Get With The Plan: September 9, 2013

9813Francine, 60, and Milton, 68, are ready to enter the next phase of their financial lives.

Milton is already retired, and Francine would like to stop work in two years.

“I would like to move if I retire as planned,” Francine says. “I want to go where my money will go the furthest.”

They’re considering Florida, New York or staying in New Jersey.

The couple has one financial unknown, though. They provide for their disabled daughter, 26, who lives at home and is currently unemployed.

Francine and Milton, whose names have been changed, have saved $226,300 in 401(k) plans, $275,000 in annuities that are within IRAs, $402,300 in mutual funds and $1,000 in checking.

The Star-Ledger asked Vince Pallitto, a certified financial planner and certified public accountant with Summit Asset Management in Florham Park, to help the couple make some big money decisions that will affect the rest of their lives.

“They are concerned because they feel that they do not have enough saved to sustain a comfortable retirement and provide for their daughter,” Pallitto says. “Their daughter is 26 and has a disability that may make it difficult for her to earn an income needed to cover the cost of living in the New Jersey area.”

Pallitto said his first question to the couple was if they had any family ties or emotional reasons to stay in New Jersey.

“Francine made the solution rather simple because she said they have friends and family in Florida, and were considering moving to Florida,” Pallitto says. “Therefore, retiring to Florida makes sense on every level for her and her family.”

About $841 of the couple’s budget is real estate taxes, and they pay about $490 a month on their home equity line of credit. When they sell their New Jersey home, they expect to net about $250,000, and they’d use the money to purchase a Florida residence without a mortgage.

Pallitto says if they move to Florida, Francine and Milton expect their real estate taxes and community fees to be less than $500, which would save them saving them about $800 per month compared to what they spend for their New Jersey home.

“I suggested that they assume that they will spend approximately $6,500 a month when they retire,” he says. “Even with the increased spending projection, they will be able to retire very comfortably and provide for their daughter better than they expected.”

Several factors will impact their plan.

The couple has about $500,000 saved in various retirement accounts, including Francine’s 401(k) plan and two IRAs, which are both invested in annuities. They also have about $400,000 in a brokerage account, and half of that is in an annuity.

“In most cases this would not be enough to completely retire at age 62, however, they are fortunate because they both have employer-sponsored pension plans,” Pallitto says.

Milton is currently receiving $2,200 a month from his pension plus $1,500 a month from Social Security. Francine would get $3,350 a month from her pension when she is 62.

There’s a slightly unconventional pension strategy she could consider to both provide income for herself and to care for her daughter once Francine is gone.

“Francine’s employer would allow her to take a reduced payout if she chooses a joint life payout on her pension,” Pallitto says. “Based on the employer’s information, if she elects to have her daughter as a joint life payee, she would receive $3,050 a month for her life and her daughter would receive $775 for life upon Francine’s passing.”

If Francine was to take the reduced payout, the couple’s income upon Francine’s retirement at age 62 would be $6,750 per month. This doesn’t count Francine’s Social Security or Milton’s required minimum distributions from his IRA, which would start in two years when he turns age 70.

Francine is also concerned about what would happen if she or Milton was to pass away suddenly.

“How would the other be able to afford their expenses?” she asks.

After reviewing the couple’s projected expenses, Pallitto says it appears the surviving spouse’s monthly spending would be about $4,000. Based on that assumption, if Francine predeceased Milton, he would still have $3,700 a month plus his required minimum distributions from his IRA, Pallitto says. If Milton predeceases Francine, she would have her pension, plus her Social Security, which is projected to be $2,200 per month at age 66. She’d also have her IRAs.

In short, both spouses should be able to handle their expenses.

Pallitto wasn’t thrilled with the couple’s asset allocation and account types.

Their current IRAs and about 50 percent of their brokerage account are invested in annuities. Palitto says this could be a good strategy for people who don’t have pensions, but for this couple, “it may be too much.”

“It is clear that their advisor at the time did not know, or ask, about their pensions prior to investing about 75 percent of their assets in annuities,” Pallitto says.

He recommends they review the annuity contracts to see where the account values are compared to the benefit base for each annuity.

“If their account value is close to or more than their benefit base, I would suggest reallocating the funds into an annuity with enhanced benefits for long-term care,” Pallitto says. “The primary reason for this is — because of their age and health — actual long-term care insurance will be too expensive.”

To make sure the couple provides for their daughter in the way they want, Pallitto syggests they change their wills. He says they should create a trust that would provide for their daughter upon their passing.

“She will receive $775 a month from his mother’s pension,” Pallitto says. “She has the ability to make a living that, when combined with the pension, should cover her living expenses.”

Pallitto says the trust would receive the remaining marital assets from Francine and Milton and distribute income to their daughter as needed, or provide for major expenses.