Their oldest is loan-free and done with school. The middle child has $10,000 in loans
Bill and Lauren want to pay, and the youngest is still a junior in high school. Then, retirement.
“Nothing fancy, just to be able to pay bills and go out to eat once a week,” says Lauren, 49. “We hope Social Security is still around when I retire in 10 or 15 years.”
Bill, 61, hopes to retire sooner, in four or five years.
The couple, whose names have been changed, have saved $4,200 in a brokerage account, $2,300 in Certificates of Deposit, $3,200 in savings bonds, $9,700 in a money market, $8,900 in savings and $2,100 in checking. They also have $300 in a 529 plan for college
Upon retirement, Bill will get an annual pension of $18,500, and Lauren’s will pay $11,400 a year. Both will see benefits increase about $40 for every year they work until they retire.
The Star-Ledger asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to help Bill and Lauren afford their two big-ticket goals.
“They have a very modest lifestyle, $50,000 (spending) after-tax, which includes an $800 per month payment into principal of their home equity loan,” Power said. “This lifestyle will allow them the flexibility of helping their child pay off student loans, help their youngest pay for college, and build up an investment account by the time Lauren retires.”
Bill and Lauren have a net income that’s approximately $2,000 more than they spend each month, including the home equity loan payment. That free cash flow will go a long way toward reaching their goals.
Power says the home equity loan will be paid off in approximately four years if they continue paying at today’s pace. That means they can use that $2,000 per month free cash flow to pay for something else: to pay off their child’s $10,000 college loans in a mere five months.
Then they can get on a plan to save for their youngest child’s college education, which won’t start for two more years. Power says they should be able to bank $35,000 toward those college expenses, and depending on how much they want to pay for, they can fund anything further from future cash flow.
Power suggests they save any money earmarked for college in a very conservative investment in their names.
“There would be no benefit to put it into their child’s name, and in fact would hurt financial aid opportunities,” he said.
Because their child is 16, there isn’t much time to benefit from the tax-free growth of a 529 plan, Power said. With the restrictions of accessing the monies from the 529, he said, it’s not worth the trade-off.
“The reason they are able to focus on helping their children with college and aggressively paying down debt is that their retirement goals are secure, given that they will both be receiving pensions in retirement in addition to their Social Security,” Power says.
Bill wants to stop work in four or five years, which will coordinate with a trifecta of positive money events: their youngest child finishing college, their home equity loan being paid off and Bill qualifying for his full Social Security benefit.
Lauren plans to continue working, but once Bill retires, his pension and Social Security would cover the costs for their living needs. That means they could save every one of Lauren’s paychecks to help build up a healthy investment account by the time she retires.
“This investment account will be there more as a buffer to fall back on since they’ll have more money coming in from pensions and Social Security than they will need to support their lifestyle,” Power says.
Assuming no drastic changes to retirement account laws from now until the time Bill retires, Lauren should save part of her after-tax income into Roth IRAs for both of them, Power says.
They could save $13,000 a year as a couple if the contribution limits stay similar to what they are today, he says.
“Because there are no minimum distribution requirements for Roth IRAs, distributions are free from income taxes and there is a good chance that they will never need to touch their investment accounts to support themselves, Roth IRAs could be an excellent way to leave a nice income tax-free legacy to their children,” Power says.
To be conservative, Power also ran an alternate scenario in which the couple would only receive 75 percent of their anticipated Social Security benefit.
Such a cut is what Power says is predicted by a government report that said benefits would need to be cut by 2033 if no changes are made to Social Security, such as raising the full retirement age or increasing maximum earnings subject to Social Security tax.
“Even in this alternate scenario, they had a very high probability of a secure retirement without touching investment principal,” he says.
To increase their chances for success, Power recommends Lauren continue working until at least age 62, which is the age that she can apply for a spousal Social Security benefit off of Bill’s earnings record. She’d qualify for approximately 40 percent of Bill’s full benefit, Power said.
“By applying for the spousal benefit at age 62 instead of her own benefit, her Social Security benefit continues to accrue until she reaches full retirement age of 67, which will allow her to get the most from her own Social Security benefit while at least collecting something,” Power said.
This would also shorten the time for which she’d have to pay for health insurance until she’s eligible for Medicare.