Get With The Plan: September 2, 2012

Bobby and Sue have 10 years until their goal retirement age, so they feel they need guidance. Both 52, the couple has concerns about their child’s college tuition costs, which will start one year from now. They also plan some major upgrades to their home worth about $25,000, but they don’t want to go into debt.

“For retirement, we would like to sell our house and move to another part of the country,” Bobby says. “We would like to be comfortable, periodically travel and be as debt-free as possible.”

The couple, whose names have been changed, set aside $111,100 in 401(k) plans, $10,300 in IRAs, $6,500 in bonds, $2,700 in savings and $200 in checking. They also have $34,000 earmarked for college tuition, and Bobby expects an annual pension of $64,650 at age 62.

The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help the couple plan for their future.

“Bobby and Sue are wise to begin to see if their retirement can take shape for them,” she says. “One of the obstacles in knowing if you have enough to retire is first to visualize what you plan to be doing in retirement, and where you plan to be doing it.”

Then, you can attach a price tag.

Bobby and Sue have several goals, including home improvements, which they have been putting off, and a college education for their child. They’d like to retire in 10 years when they’re both 62.

First, retirement.

D’Agostini says retirement often takes on three stages.

First is the “go-go” stage, where retirees often enjoy good health and want to maximize their days by traveling and engaging in new hobbies. “This can often be costly, resulting in expenses that exceed their pre-retirement budget by as much as 105 percent,” she says.

Next is the “slow-go” stage, where health issues can start to creep in, and retirees start to pull back on their expenses.

Lastly is the “no-go” stage, where health issues can become quite prominent and costly. D’Agostini says the medical portion of the budget can swell in this stage, particularly if one or the other requires some long-term care.

D’Agostini took a look at the couple’s retirement income options.

Bobby has several choices for his pension. One choice is a 100 percent joint and survivor option, which would pay $400 less per month but ensure that Sue receives the pension even if Bobby predeceases her.

D’Agostini says instead, it might be worth considering taking the higher pension amount for Bobby’s life only, but only if Bobby takes on additional life insurance to cover the difference.

“If Bobby then predeceased Sue, she would have life insurance that would provide a lump sum amount that could be used to help provide an income,” she says. “This concept is called pension maximization. This concept works only in cases where sufficient life insurance coverage can be obtained at a cost less than the difference between the payout options.”

Both Bobby and Sue have full retirement ages of 66 for Social Security benefits. They could begin to collect benefits as early as age 62 ½, but each year they delay taking benefits will increase their benefits by approximately 8 percent a year.

If they wait until their full retirement ages, they will get approximately one-third more per month, and if they hold off until age 70, they will get approximately three-quarters more in benefits, D’Agostini says.

“This could be quite significant if they live long lives,” she says “It is an important benefit, and it comes with a cost of living benefit, to boot.”

She says they should consider what their health will be at retirement, their family history, their financial needs and their ability to meet these needs to determine when it’s best to start claiming benefits.

In the short term, the couple would like to accomplish $25,000 in home improvements. They have an available home equity line of credit which allows them to borrow up to $65,000, and they have an outstanding balance of $25,000 at a rate of 3.25 percent. Additionally, their current mortgage balance is $51,300, with an interest rate of 4.75 percent.

D’Agostini says rates are at an all-time low, so she recommends they consider refinancing their mortgage and consolidate the home equity line balance while keeping the line of credit open.

Looking at college, which starts next year for their child, D’Agostini says they are underfunded. Their child is looking to attend a public college with a price tag of approximately $30,000 a year for four years.

They have currently saved $34,000 towards projected four-year expenses of over $129,000, which is approximately 26 percent of the amount needed.

“Since current college loans are at rates of 6.8 percent and up, they might want to consider using their line of credit to cover any shortfall that they could not make up from savings and current income,” she says.

Their child should also look for some financial aid, especially in the form of grants and scholarships that would not have to be repaid upon graduation.

“It is an important discussion to have with students in this climate, as the average graduate last year had over $23,300 of student loan debt and total student loan debt topped $150 billion,” D’Agostini says.

“They entered a job market that is tight and has not provided jobs with starting salaries that would help them pay for both their student loans as well as live on their own.”