Get with the plan: October 5, 2014

Every parent, sometime, will find it’s time to turn their attention from their children and to themselves.

For Sally, 50, and Lee, 47, now is that time.

Their one child is in her late 20s and financially independent. So now, the couple want to concentrate on themselves.

“I want to retire comfortably at 58,” Sally says. “Comfortably.”

The couple has saved well. They have $373,600 in 401(k) plans, $212,800 in IRAs, $90,000 in an annuity, $358,300 in mutual funds, $1,700 in a brokerage account, $50,000 in savings and $15,000 in checking. They are debt-free, and they own their home outright.

The Star-Ledger asked Michael Pirrello, a certified financial planner with Mill Ridge Wealth Management in Chester, to help the couple see if that’s a doable goal.

“Sally and Lee can begin to see the light at the end of the savings tunnel,” Pirrello says. “Through hard work and diligent saving, they currently find themselves in a very strong financial condition as they begin to look toward retirement.”

While Sally wants to stop working at 58, Lee anticipates that he will want to work an additional five years and retire when he is age 60. They plan to continue to live in their current home until Lee retires. At that time, they plan to downsize and relocate, selling their home and using the proceeds to pay cash for their new home.

Pirrello says Sally and Lee have been fortunate to avoid many of the obstacles that challenge pre-retirees, such as debt accumulation and significant investment loss.

“They have been disciplined throughout their working lives, living within their financial means and being keenly focused on paying down debt,” he says. “To that end, they now find themselves in the enviable position of being prepared for an early retirement.”

With any comprehensive financial plan, Pirrello says savers need to check off some important boxes prior to proceeding to a retirement analysis. He says in addition to having no debt, the couple is adequately insured.

“With one adult child doing very well on his own, this couple does not need life insurance to cover potential future family needs, such as college costs and debt coverage for a mortgage,” he says. “They each have life insurance coverage through their employers as well as $300,000 in low-cost term policies that cover them into their early 70s.”

They’re not yet ready to commit to a long-term care insurance strategy, but they plan to address that need at an appropriate time in their mid-50s to early 60s, Pirrello says.

From an estate planning standpoint, they have their legal documents in place, including an updated will, power of attorney and medical directive.

“They currently do not need to address a federal estate tax issue as they are well under the current $5.34 million federal estate tax exclusion and under current tax-law, and their estate is anticipated to stay under that level in the future,” he says.

What Sally and Lee want to do is to understand their options as they relate to the timing and quality of their retirement. The couple doesn’t anticipate needing more than 50 percent of their current income in today’s dollars to live on in retirement.

“Assuming Sally retires at age 58 and her husband continues to work for an additional five years, until he is age 60, they will have sufficient income to support themselves in retirement through Sally’s age 95,” Pirrello says.

That assumes they receive annual Social Security at age 65, and Lee receives his $66,000 per year pension at age 61.

“Sally and Lee are in this enviable position regarding their retirement plan because they have continually had strong incomes over the course of their careers and have been extremely diligent with their spending and savings,” Pirrello says. “Ultimately they are on their way to winning the retirement game, which is certainly a desirable position for a couple to be in as they begin to plan their retirement.”

Pirrello says key to their successful retirement plan from an investment perspective will be a “win by not losing” investment approach.

He says right now, the couple has 57 percent of their portfolio in U.S. stocks, 13 percent in non-U.S. stocks, 20 percent in bonds and 10 percent in cash. But because they’re on track to reach their goals, they need to mitigate any risks that could derail their plan, Pirrello said.

One such risk would be a health-related risk that would incur significant expenses, but Sally and Lee say they will eventually get long-term care insurance. So what they have to control now is the risk of any loss in the value of their investment portfolio.

Pirrello says they’re not in the position where they need to take significant risks with their portfolio to reach their retirement goals.

“Trying to achieve higher than normalized investment returns will introduce increased risk in a portfolio and potential for investment losses,” he says. “They are on track to achieve their retirement goals with moderate 6% returns.”

Their portfolio should be invested in such a way to enhance diversification and reduce investment volatility.

Get With the Plan is designed to illuminate personal finance concepts and isn’t a substitute for actual financial planning or dedicated professional advice. To participate, contact Karin Price Mueller at Bamboozled@NJAdvanceMedia.com.

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