Get With The Plan: October 3, 2010

10310Nancy faces many money concerns as she contemplates retirement next year at age 62. Divorced with two adult children, she worries her kids won’t be able to pay off the college loans for which Nancy co-signed. That adds to her money concerns, big time.

“I wonder if I should sell my house and move into a condo which will be more manageable as I age,” she says. “I am so afraid of being old and poor and running out of money should I live another 20 years.”

Nancy, whose name has been changed, has saved $775,130 in her 401(k), $4,000 in savings and $500 in checking. She’s eligible for a pension worth 65 percent of her current salary. Nancy also will receive back child support of $10,921 a year for the next 10 years.

The Star-Ledger asked Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Berkeley Heights, to help Nancy look at her coming retirement and how her children’s loans could impact her financial plan.

“In spite of her concerns, Nancy is actually in good shape entering retirement since she can retire today with a pension that entitles her to 65 percent of her pay and also has employer retiree health costs at the same subsidized rate she enjoyed as an employee, $80 per month,” Maye says.

First, the college costs. Nancy paid 75 percent of college costs for her kids, and she’s still paying tuition for her college senior. Come graduation in May, her cash flow will improve dramatically, and she’ll have an extra $42,000 a year available after paying bills, assuming she continues to work.

The rest of the college bills were paid by college loans, which will amount to $55,000 for each child. Nancy co-signed on the loans, and she’s worried the children may not pay them back.

“Her oldest has already graduated and was fired from a job with a salary of $42,000 a year,” Maye says. “She’s not working and doesn’t feel responsible for paying back the loans.”

Nancy has considered taking money from her 401(k) to pay off the loans — something Maye does not recommend.

He says Nancy needs to have a frank discussion with her children about how the payments are primarily their responsibility. Yet, as co-signer, Nancy is equally on the hook for the loans, so she’s smart to stay in touch with how her children are faring financially.

Maye evaluated what the impact would be if Nancy had to pay back the entire amount of the loans.

“Based on cash flow projections, if the need should arise Nancy can afford to cover 100 percent of the student loan payments,” Maye says. “Just because she can make the payments doesn’t mean she should, plus it is money she could be using to enjoy her retirement.”

Looking at the rest of Nancy’s finances, Maye says he has concerns about her lack of emergency cash. He recommends she set aside $50,000 for emergencies once current tuition payments end. Nancy has had a couple of health scares, so Maye agrees it makes sense for Nancy to retire sooner rather than later.

He analyzed her potential income sources and expenses, and says Nancy can afford to retire at 62.

Maye says Nancy’s projected after-tax retiree cash inflows exceed her current cash inflows. He projects her sustainable spending level based on her extremely conservative asset allocation is roughly $65,000 per year base spending, which is 30 percent above her current spending level plus $13,200 a year for student loan payments. He also recommends she begin to collect Social Security as soon as she is eligible given her health history.

Maye says he usually encourages individuals to have their mortgages paid down or nearly paid down before retirement. But Nancy’s projected cash flow is strong enough to cover the mortgage, he says.

“Nancy does not need to sell her home in retirement, but it remains a viable option if she wants to downsize and create even more liquidity to enjoy during retirement,” he says.

Another way to increase retirement income would be if she adjusted her asset allocation. Maye says her current retirement portfolio is very conservative, with 76 percent invested in cash equivalents. The portfolio has a historical return of 6.57 percent.

If she diversified, purchasing instead a combination of bonds and equities — still conservative — she could increase her return to 8.79 percent. That would allow for another $10,000 a year of spending money.

And if Nancy’s children step up and take responsibility for the student loan debt, she’ll have even more assets available to her.

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