05 Nov Divorced woman gearing up for retirement, but worries her money won’t last
Eve is ready for the next stage of her life. She just wants to make sure her money is ready, too.
“My biggest money concern is retirement and downsizing from my current home,” Eve says.
At age 58, Eve is divorced and her two children are grown and financially independent, but money is tight. She doesn’t contribute to a 401(k) plan, but she’s set aside $14,200 in IRAs, $88,000 in mutual funds, $45,000 in a savings account and $2,000 in checking.
In addition to her mortgage, she has $900 in credit card debt.
We asked Brian Power, a certified financial planner with Gateway Advisory in Westfield, to review Eve’s finances for NJMoneyHelp.com.
RETIREMENT PROJECTIONS
Power took a look at how Eve’s situation would change based on several variables.
For his analysis, Power used an after-tax retirement lifestyle of $36,000 per year. This budget includes Eve’s current mortgage payment, which would stay the same for the rest of her life.
The first scenario doesn’t look so good.
“Eve’s probability of success is very low if I assume she retires once she reaches full retirement age for Social Security purposes, which is age 66 and 4 months,” Power says. “The assumption is that she will not contribute to a retirement account since her current after-tax income is just sufficient to cover her expenses.”
The second scenario assumed she would retire at the same age as the first scenario, but she would make the maximum contribution of $6,500 (for those over age 50) to an IRA or Roth IRA.
“To be able to save this money, she would need to downsize her home and lower her costs by the $6,500 per year,” he says. “The easiest solution would be to make sure the sales proceeds from her current home would fully pay for her next home so she wouldn’t have to carry a mortgage.”
But there are other scenarios with better success rates.
Eve’s probability of success jumps to 79 percent if she retires at the same age, but saves more and spends less. Power says she’d need to save the same $6,500 per year to an IRA or Roth IRA and lower her spending to $26,000 per year from the current $36,000 per year.
And in the final scenario, Eve’s probability of success jumps to 99 percent if she delays retirement to age 70 and doesn’t apply for Social Security until then. She’d still need to save the max to an IRA or Roth IRA, and she’d need to lower her expenses to $30,000 a year.
Power says the last scenario seems like the most reasonable plan.
“This will allow her to keep her lifestyle consistent to what it is today — not having to make drastic lifestyle changes — and own her home outright,” he says.
That scenario also offers the highest probability that Eve would have some money left over when she reached her 90s, which she could then leave to her children.
SOCIAL SECURITY STRATEGIES
Deciding how and when to take Social Security is important for any retiree, and the options are different if you’re divorced.
If Eve was married to her ex-husband for more than 10 years, she has some choices to make.
“If Eve applies for Social Security at full retirement age (66 and 4 months), she may restrict her application to her divorced-spouse benefit — even if her own benefit is higher — and receive 50 percent of her ex-husband’s benefit from age 66 and 4 months to age 70 while her own benefit builds delayed credits to age 70,” Power says.
If Eve and her ex were divorced for at least two years — which will be the case when she turns 66 and 4 months — her ex doesn’t need to apply for his benefits in order for her to receive hers, Power says.
“He does need to be eligible for benefits and be at least 62 years old, though,” Power says. “This assumes that Eve does not remarry, because if she does, this strategy is not available.”
Eve should speak directly with Social Security about the specifics of her options when the time comes.
INVESTMENT CONSIDERATIONS
Eve says her risk tolerance is moderate.
Power’s recommended asset allocation for moderate investors is 50 percent equities and 45 percent fixed income, with a 5 percent money market position.
For Eve’s retirement years, he assumed an even more conservative allocation of 35 percent equities and 65 percent fixed income and cash.
But for right now, Eve’s allocation of 41 percent equities and 59 percent fixed income needs some tweaking, Power says.
She’s not diversified enough because 100 percent of her equity stake is in U.S. large companies, Power says. So, he says, she could benefit by owning additional asset classes, such as, mid- and small-cap U.S. stocks, international stocks, emerging markets, REITs and high-yield bonds.
“By combining these asset classes in the proper mix, she can potentially lower the volatility of her stock portfolio and keep her projected stock market returns on track,” Power says.
And if she decides to start contributing the max to an IRA, Power recommends she use a Roth IRA instead of a traditional one.
“She will give up the up-front tax break that a traditional IRA offers, but with the likelihood of having money left over for her two sons, the most income tax-efficient way to pass it to them is with the Roth IRA,” Power says.
This story was first posted in November 2014.
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 .Net Worth:
Assets:
- Checking: $2,000
- Savings: $45,000
- IRAs: $14,200
- Mutual Funds: $88,000
- Primary Home: $315,000
- Personal Property: $10,000
- Autos: $7,000
Total Assets: $481,200
Liabilities:
- Mortgage: $78,000
- Credit Cards: $900
- Total Liabilities: $78,900
Total Liabilities: $78,900
Total Net Worth: $402,300
Budget:
Annual Income:
- Salary: $47,000
Monthly Expenses:
- Income Taxes: $750M
- Housing: $1,246
- Utilities: $432
- Food: $370
- Personal Care: $120
- Transportation: $270
- Medical: $30
- Credit: $400
- Entertainment: $15
- Charity: $40