Marty, 62, and Linda, 62, have raised three children and now they’re focusing on themselves.
Marty still works, but not for long. And while many couples want to flee New Jersey to live in a warmer state, that’s not the plan for Marty and Linda.
“We’d like to staying stay in the same house we live in now with two or three months a year renting in Florida,” Marty said.
To that end, the couple has saved $540,000 in Marty’s 401(k) plan, and Linda has an annuity worth $29,000. When Marty retires, he’s eligible for a pension worth almost $5,000 a year, and if he dies first, Linda will receive $3,700 per month as part of the joint/survivor option.
They also have $41,000 in savings, $5,000 in a money market and $17,000 in checking.
Importantly, they have no debt, and their home is mortgage-free.
NJMoneyHelp.com asked Matthew Masterson, a certified financial planner with RegentAtlantic in Morristown, to review the couple’s long-term plan.
“Overall, they have done a great job saving and getting ready for retirement,” Masterson said. “Now that retirement is becoming more imminent, their short-term focus should be to zero in on their goals – retirement and spending two to three months in Florida during their retirement.”
Masterson took a look at how the couple’s income would fare compared to their expenses in retirement.
He assumed a 3 percent rate of inflation on expenses and Social Security, and assumed Marty’s pension remains flat through the remainder of their lives.
The projection runs their retirement through 1,000 different scenarios through age 91 for Marty and age 93 for Linda.
“Each time we are using a different sequence of portfolio returns based on your current allocation of approximately 40 percent in growth assets and 60 percent in fixed income and cash,” Masterson said. “We attach a probability of success to these projections, with a `success’ defined as having assets remaining at the end of your lives – meaning you have attained all of your financial goals.”
Given their current situation, if Marty retired today, their probability of success is 99 percent. Any probability over 80 percent is considered successful, Masterson said, so they’re in great shape.
He also looked at their secondary goal: spending two or three months a year in Florida.
“Since they have not factored these costs into their budget, this is one area they should focus on in the coming months,” Masterson said. “We find with many of our clients, they tend to underestimate the costs of spending the winter months in Florida.”
Aside from the obvious rental costs, Marty and Linda need to make sure to build in an appropriate amount of travel and budget for more dining out and entertainment costs than they would in their normal budget at home.
For the projections, Masterson built in an additional $10,000 in spending. With this addition, their probability of success remains at 99 percent.
The reason for the high probability of success is that their income sources — pension and Social Security — exceed their expenses, reducing their need to rely on the portfolio.
One big decision that Marty will have to make is when to begin receiving Social Security.
While it may be tempting from a cash flow standpoint to take Social Security at retirement, Masterson recommends Marty wait until at least his full retirement age of 66, and ideally wait until age 70.
Waiting to 70 increases his monthly benefit from $2,682 per month to $3,557 per month.
“Perhaps even more important given the disparity in Social Security benefits between Marty and Linda is that [waiting][/waiting] also maximizes any potential survivor benefit for Linda should she survive Marty,” Masterson said. “Maximizing the survivor benefit, along with the 75 percent Joint and Survivor benefit from Marty’s pension, should provide Linda a similar solid financial situation should Marty happen to pass before Linda.”
While Masterson likes the overall balance of the couple’s current asset allocation, he has concerns because they describe themselves as “very conservative” investors.
“First, with the portfolio not playing a meaningful role in their retirement and them describing themselves as conservative investors, they could consider reducing their equity allocation and they would still be okay in retirement,” Masterson said. “However, in the rising rate bond environment we are entering, they’ll want to be careful in selecting the correct type of bonds in their portfolio, especially if they are increasing the allocation to that side of the portfolio.”
He also has a concern about the lack of diversification in their current holdings. The portfolio is heavy in domestic equities relative to international equities.
“While this is typical, we would recommend an allocation to international equities of 20 percent to 30 percent as this has proven to lower risk and raise returns in portfolios over the long term,” he said.
Another concern is the equality between large-, mid-, and small-cap equities in the portfolio. Mid-cap and small-cap companies carry a higher level of risk than large-cap stocks, Masterson said, and as a result should make up a smaller allocation in the portfolio relative to large-cap equities.
Looking at the couple’s fixed income allocation, Masterson notes it’s all in one fund, and it takes up a large portion of the assets. He said the rising rate environment is a reason for concern for conservative bond investors like Marty and Linda, so he recommends they consider diversifying this position to focus on shorter duration bonds, which he said will prove less sensitive to interest rate movements.
When Marty retires, he should consider rolling over the assets from the 401(k) plan to an IRA. An IRA will provide a wider array of investment options.
Health care and possible long-term care costs are worth reviewing.
If Marty retires prior to when either he or Linda reaches age 65 and qualifies for Medicare, health insurance could become a large expense that is not accounted for in their budget. Unless the they’ll be covered by Marty’s employer, they need to begin to weigh options to bridge the gap to Medicare, Masterson said. COBRA or going through the healthcare exchange under the Affordable Care Act would be among the options, he said.
The biggest risk Masterson sees in their overall plan is the possibility of a long-term care event.
He said the average cost of a nursing home is $127,750 annually, according to Genworth’s 2015 annual cost of care survey.
Any long-term care event could greatly impact the success of the couple’s retirement.
He said he generally finds the optimal point to purchase long-term care insurance is in your mid-50s, but this couple has the cash flow flexibility to pay a long-term care insurance premium depending on their overall health history.
“We would recommend considering a shared care policy with a benefit of at least $200 per day to mitigate this risk on their financial well-being,” Masterson said. “They will also want to make sure that the policy has an inflation rider, as costs in this area are increasing significantly each year, and provides for home health care costs.”
And finally, while the couple has a comfortable amount of cash, they may want to consider a home-equity line of credit as a backup plan so they have quick access to cash in an emergency.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.p1501043831leHye1501043831noMJN1501043831@ksA1501043831.
Total Assets: $1,079,000
Total Liabilities: $0
Total Net Worth: $1,079,000