Jack and Ruth have made saving a priority. As they approach retirement, they’re not slacking off.

They save a large percentage of their income in their retirement plans, and when they retire, they’ll benefit from pensions of more than $80,000 a year.

“My hope is that through judicious planning and saving, we are going to keep and maybe improve our standard of living without the need for further employment after retirement,” said Jack, 54.

If they can afford to, retiring at age 56 would be their hope. But they don’t want to jump too early, and they know they need to plan to make sure their retirement dreams will come true.

The couple has saved $1.3 million in their employer-sponsored plans, $5,500 in a brokerage account, $20,000 in a money market and $4,000 in checking.

Tax planning is a concern.

They want to know how taxes will impact their plan when they start drawing from their retirement assets and when their pensions kick in. Plus, they question whether to take Social Security at 62 or whether they should let the benefits grow.

And the big question:

“Should we move to a tax-friendly state to maximize our retirement take home amount?” they asked.

NJMoneyHelp.com asked Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield, to help the couple with all of their financial planning questions.

After examining their situation, Gallo had good news and bad news.

“We would not be comfortable suggesting that they are able to retire at their ages 56 since there are multiple factors to consider,” he said. “With at least yearly monitoring and the right guidance they are in a good position, but it will need attention to succeed.”

Here’s what they need to do.

RETIREMENT OUTLOOK

Jack and Ruth have no doubt been good savers, and their pensions will make a large difference in their retirement cash flow.

For this review, Gallo assumed they both retire in 2020 when they’re each 56, and that’s when they start taking their pensions. He also assumed they start taking Social Security benefits at age 62.

Gallo also assumed the couple’s expenses would rise 3.7 percent a year with inflation, and he made a few other adjustments. He increased their medical spending to $10,000 a year to reflect rising costs and the general need for more care as we get older. He also increased spending for groceries, entertainment and vacations — he thought their budget seemed a bit light — and also assumed higher home maintenance expenses as repairs may be needed over time.

Next, Gallo prepared a Monte Carlo simulation, an analysis that reflects the results of 1,000 simulations with random investment returns.

“Based on their situation, they have an 100 percent probability of attaining their retirement objectives without asset depletion under the composite annual rate of return of 8 percent,” Gallo said.

That sounds great, but it’s not a slam dunk.

They need to prepare for the many forks in the road they will pass through their senior years.

“The Monte Carlo is no guarantee of success and since the returns are random, it doesn’t prepare this couple specifically for a prolonged market downturn close to or right after retirement,” Gallo said. “In this specific case we would suggest reevaluating their plan each year to ensure projections match reality.”

Also, he said, once they retire, they need to make sure they live within their means and monitor their investments.

While Gallo assumed they would take their Social Security benefits at 62 based on their request, he said they could potentially have more portfolio assets if they were to wait until the full retirement age of 67 to begin taking their benefits. He calculated they would have approximately $80,000 more in their portfolio by waiting.

“In this instance based on the information we have, they should take their pensions upon retirement so they have some steady income, and the decision to take or delay Social Security would need to be made in the future with further planning to ensure they allow their portfolio assets to grow while maintaining their current lifestyle,” he said.

TAXING ISSUES

Jack and Ruth said they had concerns about taxes as they head into retirement. They understand once they stop earning income but instead rely on pensions, Social Security and investment income, their tax scenario could change radically.

This is especially true given that we don’t know what kind of tax reform — and when — will come from President Trump and Republican legislators.

Gallo said the couple should consider the saying, “Don’t let the tax tail wag the dog.”

They appear to easily be within the 25 percent marginal tax bracket as of today, Gallo said, and their spending will dictate how much they will need to liquidate from retirement accounts to satisfy cash flow needs above guaranteed income sources, he said.

“When they ask how much of their take home pay will be affected by taxes, that question is a moving target and determined each year based on spending vs. excess liquidations — which increase taxable income,” he said.

When they ask if they should move to a more tax-friendly state to maximize retirement take-home pay the answer is entirely up to them, Gallo said.

Gallo said states like Florida or the Carolinas may allow them to increase their retirement take-home amount from a cost of living perspective — in addition to tax considerations relative to New Jersey.

“We would never suggest someone move for the sole purpose of maximizing take home pay when we don’t have a long-term relationship with them and aren’t monitoring their situation on an annual basis at the very least,” he said.

CASH FLOW CONCERNS

As mentioned earlier, Gallo thought some of the couple’s budget line items were a little light. If they’re wrong about what they’re spending, it could lead to a big surprise when they’re relying on pensions, Social Security and income from their portfolio.

“If the expenses they provided are accurate and remain relatively the same, then they might have the ability to retire at 56,” he said. “Their plan should be monitored on a yearly basis to determine if projections match reality.”

And if a prolonged market decline were to occur, Gallo said, they may wish to review even sooner.

Gallo offered some tips on how to create an accurate budget.

First, determine the income and expenses you have and write them down in Excel or even in paper format. Then compare this original projection with reality.

On a monthly basis, transfer bank account and credit card spending data to Excel and monitor spending on a monthly basis, he said.

“This will help individuals and couples to ensure they are on track over the course of a year and then a year-end review will determine actual spending, which can be used as the barometer moving forward,” Gallo said. “If they are spending too much or wish to spend more on vacation then adjustments can be made at that time.”

He recommends to make the whole process easier, they can use bank accounts and credit cards that itemize spending into categories such as vacation, entertainment and dining, auto, discretionary, etc.

“Have the companies you use to make purchases categorize your spending to make your life easier and save time when monitoring,” he said.

LONG-TERM PLANNING

Without children, the couple needs to plan carefully for their estate.

“They should absolutely create a formal estate plan and dictate what portion of their assets go to friends, family or charity,” Gallo said. “They also need to determine who will legally advocate for them financially/medically should they become incapacitated.”

He said they should consider a will, a power of attorney and a health care proxy.

They also need to consider what would happen if they ever need long-term care, which is incredibly expensive and could wreck the best laid financial plans.

Gallo said in New Jersey, according to the American Association for Long-Term Care Insurance, annual costs for a semi-private room in a nursing home are approximately $96,000, and the average stay in a nursing home for an individual is between two and three years. Also, according to Morningstar, the majority of Americans who encounter a long-term care facility pass away during the stay.

Assuming an annual cost of $96,000 for three years, historical inflation of 3.73 percent and assuming this couple each has a life expectancy to 90 years old — 38 years remaining each —Gallo calculated the total cost of care:

Annual expenses (per person): $324,269
Total cost over 3 years (per person): $1,009,543
Total cost: $2,019,086

Gallo cited reports that say more than 70 percent of Americans over age 65 will need long-term care services at some point in their lives.

Long-term care insurance is an option for some, but policies are costly and companies may increase insurance premiums at the discretion of the provider, Gallo said.

“Some options to meet LTC needs are to save and invest enough so that you may self-fund if the event occurs, you may purchase traditional long-term care insurance and pay the premiums even if they increase substantially, obtain whole life with an acceleration rider to allow you the ability to take a portion of the face amount of the policy to pay for long-term care costs and limit the amount of liquidations from your portfolio to cover the excess costs,” he said.

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