Lou and Alison aren’t looking for an extravagant retirement.
They hope to move out of New Jersey to enjoy lower living expenses, but they’re worried that they’re going to outlive their money anyway.
“I expect we both will retire when I reach 65, and use our retirement funds until I reach full retirement age for Social Security at 66 years and 6 months,” said Lou, 57.
Lou and Alison, 56, expect their out-of-state retirement home to be about the same value as their current home, so they won’t receive a lump sum to invest for their later years.
That means they have to count on whatever else they can save before the stop working — and make the most of what they already have.
So far, the couple has saved $223,000 in 401(k) plans, $208,100 in IRAs, $20,000 in savings and $1,000 in checking. They’re expecting a $500 monthly pension for Alison when she’s 60.
One positive items is that there are no college costs in the future because they’ve raised two children who they say are now “off the payroll.”
Still, they don’t feel like they’re rolling in the dough.
“As with most people, we will outlive our retirement funds,” Lou said. “I do not expect to live past 85, however I expect my wife to live to 95.”
Brian Power, a certified financial planner with Gateway Advisory in Westfield, reviewed their finances for NJMoneyHelp.com.
Power ran several projections for the couple.
Based on a budget prepared by Lou and Alison, Power assumed they’d need an after-tax retirement budget of $45,000 per year.
Their mortgage will be paid off in two years, so that’s a plus, but they can expect some additional expenses in retirement.
Power added $6,000 per year for travel expenses for the first 15 years of retirement, and he added another $4,000 for supplemental Medicare health insurance.
The news was good.
“Because of their very modest lifestyle, they have a very high probability of not running out of money and will most likely keep their investment portfolio’s principal intact,” Power said.
For the numbers to work, Power assumed Lou would continue to save 10 percent of his salary in his 401(k), and that he’d continue to receive his generous 6 percent employer match. That adds $19,000 a year to the 401(k).
Lou said the couple is also saving $2,000 a month into their savings account, which Power didn’t count in his retirement projections.
Power also looked at the couple’s asset allocation, finding they’re approximately 53 percent in stocks and 47 percent in cash.
Within those allocations, 39 percent of the stock portion is in small- to medium-sized companies. Power said those kinds of companies tend to be more volatile than the stocks of larger companies.
And there was more.
A large part of the small and medium companies — 22 percent — is invested in Real Estate Investment Trusts (REITs) within Lou’s IRA.
Power said that’s a risk.
“They are too concentrated in one industry of the economy and real estate is very interest rate sensitive,” Power said. “If interest rates start going up like they look like they might, they could see a significant erosion of their principal in that IRA.”
Power said one of the fundamentals of investing is to try to diversify away company-specific and industry-specific risk by not having too much of your investments in any one company or industry.
They’re taking on more risk than they need.
Power did a probability analysis to see when or if they’d run out of money during their lifetimes. He used a “moderately conservative” asset allocation of 35 percent stocks and 65 percent fixed income and money market, and it showed the couple could lower their stock allocation and reduce future volatility in their portfolio — without going broke.
For the money that remains in stocks, he recommends they tilt more funds to safer large companies, and also invest in asset classes not represented in their portfolio such as developed international countries, emerging markets and high-yield bonds. On the bond side, he suggests they consider international and short-term bonds.
“When reallocating to have more bonds — both from stocks and cash — emphasizing towards short-term bonds could help protect their principal against rising interest rates,” Power said.
REAL ESTATE OPTIONS
Today’s interest rate climate, which often an investment risk, could be an opportunity for Lou and Alison right now.
“They can use their additional savings to buy their retirement home now,” Power said. “Interest rates are still at historical rock bottom, so the carrying cost would be very affordable.”
He said they could use a 7/1 fixed-to-adjustable interest-only mortgage to help minimize the payments even more.
“The seven-year fixed time period on the mortgage would coordinate with their desire to retire at age 65 and sell their New Jersey home to pay off the mortgage on their retirement home,” Power said.
They could use their non-IRA accounts and/or their existing home equity line of credit — which hasn’t been tapped — for the down payment on the retirement home.
If they decide to wait before purchasing the property, Power said, Lou should save more to his 401(k) to get the best possible tax benefit.
“According to Lou, they are saving $2,000 per month above and beyond their current 401(k) savings,” Power said.
Power said that’s $24,000 a year. They can earmark half of that — $12,000 — to max out the 401(k) contributions, adding $6,000 to reach the $18,000 maximum and another $6,000 for the “catch-up” contributions permitted for those 55 and older.
This would still leave them with $1,000 a month into savings.
PROTECTION FROM RISK
Power also reviewed the couple’s life insurance, and he said they have enough coverage.
But what they’re lacking is long-term care insurance, which is something they may want to consider.
“Since they have a very modest lifestyle and will hardly need their investments to support themselves, they can afford to pay the premiums,” Power said.
Because Lou believes he won’t live as long as Alison, at a minimum, they should get a policy on Lou in case he runs into an expensive illness that wipes out their savings when Alison still has many years to go, Power said.
Plus, getting a policy now will be much cheaper than trying to get it in a few years when they’re older.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.p1490695173leHye1490695173noMJN1490695173@ksA1490695173.
Total Assets: $782,100
Total Liabilities: $36,000
Total Net Worth: $746,100