Get With The Plan: September 9, 2012

Vito and Maggie have only been in New Jersey for a few years, and they don’t plan to stay very long. Vito would like to work five more years at the most, and then retire down south to their original home state. They have little debt and the costs for college and a child’s wedding are behind them.

“My biggest concern is having enough money to live comfortably during retirement,” says Vito, 58.

The couple have means, but they want to make sure there’s enough to last. They currently have $70,000 a year in discretionary income, but they don’t know what to do with it. They’re also sitting on $250,000 in a savings account because they’re afraid to risk the funds in the stock market.

Additionally, they’ve saved $733,500 in annuities, $305,000 in 401(k) plans, $381,000 in mutual funds and $10,000 in checking. Vito also receives $40,000 a year from a pension from a former employer.

The Star-Ledger asked Kim Viscuso, a certified financial planner with Stonegate Wealth Management in Fair Lawn, to help the couple plan their retirement.

Viscuso says the couple has the same concerns as other soon-to-be retirees.

“Most baby boomers approaching retirement age are concerned about having inadequate retirement funds,” she says. “They are realizing that they cannot count on Social Security alone for retirement. They are trying to save more for retirement and are looking for investments that can help assets grow.”

But this couple is also afraid of another big hit from the market, so they are keeping a big chunk of savings in a passbook savings account, which has no earning potential.

Viscuso says a key risk that retirees face is inflation. They need to make sure the value of their savings keeps up with rising costs. If they don’t, inflation will erode the value of savings and their standards of living will decline.

“Investors often do not understand the damage inflation can do to the value of their assets over time,” she says.

“It is recommended that the family move the money out from the passbook account to a brokerage account and invest in a conservative yet diversified portfolio. Keeping money in a passbook savings is safe, but it earns less than inflation thus reducing the buying power over the time.”

In five years, Vito and Maggie would like to sell their New Jersey home and buy a new one in another state. Viscuso says given their price expectations, they should be able to pay cash for the new home.

But the couple has concerns about taxes, and they say they need more deductions. Although they can afford to pay off their debt, they are keeping their home loans because the interest is deductible. Viscuso says it would be wise for them to pay off their high-interest credit card debt with funds from their home equity loan, which has a far lower rate and tax benefits.

“Most homeowners know that in general, you can deduct all of your home mortgage interest if you file Form 1040 and itemize deductions on Schedule A,” she says. “Some homeowners may not be aware that they can also deduct the interest paid on a home equity loan up to $100,000.”

Viscuso looked at the couple’s retirement savings to see whether they should have enough to fund a long retirement. Vito maxes out his 401(k), and they also have substantial assets in annuities and mutual funds.

Viscuso assumed inflation at a 4 percent rate, and health care costs with a 5 percent inflation rate.

“While current life expectancy for a 60-year-old male may be 81, there is a significant possibility that actual life expectancy may be 95,” she says. “Most people believe they will never live that long. Since running out of money is not an option, we assumed both Vito and Maggie will live to be 100.”

Social Security is another decision that would have to be made upon retirement. Viscuso said the couple could take a reduced benefit at age 62, or wait until eligibility for full benefits, or take an increased benefit by postponing until age 70.

For this couple, Viscuso assumed they’d delay benefits until age 70.

Health care costs are another concern. When Vito retires, the couple would no longer have employer health benefits, so they’d incur out-of-pocket costs for several years until they’re each eligible for Medicare at age 65.

With all these cost considerations, Viscuso ran a Monte Carlo analysis to judge the probability that any given financial goal will succeed.

“Instead of just assuming the same year after year portfolio returns, we used Monte Carlo to represent the more realistic notion that year-to-year returns fluctuate around the long-term average in a statistical distribution based on the historical properties of the portfolio,” she says.

The findings were favorable.

“The couple has the potential to meet their goals although it is important that they seek professional help to manage their investment portfolio,” she says.

“Diversification across all investments including their annuities and his 401(k) plan is imperative.”