Get With The Plan: September 11, 2011

91111Danny and Irene have a retirement plan. They’d like to retire in the next couple of years, but they’re wondering if they can afford their dream lifestyle.

“Can we afford to maintain two residences,” asked Irene, 58. “We’d like a townhouse or condo in the Northeast and a small home in the Southeast.”

But that takes money. They’re not sure if their retirement budget will be enough.

Danny and Irene, whose names have been changed, have saved $238,800 in 401(k) plans, $13,850 in IRAs, $36,150 in savings bonds, $69,300 in certificates of deposit, $192,900 in savings and $4,000 in checking.

Making a big difference to their bottom line is their anticipated pensions.

Irene will receive a monthly pension of $3,775 when she retires, or she can take a lump sum of $586,519. Danny will receive $5,000 a month, half of which Irene would continue to receive upon his death.

The Star-Ledger asked Leslie Beck, a certified financial planner with Compass Wealth Management in Maplewood, to help the couple see if they’ve saved enough to start their retirement years.

“Danny and Irene are in many ways typical of the average financial planning client I see,” Beck says. “For one thing, they would like to retire before the traditional age 65. For another, they would like to have two residences.”

In one critical way they differ from most planning clients, she said, because they’re both eligible for generous pensions, which Beck says gives them an important and valuable advantage when planning for retirement.

Beck says retirement planning is difficult because not only do you have to try to estimate how much income you will have available and for how long, but you must also project what your expenses will be over that timeframe.

To do that with any degree of accuracy, it’s important to know what you are spending now.

“Pre-retirement spending habits are usually a good predictor of spending in retirement, at least in the early stages,” Beck says. “And here we had a little trouble with Danny and Irene.”

Like a company’s balance sheet, the amount of money you receive in income should equal living expenses, plus any monies you are saving. If written as an equation, it would look like this: expenses + savings = income.

Beck says sometimes the savings figure is a negative such as with credit card borrowing. She says when she originally looked at the couple’s budget figures, there was a large gap in the equation: income exceeded expenses and savings by almost $60,000.

She says this isn’t unusual because most people don’t really have an accurate picture of what they spend. Beck asked the couple to go back over their expense numbers and see what they were missing.

They came back with some fairly large adjustments, but most were one-time expenses such as paying off a car loan early, and there was still a $30,000 discrepancy.

Giving it more thought, the couple forgot to add $4,000 in annual savings to a credit union. Still, there’s unaccounted for money.

Beck recommends the couple track their day-to-day expenses for three months, keeping a ledger of every dollar they spend. She recommends they keep a small pad or notebook with them, or use a cell phone, and jot down every dollar. Three months of data should give them a good idea of where the money is going, which is especially important as retirement approaches.

Pensions will be a big help to their retirement budget. Once Irene retires in 2013, and Danny, earlier, their combined pension income will be $101,232. Plus, they will have free health insurance through Danny’s job.

“While their pensions will not adjust with inflation, their combined estimated Social Security benefit of $45,061 beginning at age 62 will provide some inflation protection,” Beck says.

Based on their spending patterns and their anticipated retirement income, the analysis shows a very high probability of a successful retirement. Because of their high pension income, Irene’s desire to work part time for a few years while in retirement and the couple’s general good health, Beck recommends they postpone collecting Social Security benefits at least until their full retirement age 66, and ideally, until age 70.

“Social Security also provides a bonus for delaying benefits beyond the full retirement age,” she says. “For Irene and Danny, this bonus amounts to an additional 8 percent credit per year from age 66 until age 70. Potential cost of living increases make the benefit of postponing even larger.”

To the couple’s goal of owning two homes. Beck says she ran a scenario with a home purchase for $250,000 in 2013, and additional homeowner’s expenses of about $6,000 annually. The purchase still results in a very high level of confidence for a successful retirement, she said.

“Purchasing a home at that level for cash would put a serious dent in their non-qualified (i.e. non-IRA) savings,” she says. “If contemplating such a purchase, we would encourage them to begin putting extra funds away for such a purchase so they won’t have to tap into their IRAs for emergency funds during their early retirement years.”

She says an extra $30,000 in non-qualified savings before Irene’s retirement should do the trick.