Sam, 50, and Deb, 53, say they’ve had some ups and downs with employment during the recession, but they’ve bounced back.
Now they want to know when they’ll be able to retire, and how much money they need to save to make sure they won’t run out of money when they do leave work.
“We want to move someplace less costly and with better weather than New Jersey,” Sam says. “Also, we would like the opportunity to travel extensively.”
The couple has no children, and they’ve saved a pretty nice nest egg.
They have $956,000 in IRAs, $172,000 in Roth IRAs, $87,500 in 401(k) plans, $500,000 in a brokerage account, $135,000 in money markets and $22,000 in checking accounts.
When Sam reaches age 65, he’ll receive a pension worth $1,544 per month, and at their full retirement ages, the couple expects to receive Social Security benefits worth $4,770 per month.
Brian Power, a certified financial planner with Gateway Advisory in Westfield, ran some projections about Sam and Deb’s future for NJMoneyHelp.com.
THE BIG NEWS
Power said he used an after-tax retirement lifestyle of $60,000 per year, increasing every year for inflation, based on the couple’s expected retirement budget. This included an additional $5,000 a year for additional travel expenses.
When the numbers settled, Power had good news.
“They have a very high probability of not running out of money and will most likely keep their investment portfolio’s principal intact retiring today,” Power said. “With their modest lifestyle and significant savings, Sam and Deb are in rare company in that they can retire at age 50 and 53 respectively.”
In order to pay the bills today, without their work income, the couple would need to withdraw 3 to 4 percent from their portfolio. That would just be until Social Security and Sam’s pension kick in.
“Once the cash flow spigots are turned on, they would need less than a 1 percent withdrawal rate to supplemental their lifestyle,” Power said. “At that point the portfolio will start to snowball and build itself back up to the point that they could have more money at the end of their lives than at the beginning of retirement — also a rare planning outcome.”
LOWER THE RISK
Having the luxury of being able to retire in their early 50s doesn’t mean their planning is done.
Power said if they do retire now or sometime in the near future, it would be important for Sam and Deb to lower the risk on their investments.
Why take extra risk if you don’t need to?
Power’s asset allocation study showed Sam and Deb are approximately 90 percent in stocks and 10 percent in cash, but they didn’t need that much stock exposure to have a successful outcome.
To compare potential future outcomes, Power ran a probability analysis assuming a moderate asset allocation of 50 percent stock and 50 percent fixed income/money market. That allocation was based on a combination of Sam’s “high” risk tolerance and Deb’s “moderate to low” risk tolerance.
Power had some suggestions for the couple.
Right now, they have 75 percent of their stocks in U.S. large-cap stocks. Power said their stock market investments could use some more diversification, even as they consider lowering their equity exposure.
He recommends Sam and Deb consider reallocating money into developed international stocks.
“Besides potentially helping reduce the volatility of the portfolio, international stock markets are starting to wake up and domestic stocks are starting to fall to sleep a bit,” Power said.
On the fixed income side, he said the couple should consider international bonds and a heavier weighting towards short-term bonds.
“Emphasizing towards short-term bonds could help protect their principal against rising interest rates,” Power said.
As Sam and Deb enter into a new stage of their financial life, they have some housekeeping to take care of.
For starters, the couple has too many accounts.
“They have 17 different accounts at seven different financial firms,” Power said. “Keeping things consolidated at one financial firm can ease the burden of administering the accounts and tracking their performance.”
He said there may also be a cost savings by consolidating. That’s because many firms that charge a percentage fee of assets under management will lower the percentage charged if investors have higher balances.
Once Sam and Deb turn age 60, they should consider taking withdrawals from their retirement accounts to help supplement their lifestyle, Power said.
“This may sound counterintuitive since they don’t need to take withdrawals from their retirement accounts until age 70 ½, which is when most people wait to take those withdrawals,” Power said. “Based on my analysis, their effective tax rate will jump significantly after required minimum distributions must begin.”
He said the strategy may not seem to be tax-smart for the present, but there would be a big difference when looking at what their total tax bill will be over their retirement lifetime.
“The goal should be to take enough money from their IRAs prior to age 70 so their total anticipated tax bill through retirement will end up being lower than if they wait until RMDs kick in,” he said.
The couple also needs to make sure their estate planning is reviewed to make sure they can both take full advantage of New Jersey’s $675,000 estate tax exemption, Power said.
“Along with that, they must each own $675,000 of assets in their individual names to be able to fully take advantage of the exemption,” he said.
It would probably be a good investment to meet with an estate planning attorney to make sure their documents are in order.Money makeovers offered by NJMoneyHelp.com should be treated as general advice about personal finance and money decisions. Before you make any changes to your personal financial plan, see a professional who can consider your entire financial situation. If you’d like a free money makeover, email moc.p1502955519leHye1502955519noMJN1502955519@ksA1502955519.
Total Assets: $2,353,500
Total Liabilities: $0
Total Net Worth: $2,353,500