Get With The Plan: October 5, 2008

Howard, 47, and Joanne, 46, would like to retire in 10 years, but they’re worried about whether or not they can afford it.

‘‘Joanne does not have a deferred compensation account, and I cannot get her to open one,’’ Howard says.

But they both have healthy pensions. Howard, a government employee, will receive 65 percent of his base pay after 25 years of service. He would get an extra 1 percent of pay up to 30 years of service, for 70 percent of his base pay.

Joanne’s pension is based on age, salary and years of service. They each have 10 years until they’re eligible for the pensions, and that’s when they would like to retire.

The couple, whose names have been changed, also have saved $80,911 in Howard’s deferred compensation plan, $13,033 in IRAs, $80,103 in mutual funds, $200 in a brokerage account, $10,000 in a money market, $9,000 in CDs and $5,250 in checking. They also have $52,882 in college savings. The couple is done paying for their two oldest children, but they still plan to contribute to the college education of their 10-year-old.

The Star-Ledger tapped Doug Buchan, a certified financial planner with Tilson Financial Group in Watchung, to help the couple tune up their retirement plan.

‘‘Howard and Joanne have relatively limited investment assets that are earmarked for retirement given their desire to retire in 10 years,’’ Buchan says. ‘‘Although their investment assets at first glance may not suggest a realistic early retirement, they do have outstanding pensions.’’

This case becomes more about living within their means than optimizing investment strategies, he says.

Unlike most private pension packages, both Howard and Joanne, as government employees, have pensions that will increase with the cost of living. Buchan says this benefit is significant, as it greatly reduces purchasing power risk that others without pensions or with private company pensions face.

Buchan says given their pensions, assets and projected expenses, a goal of retirement in 10 years is feasible, but there are a few things to consider and clean up to help ensure a fruitful retirement.

Howard’s deferred compensation plan is currently worth approximately $80,000, consisting of 90 percent stocks and 10 percent bonds. The equity investments in the plan are well-diversified, Buchan says, but it appears to be too aggressive given Howard’s stated conservative risk tolerance.

‘‘Some 47-year-olds can and should be in 90 percent stocks in their retirement accounts, given that many will have a time horizon north of 20 years,’’ Buchan says. ‘‘But a self-described conservative investor who may begin drawing on this money in as little as 10 years should re- think a 90 percent stock allocation.’’

Instead, Buchan says, somewhere between 50 percent and 70 percent in stocks would be more appropriate.

Now, to the debt. There is ‘‘good debt’’ such as mort- gages, and ‘‘bad debt’’ such as credit cards. Howard and Joanne have a credit card balance of about $12,000 at a zero-percent interest rate.

‘‘These rates can jump up to north of 20 percent after the teaser rate expires,’’ Buchan says. ‘‘It is possible to jump from one zero percent teaser card to another, but this is not as easy as it was a few years back, as most credit card issuers have caught on to these noble efforts.’’

And given today’s credit environment, Buchan says it’s much harder to get these attractive rates. They’ve been paying $280 a month, but Buchan advises they take a more aggressive approach to paying off the balance. They should shoot for a goal of paying the balance in full before the zero percent rate expires.

Here’s how: Because they both have secure jobs and nearly $25,000 in cash accounts, he says a 3-month emergency fund, or $21,000, is sufficient. They should use the excess to pay down some of the credit card debt. Then when the zero-percent rate is about to expire, they should pay the rest with some of their emergency fund.