Get With The Plan: September 26, 2010

92610Doreen, 67, is divorced and financially independent. She has raised three children and, in retirement, wants to enjoy her grandkids. Her parents are both healthy and active in their 90s, so she’s planning for a long retirement. And, she’s full of questions.

“How much can I draw from my funds yearly? Do I have enough funds to comfortably retire now? Will I outlast my funds?” she asks.

Doreen, whose name has been changed, hopes to partially retire next year, then fully retire in 2012. She’s set aside $687,112 from a 401(k) account she received from her ex-husband in the divorce, $94,108 in IRAs, $247,468 in a brokerage account, $50,000 in savings and $14,000 in checking.

The Star-Ledger tapped Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown, to help Doreen look at her money future.

“Because Doreen has disciplined herself to a strict budget, continued to grow her current accounts and added to her retirement accounts on a yearly basis, she can in fact retire fully in 2012, and enjoy her retirement up to the age of 100 and beyond,” D’Agostini says.

With her current good health and her family history, Doreen is wise to prepare for a long life. In fact, D’Agostini says, one of the biggest risks in retirement is longevity, or the risk of outliving one’s resources. Often, retirement accumulation occurs over 30 to 40 years, but now de-accumulation, or the spending down of your assets, can be just as long.

Doreen lives well within her budget, even managing to put away $5,500 in her Roth IRA while her employer puts away $2,000 a year in a traditional retirement plan for her.

“She’s done what we hope for most retirees — managed to pay off her mortgage in full and lead a debt-free existence,” D’Agostini says.

Doreen has not started to take Social Security, which also benefits her if she lives a long life. Every year she holds off taking Social Security gives her an average increase of 8 percent from her full retirement benefit, D’Agostini says, which for Doreen was age 65.

“This means that the floor, or starting point, will be begin at a permanently higher point,” she says. “This is most important as, once taken, Social Security will only see minimal cost of living increases of around 1.8 percent annually, and in 2010, there will be no increase at all.”

If Doreen lives the projected life span of 100 years, this will mean considerably more income for her over time.

Doreen has made a smart move in buying long-term care insurance. Women tend to have longer life expectancies, D’Agostini says. This, coupled with her family history, means statistically she will be in a pool of individuals who have well more than a 50 percent chance of needing long-term care at some point.

D’Agostini cites a study by the National Association of Insurance Commissioners, which found that 68 percent of people older than age 65 are likely to need long-term care. As the population ages, this will continue to grow. And in New Jersey, long-term care costs an average of $60,000 a year at assisted living facilities and more than $85,000 a year for nursing home facilities.

On an hourly basis, D’Agostini says, nursing care comes in at $22 to $25 per hour — costs that can implode even the best of retirement plans.

Because she has other assets, Doreen purchased a policy with $120 per day of coverage, and D’Agostini says the balance of her needs could be met by her savings and retirement plans.

“It is important that long-term care insurance acquired at her relatively `young’ age have an inflation rider,” she says.

Inflation riders are essential, D’Agostini says, as medical costs have been rising well beyond the traditional inflation rate of 3 percent, showing upwards of 5 percent a year. Because Doreen may not need this benefit for another 30 years, it is important to keep pace with escalating costs. Also, she purchased two years of coverage. D’Agostini says she would have recommended at least three years which covers more than 90 percent of those who need long-term care.

Doreen needs about $3,000 a month in income. She will have a Social Security benefit at age 68 of around $1,788 per month. D’Agostini says it would be wise to meet fixed expenses with fixed income that is not subject to market volatility. She says there are three sources for this: Social Security, pensions and annuities.

Because Doreen doesn’t have a pension, D’Agostini recommends she consider an annuity that could provide the rest of her predictable monthly income, ensuring she will never outlive her income.

The annuity would also provide a death benefit so Doreen can leave a legacy to her three children.