Get With The Plan: October 20, 2013

102013At age 58, T.J. has set his sights on retirement at the end of the year. Before he does, he wants to make sure he can afford it.

“I may work part time to keep busy,” he says. “I want to travel by taking driving trips around the country. Enjoy myself fishing. I do volunteer work now and would do more with my extra time.”

T.J., whose name has been changed, has saved $356,000 in an annuity through his employer, $156,700 in a brokerage account, $307,500 in mutual funds, $19,000 in Certificates of Deposit, $24,900 in savings and $3,500 in checking. He also has an annuity that will pay out $500 a month when he reaches age 66.

Added to that, T.J. is eligible for a pension that will give him $2,142 per month at age 59, after $350 is taken out to pay for health care benefits until he’s eligible for Medicare.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Wealth Management in Montville, to help T.J. see if he can afford to retire.

“He has done an excellent job of keeping his expenses in check, having no outstanding debt, and he’s been a good saver,” Duerr says. “He is also fortunate to be eligible for a pension from his employer, yet like most individuals he wants to ensure he is making the correct decision on his retirement timing.”

Duerr says T.J.’s monthly pension from his employer will not be enough to cover his current monthly expenses.

But the good news? He has plenty of other assets he can use to live off of until he begins receiving Social Security at age 62.

“T.J. also plans on working part-time and picking up odd jobs to help cover his expenses,” Duerr says, noting that could make up for any shortfall.

One item T.J. hasn’t focused on is his income taxes, and what will be owed going forward, Duerr says.

T.J. needs to determine an appropriate amount of taxes to be withheld for both federal and New Jersey taxes, he says.

“When determining this, he needs to consider any other earnings, whether they are from part-time employment or dividends and interest to ensure he has the correct amount withheld for his taxes,” Duerr says. “If he does not have the appropriate amount withheld, he could be subject to penalties from the IRS and New Jersey for underpayment of taxes owed.”

Duerr says this is something that is missed all too often when a person reaches retirement and begins to live off of their retirement savings and pensions rather than a paycheck.

T.J. considers himself to be a fairly risky investor, and he says he believes he has a higher risk tolerance than he should at his age.

This is an area he should address immediately, Duerr says.

“Once he retires he will need to live off of his assets to help supplement his pension,” Duerr says. “As a result, he should ensure that his overall risk tolerance ensures that he is not too aggressive with his investment choices.”

At the same time, Duerr says, he will hopefully have a long retirement given his current age, so he does not want to be too conservative.

As a strategy, Duerr says T.J. could consider having several accounts established. They can be structured so one is less aggressive, which would cover the funds needed to be used in the near-term, while another account would be more aggressive, with funds that are for the more distant future.

“There are various ways to manage his investments that should be able to help him be more in line with an appropriate risk tolerance and still enable him to address his overall long-term goals,” he says.

T.J. says when he retires, he’d like to take his employer annuity, worth $356,000, and roll it into an IRA, and perhaps to another annuity.

“While this may be a good idea to help protect the assets and create an annual cash flow, annuities are very complicated investment products,” Duerr says. “He needs to fully understand all of the costs and benefits associated with this type of investment and ensure that it will help him attain his overall goals in retirement.”

With all of that considered, Duerr says T.J. appears to be in a good position to retire at his current age.

“Even though he will be taking a decreased pension by retiring at 59, he has enough assets and reasonable expenses that this should not be a problem,” Duerr says. “Given that he also plans on working part-time and not significantly increasing his expenses in retirement, it will also enable him to attain his retirement goal.”

There is one additional consideration for T.J.: a long-term care policy. While his life insurance is adequate, he doesn’t have a long-term care policy.

“He looked into purchasing a long-term care policy but determined it was too expensive,” Duerr says. “I would suggest that he reconsider purchasing a policy while he is still young. These policies can be expensive, but should you need care at some point in the future, the actual cost of the care could cripple him financially.”