Get With The Plan: October 23, 2011

Vincent, 53, and Gigi, 55, are planning ahead. They have three more years of their child’s Ivy League education to pay for, and then, retirement takes center stage.

“Our biggest financial challenge is to ensure we have an adequate, reliable income stream upon retirement that will include anticipated health care costs,” Gigi says. “We will not be getting health coverage from our employers when we retire.”

The couple would like to begin what they call semi-retirement around the time their child graduates from college, with full retirement to follow in six to eight years.

Vincent and Gigi, whose names have been changed, have saved $595,500 in 401(k) plans, $531,700 in IRAs, $52,200 in a brokerage account, $25,400 in a money market, $57,100 in savings and $11,000 in checking. And at age 65, Vincent expects a $12,000 per year pension.

The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help Vincent and Gigi see if their retirement goals are feasible.

“Vincent and Gigi have done a nice job of building up both their retirement and taxable assets as well as paying off their mortgage,” Kazanchy says. “As future retirees they would like to have a reliable and adequate income that accounts for medical care costs and allows them to travel extensively.”

Kazanchy ran several retirement scenarios for the couple. Each scenario assumes Vincent is contributing the maximum amount to his 401(k) on an annual basis ($22,000 for 2011, including the catch-up contribution for those over age 50).

The first scenario assumed they’d both retire at age 60 and spend $72,000 a year, after taxes, during retirement. This also assumes expenses rise 3 percent a year with inflation.

“The results of this scenario are excellent. We project a 99 percent probability that they will not deplete their assets by the time Vincent reaches age 90,” he says.

The primary drivers of these favorable results are the couples’ moderate after-tax spending level coupled with a portfolio that is allocated to 60 percent equities and 40 percent fixed income.

The second scenario assumes the couple increases their after-tax spending level to $89,000 a year in retirement.

Kazanchy says there’s an 82 percent probability that the couple will not run out of money before Vincent’s age 90, again assuming retirement at age 60 and the same portfolio allocation. It shows the couple can have some spending flexibility in the future. The third scenario took a look at how the couple would fare if they retired earlier, at age 56, spending $72,000 a year after taxes. Kazanchy says this has a favorable 81 probability of success.

“This scenario demonstrates that they have flexibility in regards to the age in which they retire,” he says.

Also in the couple’s favor is the security of the equity they have in their home. If needed, they could sell their home and downsize in order to provide additional funds for their retirement years, Kazanchy says.

A contributing factor to the couple’s high probability of financial success is their well diversified portfolio.

They have an appropriate balance of equities and fixed income as well as exposure to various asset classes (bonds, U.S. and international large- and small-cap stocks and real estate), Kazanchy says.

“The lack of correlation between the various asset classes in a diversified portfolio provides a hedge against larger losses that could occur if they were only invested in one or two asset classes,” he says. “Maintaining a diversified portfolio will help them weather the down turns in the market as well as take advantage of the upswings.”

While all these scenarios demonstrate that Vincent and Gigi have a favorable path ahead of them, Kazanchy says there are risks — such as a lawsuit or a major medical issue — that can derail them and prevent them from reaching their future goals.

While a homeowner’s insurance policy and auto insurance policy provide liability protection, they are generally insufficient to cover what would be needed to settle a lawsuit, Kazanchy says. He recommends the couple buy an umbrella liability policy as an extra layer of protection.

The umbrella policy sits on top of the other property and liability insurance policies, kicking in if the other policies have reached their limits. Kazanchy recommends they buy a policy with $3 million of coverage.

On the medical front, the couple needs to be mindful of insurance costs and coverage until they are eligible for Medicare at age 65. They’ll have to use a combination of COBRA and private medical insurance plans to fill the gap.

When Medicare kicks in, Kazanchy says they need to be aware that it is usually not sufficient for the medical and health needs of most retirees, so they should investigate Medigap policies.

“Medigap policies are sold by private insurance companies and cover deductibles, coinsurance and prescription drugs,” he says.

Long-term care insurance should also be considered, and the couple is at the perfect age to start shopping.

“When evaluating policies to purchase, it is important that they find out if the policy offers protection from inflation, is a sufficient amount of coverage — both monetarily and duration — and that the insurance carrier is in good financial health,” Kazanchy says.

And finally, the couple should meet with an estate planning attorney and update their wills and other documents, which were drafted 19 years ago with the birth of their child.