Age difference, when to start Social Security, top retirement questions for couple

Photo: taliesin/morguefile.com

Clarice, 62, and James, 56, have some specific worries for their retirement plan.

Because James is six years Clarice’s junior, their long-term financials are somewhat complicated. They want to know if Clarice should start to draw Social Security now.

“I just turned 62 and I’m therefore eligible to begin to draw benefits in January 2015,” she said. “I would only receive less than $700 per month to start off with versus $900 per month if I wait until January 2019.”

She said technically, she’ll never retire, but her home grown business brings in little income and always operates at a loss from a tax perspective.

But Clarice is concerned that if she starts taking benefits now, the extra income would be nice, but she worries it would mean a huge hit on their jointly filed  tax return.

“To start filing separately after nearly 25 years could raise a red flag due to my mostly lack of income and could make tax filing more complex since we used to deduct my office in the home for business and it’s unclear how that could affect our profile and our tax filing,” Clarice says.

The couple is also concerned about what would happen if James, the main breadwinner, loses his job. He’s not planning to retire for another 10 years.

They’d also love to pay off their mortgage as soon as possible.

James and Clarice have saved $225,900 in 401(k) plans, $104,200 in IRAs, $25,000 in a savings account and $10,000 in checking.

Michael Green, a certified financial planner with Wechter Feldman Wealth Management  in Parsippany, took a look at this couple’s interesting scenario.

IMMEDIATE DECISIONS

Green took a look at the couple’s goals and their financials, and then he ran some numbers.

He determined that Clarice should take her Social Security retirement benefits immediately at age 62.

“By taking her benefits now instead of waiting to reach full retirement age, their net worth at the end of your plan is reduced, but does not negatively impact the probability of your plan succeeding,” Green said.

That means the choice to take Social Security now won’t mean the couple will run out of money before their life expectacies,

Health, though, is an issue, because Clarice has faced some challeges.

“Clarice and James should be planning for the long-term and assuming a life expectancy more in-line with general demographics,” Green says. “However, due to Clarice’s current health status we recommend she begin taking her benefits sooner rather than later.”

He said the added income will not increase marginal or effective tax rates and does not decrease the plan’s overall success.

That makes the move a slam dunk.

Additionally, the financials work so that James can retire in August 2024 when he reaches 66 years of age, or any time after that date, Green says.

Clarice had no plans to stop working, nor should she.

Green’s financial plan assumes she will continue working and collecting a small income throughout the plan. She can continue working as long as she chooses to do so.

The couple has been paying an extra $300 per month on their mortgage because they’d love to have it paid off as soon as possible, or at least by the time they retire. Green says the extra payments should continue.

“This will allow them to finish paying off the mortgage in May 2030 instead of the scheduled date of November 2035,” he said. “They should not use savings to pay off the mortgage with an early lump-sum payment.”

Instead, he said, it’s a benefit to allow their savings to continue to grow at a higher rate than the interest they’re paying on their mortgage, and their net worth will reach a higher level over time.

 

ASSET ALLOCATION

Investment performance is an important part of this couple’s plan.

“A well-diversified portfolio reduces the risk of having `all your eggs in one basket,'” Green says. “A proper asset allocation helps maximize your rate of return for the level of risk that is within your comfort zone.”

The couple’s current asset allocation is 45 percent equities, 22 percent fixed income and 33 percent cash and cash equivalents.

But James and Clarice are still young and have several years until retirement, therefore, Green says, they can afford to take a moderate to moderately high degree of risk in their investment portfolio.

And the rate of return received from investments will impact the plan significantly, Green says

“Because they have a 10-year time horizon until retirement, the power of compounding has the potential to work in their favor and improve the chance of the plan succeeding,” Green says. “Moreover, a more appropriate portfolio asset allocation increases the plan’s Monte Carlo probability of success by approximately 25 percent.”

That’s why he recommends they consider rebalancing their investment portfolio to achieve a fully-invested target of 59 percent equities, 36 percent fixed income and 5 percent cash and cash equivalents.

This isn’t meant to be a static allocation, though. Green says his company uses an active cash management strategy when volatility is higher and the risk of capital loss is perceived to be extremely high. The strategy is designed to preserve principal and protect gains during potential protracted market and economic downturns, he says.

James and Clarice, if they’re not prepared to monitor their investments regularly, may want to consider hiring a professional investment advisor for help.

Green also suggests James and Clarice each make the maximum annual contributions allowable to their IRA accounts for as long as James is working and earning the required income amounts to do so.

INSURANCE CONCERNS

Risk management is a big part of a successful financial plan, and that means insurance.

James has group disability insurance coverage through his employer. But, Green says, should James need to access this coverage, the benefits are not enough to cover living expenses.

“Disability benefits under a group policy are typically subject to income tax if the premiums are being paid by the employer,” Green says. “These taxes further decrease cash flow abilities, which are already hindered in a disability scenario.”

So Green says James should consider purchasing additional private disability insurance with a monthly benefit of $3,865. Benefits for his private policy would be tax-free because premiums are paid with after-tax dollars, he says.

James should also consider purchasing additional life insurance coverage for himself.

“An additional $200,000 of coverage in a permanent policy or term policy to last until James retires would allow Clarice to maintain her current lifestyle and attain future financial goals,” Green says. “The cost of a term policy would be less expensive and premiums for either type of policy will be based partially on James’s current health.”

Clarice could also use some additional life insurance, but she’s had some health issues so coverage may be hard to get, Green says. At the very least she should maintain her current coverage to help support James in the event it’s needed.

The plan does not show a need for long-term care insurance, but it should still be considered.

But for Clarice, much like life insurance, this may be difficult for Clarice to qualify for.

“Despite the plan not showing a need, we continue to recommend long-term care insurance as an effective strategy to maintain control and preserve assets for the spouse not utilizing long-term care services,” Green says, citing some important statistics: According to the Centers for Medicare and Medicaid Services, at least 70 percent of people over age 65 will require long-term care services and support at some point in their lifetime.

So they may want to consider a policy for James – just in case.

This story was first posted in January 2015.
 
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Net Worth:

Assets:

  • Checking: $10,000
  • Savings: $25,000
  • IRAs: $104,200
  • 401(k): $225,900
  • Primary Home: $400,000
  • Personal Property: $150,000
  • Autos: $13,500

Liabilities:

  • Mortgage: $217,600
  • Car Loans: $3,000

Total Liabilities: $220,600
Total Net Worth: $708,000

Budget:

Annual Income:

  • James Salary: $147,500
  • Clarice Salary: $300

Monthly Expenses:

  • Income Taxes: $1,537
  • Housing: $2,350
  • Utilities: $959
  • Food: $650
  • Personal Care: $120
  • Transportation: $906
  • Medical: $963
  • Insurance: $166
  • Entertainment: $33
  • Charity: $125
  • Gifts: $50
  • Pet Care: $833
  • Misc: $300

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