money market account, that makes up more than 19 percent of their investable assets. In today’s low interest rate environment, Plechner says, this level of cash is not often recommended.

However, each situation is different.

“This level of cash may indeed be appropriate for them. Tony and Linda should assess their short-term cash needs, considering any upcoming major expenses, such as home repairs, automobile purchases or trips,” he says.

Then regardless of their level of cash reserves, they should look for a bank that will offer them close to 1 percent or more of interest on a money market account. He recommends they use a site like BankRate.com to search for the best interest rates in the country for various types of accounts.

Plechner says the couple should think seriously about their options for Social Security benefits.

Even though they plan to retire at 60, the earliest they can start receiving Social Security benefits is age 62, and that’s at a reduced amount compared to what they would receive at Full Retirement Age (FRA), which is 66 and 2 months for Tony and 66 and 4 months for Linda.

“Claiming retirement benefits at age 62 could reduce benefit amounts by as much as 30 percent,” Plechner says. “If Tony and Linda delayed retirement by just a few years, they could delay claiming Social Security by a few years and earn much more over the course of their retirement.”

Plechner says the most important thing for the couple to be mindful of throughout retirement is their expenses. With no mortgage and lower taxes, their total expenses in retirement drop to just about $100,000 per year. With income from Social Security, the pensions and the annuity payments totaling approximately $130,000, a surplus is indicated.

“The surpluses are tremendously valuable to the long-term health of their plan,” he says. “Therefore, they must be fully aware of their expenses and careful with their discretionary spending so as not to pass up the chance for continued saving.”

Plechner also looked at Tony’s annuity, which makes up 64 percent of their investment assets. He says this presents a potential liquidity risk because the principal portion of an annuity is usually inaccessible after it has been annuitized.

“They also have no control over what the annuity is invested in,” Plechner says. “Additional savings will create the opportunity for further diversification and investing in more liquid products.”

He says their remaining investment assets are mostly held in mutual funds, which he calls a step in the right direction.

He recommends the couple examine their current asset allocation to confirm that it matches their risk tolerance.

“They classified themselves as having a moderate risk tolerance while their investment assets seem to be heavily weighted in stocks, a sign of a more aggressive investor,” he says. “They should consider adding more exposure to investment-grade and high-yield U.S. bonds, foreign bonds and alternative investments such as commodities and real estate.”

Get With the Plan is designed to illuminate personal finance concepts and isn’t a substitute for actual financial planning or dedicated professional advice. To participate, contact Karin Price Mueller at Bamboozled@NJAdvanceMedia.com.

 

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