The Mercer County couple, who have two financially independent grown children, are planning for retirement. Chris has already stopped working and Jess wants to quit in three years.
“Our main concern is retirement,” Chris says. “We’d like to plan for one big trip and several smaller ones each year.”
The couple, whose names have been changed, have saved $381,400 in 401(k) plans, $330,400 in IRAs, $67,800 in mutual funds, $110,000 in savings and $10,000 in checking. They own their vacation home outright but they still have a $135,000 mortgage, and they pay an extra $1,000 in principal on the loan.
The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple determine when their bank accounts will be ready to fund retirement.
“Chris and Jess are approaching a critical transition point,” Kazanchy says.
When Jess retires — hopefully in three years — they’d like to maintain their lifestyle with after-tax spending of $100,000 a year, including their mortgage.
Kazanchy ran a Monte Carlo simulation to see how the couple’s situation would fare under thousands of variables.
Most of the time, the plan fails.
“That means there is a high likelihood that they will run out of funds during their life expectancy,” he said. “However, the goal of retirement should be attainable with a couple of adjustments to their plan.”
He said if they’re willing to reduce spending by $10,000 a year and increase their asset allocation to stocks to 60 percent — from the current 45 percent — their plan projects an 87 percent probability of not running out of funds. Kazanchy calls that a very nice success rate to plan around.
Another option would be for Jess to work an additional two years so she could save more income for retirement. That, Kazanchy says, could yield them a similar level of success without reducing their spending or increasing the risk in their portfolio.
Kazanchy says now is the perfect time for them to discuss the trade-offs they may need to make as they near the finish line of Jess’ working years.
Looking at their current budget, Kazanchy says they have several flexible areas to work with to cut $10,000 of spending.
They could reduce any or all of their spending for family gifts ($12,000 per year), charitable giving ($6,000 per year) or vacations ($12,000 a year).
There are other strategies they could employ to improve their cash flow.
Jess and Chris could take some of their cash and pay off their car loans worth $38,000.
“The interest is not tax-deductible and the rates on loans are 4 percent and 4.5 percent, which is much higher than they are earning on cash,” Kazanchy says.
They also don’t have to pay the extra $1,000 per month on the mortgage. Kazanchy says the rate on the loan is low, and the tax deduction is valuable to this couple.
They currently have more cash on hand than they need. He says about $55,000, or six months’ expenses, should do the trick, so they can invest the rest of their cash in their investment portfolio.
The couple’s overall asset allocation could also be changed to 40 percent bonds and 60 percent stocks, which Kazanchy says will increase their return potential.
He notes they should also roll over their older 401(k) plans to IRA accounts to increase their investment choices and lower their overall trading costs.
“They should roll over their former employer retirement plans to IRA accounts with a custodian that offers inexpensive trading costs and access to wide array investment options, such as Schwab, Fidelity, TD Ameritrade and Vanguard,” he said. “Once they’ve consolidated into an IRA for Chris and an IRA for Jess, they should invest 40 percent in bonds and 60 percent in stocks.”
Within that stock allocation, he suggests they spread their savings among more asset classes, including infrastructure funds, frontier market stocks, emerging markets, international small- and large-cap investments and U.S. small- and large-caps.
Another big step for the couple is how they choose to take Social Security benefits.
Kazanchy says if they use what he calls the “Claim Now, Claim More Later Strategy,” their total lifetime benefits are projected to be $1.84 million — which is nearly $300,000 more than they’d claim by starting benefits earlier.
To do this, Chris would begin collecting his benefit at age 70. When Jess is 66, she’d start collecting a spousal benefit until her age 70, at which time she switches to her own benefits.
“Benefits grow at 8 percent per year while each individual delays from 66 to 70,” he said.
He also took a look at the couple’s insurances, and he recommends they take a $3 million umbrella liability policy.
“Coverage is relatively inexpensive and they will want to protect against things that could derail their retirement plans,” he said.
Kazanchy also says they’re okay on the life insurance front. Chris has a $100,00 whole life policy with significant cash value, while Jess has $500,000 of coverage through her employer, which will protect her income as long as she’s working.
For their estate plan, Kazanchy suggests they update their will and other documents because their current docs are more than 10 years old. They should also review retirement plan and insurance policy beneficiary designations.