Retirement plan needs a second opinion

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When Alex and Jackie first contacted, it was because Alex worried their finances were not positioned as well as they could be.

It was all because of a robot investment advisor service — or robo-advisor — offered by Alex’s employer. The service analyzes investment holdings and compares them to the company’s investment mix.

“Their latest e-mail said that I could be missing out on $1.3 million in gains over the next 17 years,” said Alex, 50. “I’m sure this is just a tactic to get me to let them manage my money, but it has introduced some doubt.”

He said the service gave his portfolio a grade of “F” for performance and a “D” for diversification, but an “A” for efficiency and taxes.

The couple does use a financial advisor, but that advisor said he didn’t put much stock in the robo-advisor’s advice. He said the robo-advisor’s recommended portfolio would have worse performance than the current portfolio.

So Alex and Jackie, 48, decided to try a second living, breathing advisor for a second opinion.

Jim McCarthy, a certified financial planner with Directional Wealth Management in Rockaway, reviewed the couple’s finances for

Alex and Jackie hope to have enough money so that work is optional for Alex between ages 55 and 60. They’d like to have enough money to travel — that will be helped by the more than $4,500 a month they’ll receive in pensions at age 60 — and also help their kids, ages 15 and 10.

They’ve saved more than $1.2 million in 401(k) plans, $59,900 in a Roth IRA, $169,900 in SEP-IRAs, $60,000 in a stock purchase plan and $509,500 in a brokerage account. They also have $25,000 in a money market and $10,000 in checking, and they’ve set aside $193,000 for college educations for their children.

McCarthy said the couple knows their income in retirement will be substantially lower than their current income.

“They are preparing for this by saving almost 17 percent of their gross income each year to maximize their assets prior to retirement,” McCarthy said. “Based on their current living expenses, their pensions will only cover approximately 60 percent of their needs.”

Also, by retiring at 60, they will need to account for health insurance costs until age 65, when they can shift to Medicare, he said. While Medicare will reduce their total health insurance costs, they will still need a Medicare supplement plan to fill in the gaps in coverage.

Right now the going rate for a couple age 60 for a “silver” health insurance plan is roughly $15,000 per year, McCarthy said.

“Medicare supplement plans run in the $4,000 range per person per year,” he said. “Assuming inflation on medical costs of 7 percent per year, these figures grow to $25,000 per year by the time they are 60 and $22,000 per year by the time they are 65.”

So how are they going to pay for it all?


McCarthy said he thinks of the retirement planning process like climbing Mount Everest.

“The goal of climbing any mountain is not just to reach the summit, but to get back down safely,” he said. “Yet most deaths take place at the start of the descent. Why? It is the farthest point from the ultimate goal.”

The same is true for retirement planning.

Many people, and advisors, focus mostly on accumulating enough money (the ascent) and don’t have a plan for how to make sure the money lasts, McCarthy said. This can lead to serious problems at the transition from working and saving for retirement to spending.

McCarthy said his approach is to segment the journey, creating safe places to stop, assess progress and make any necessary adjustments. With a potential 30 years in retirement, Alex and Jackie should segment their plan every five or six years, he said.

This ties in well with their goal to retire at 60.

They have 10 years to continue building their assets, then five to six years until Medicare andSocial Security are available, and five years until Required Minimum Distributions (RMDs) from retirement assets must begin at 70 ½.

Extra focus should be paid on the first five years after retirement — the start of the descent — to protect assets, McCarthy said.

The couple’s original plan was to use the “file and suspend” strategy for claiming Social Security benefits, but the 2016 federal budget bill eliminated that strategy effective May 1, 2016. It impacted those who have not reached the age of 62 by Dec. 31, 2015.

Including Alex and Jackie.

“The part that changed was Jackie being able claim her `spousal’ benefit on Alex’s earnings record,” McCarthy said. “However, they can each still delay claiming their individual benefit until age 70, thereby earning an 8 percent per year credit to their benefit.”

Based on his analysis, the best result comes from Alex delaying his benefit until age 70, while Jackie claims her benefit at full retirement age. By Jackie collecting her benefit, they will be able to draw less on their assets to meet their needs. By Alex delaying his benefit, it ensures the highest possible benefit for Jackie when Alex passes away, McCarthy said.

“However, I recommend that they also consider their personal and family health history and longevity as Alex would need to live until at least age 81 to have this strategy pay off,” he said.

Traditional thinking with retirement income is to use personal (non-retirement) assets first, then draw on pre-tax retirement assets (like 401(k) or IRAs) and lastly turn to post-tax retirement assets like Roths, McCarthy said.

But he prefers to think in terms of income tax impact and estate tax impact.

“Managing the income tax impact focuses on generating the highest net after-tax income for the client,” he said. “Managing the estate tax impact focuses on the legacy of your retirement assets.”

Retirement accounts (pre-tax 401(k)s and IRAs) generate ordinary income, while personal (non-retirement) assets usually generate capital gains, which are presently taxed at a flat rate. The focus here is to manage your income tax bracket, he said.

From an estate tax perspective, personal assets enjoy a step-up in basis when they are passed to a beneficiary, whereas retirement accounts receive no special tax treatment, he said.

“This means that a beneficiary could potentially pay little or no income tax on an inherited personal asset, while an inherited retirement account would be fully taxable at ordinary income tax rates,” he said. “The focus here is to try to maximize your personal assets and minimize your pre-tax retirement assets.”

McCarthy said the ideal scenario is to have three pools of money, roughly equal in size: personal, pre-tax retirement and post-tax retirement, including the Roth.

Alex and Jackie have addressed the first two pools and are starting to fill the third pool, he said.

“They should consider increasing the contribution to the Roth 401(k) and reducing the contribution to the pre-tax 401(k),” McCarthy said. “There is a cost to this in the form of higher current income taxes, but that is more than offset by the greater flexibility in sourcing their income in retirement and in potentially passing a tax-free asset on to their heirs.”


Alex and Jackie took McCarthy’s risk tolerance questionnaire, and the results found Alex has a “moderate high risk tolerance,” while Jackie’s score was moderate.

It’s not unusual for married couples to have different feelings about risk, McCarthy said.

He considers a moderate risk tolerance portfolio to have 25 to 60 percent in equities, with no more than 10 percent in high-risk equity such as emerging markets. On the fixed income side, it would be between 40 and 75 percent, with no more than 20 percent in high-risk fixed income such as junk bonds. Finally, zero to 15 percent should be in alternatives, such as commodities, real estate, currencies.

Right now, Alex and Jackie’s overall portfolio is roughly 72 percent equity and 28 percent fixed income, or slightly riskier than their indicated risk tolerances.

Within equities, roughly 60 percent is in large-cap domestic equities, 25 percent is in mid-cap and 8 percent is small-cap. International equities, including emerging markets, comprise another 7 percent.

“They have been well-served by the small allocation to international equities over the last couple of years but should monitor economic and financial conditions going forward with an eye towards increasing this allocation to approximately 10 to 15 percent of the total,” McCarthy said. “They should also consider shifting some of the mid-cap allocation to small caps when market conditions warrant.”


While Alex and Jackie didn’t ask about estate planning, McCarthy said he thinks it’s important to highlight some observations.

The couple lives in New Jersey, which is one of the worst states from an estate tax perspective.

The current estate tax exemption in New Jersey is only $675,000 per person, compared to $5.45 million for federal estate taxes.

“While anyone can leave an unlimited amount to their spouse free of estate tax, doing so wastes their $675,000 exemption,” McCarthy said.

Of their current net worth, roughly $1.8 million would be in Alex’s estate, with $816,000 in Jackie’s estate. Assuming they have standard wills and each leave everything to each other, they will have a potentially sizable New Jersey estate tax bill on the second death, McCarthy said.

“If they haven’t already done so, I strongly recommend they meet with a certified financial planner experienced in estate planning to develop a plan to mitigate this liability and then work with an experienced estate planning attorney to draft the necessary documents,” he said.

This post was first published in July 2016.

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Net Worth:


  • Checking: $10,000
  • Money Markets: $25,000
  • 401(k) plans: $1,185,000
  • Roth 401(k): $59,900
  • SEP-IRAs: $169,500
  • Stock Purchase Plan: $60,000
  • Brokerage Account: $509,500
  • 529 Plans: $193,000
  • Primary Home: $800,000
  • Personal Property: $25,000
  • Autos: $22,000
Total Assets: $3,058,900


  • Car Loans: $11,000
  • Mortgage: $160,000
  • Home Equity Loan: $25,000
Total Liabilities: $196,000
Total Net Worth: $2,862,900


Annual Income:

  • Alex Salary: $173,000
  • Jackie Salary: $25,500

Monthly Expenses:

  • Income Taxes: $2,416
  • Housing: $2,519
  • Home Equity Loan: $250
  • Utilities: $443
  • Food: $1,010
  • Personal Care: $295
  • Transportation: $1,001
  • Medical: $760
  • Insurances: $85
  • Entertainment: $500
  • Charity: $20
  • Gifts: $50
  • Pet Care: $20
  • Misc.: $850