23 Jan Single dad considers cross-country move, early retirement
Hank has been divorced since 1999, and he raised his two children on his own.
He got them both through college debt-free with a combination of his savings and their scholarships, and he’s proud to say they have jobs, are successful and happy.
So now Hank is turning his thoughts to retirement.
“Earlier this year I purchased a vacation home in the southwest, where I would eventually like to retire,” he says. “I am happy with my current occupation, but am not sure if I should stay where I am for longer or relocate and take on either full-time or part-time employment there.
Hank, who turns 60 next month, has saved $503,100 in 401(k) plans, $272,500 in IRAs, $58,100 in mutual funds, $81,000 in a brokerage account, $46,000 in Certificates of Deposit, $25,600 in savings and $3,700 in checking.
He’s also expecting a pension worth $1,232 a month at age 62, or $1,698 if he waits until age 65.
Brian Power, a certified financial planner with Gateway Advisory in Westfield, reviewed Hank’s retirement prospects for NJMoneyHelp.com.
RETIREMENT PROJECTIONS
For his analysis, Power assumed Hank would retire now and make the move to the southwest sooner rather than later.
Based on the listing of expenses Hank provided, Power used an after-tax retirement lifestyle of $50,000 per year.
“This budget includes health insurance premiums and I built in a little more of a buffer for additional travel above and beyond Hank’s current budget,” Power said. “In addition, I did not reduce his lifestyle in anticipation of his property taxes being lowered significantly from his current $7,800 a year property tax bill to build even more of a buffer to his retirement lifestyle.”
The news was, well, awesome.
Based on retiring now and moving to the southwest, Hank has a 100 percent probability of success of living until age 90 and not running out of money, Power said.
“In fact, he has a very high probability of not touching the principal of his investments to live on,” Power said. “He doesn’t need to work part-time as he stated he is willing to do but can choose to if he wants.”
Power said taking a part-time job until Hank becomes eligible for his pension and Social Security at age 62 can make the move easier psychologically, but it’s not a necessity. Either way, Hank doesn’t need to put away any more money for retirement so his part-time job would just need to cover his bills.
ASSET ALLOCATION ADJUSTMENTS
Every financial plan, even the rosy ones, can use some tweaking.
Hank’s risk tolerance is moderately aggressive. Power says his current asset allocation is 72 percent stocks and 28 percent bonds and money markets.
That’s a little riskier than Hank needs, Power says.
“My recommended asset allocation for moderate aggressive clients is 65 percent equities and 35 percent fixed income/money market — 5 percent typically is the true cash position,” Power says. “Although Hank has been fortunate that the markets have worked in his favor over the past five-and-a-half years with his moderate aggressive allocation, this may be a very good time to capture much of that appreciation and get more conservative as he heads into his retirement years.”
Hank says he likes the idea of preserving capital and creating a passive income stream as he nears retirement. By moving from a moderate aggressive mix to a moderate conservative mix, Power says, his goal of preservation and more income can be accomplished.
Further diversification is also a good idea.
“He should also look to use additional asset a classes within both his stock portfolio and his stock portfolio to help reduce the volatility of his investments as he prepares to start taking money from them to live on,” Power says.
Hank’s stock portion of his portfolio is very heavily weighted in U.S. large companies, at 57 percent. Power says Hank could benefit by owning additional asset classes such as developed international countries, emerging markets and real estate investment trusts.
“By combining these asset classes in the proper mix, he can potentially lower the volatility of his stock portfolio and keep his projected stock market returns on track,” Power says.
OTHER MOVES
Hank is a perfect candidate to consider converting some of his 401(k) or traditional IRA funds into his Roth IRA once he retires, Power says.
“Since he has a high probability of not needing to touch his investment principal to support his lifestyle, he should look to position a decent percentage of his retirement assets in accounts that do not require minimum distributions, Power says. “This will allow for the longest tax-free growth compounding making the Roth conversion worthwhile.”
And if it turns out that he never needs to use the money, this would be great tax-efficient legacy assets to leave to his two children, Power says.
Power says Hank should consider a revocable living trust.
This document can replace Hank’s will and help avoid probate in both New Jersey and his new home state.
“Since he owns property in both states, if he uses an ordinary will, he will have to go through probate in both states,” Power says
The document would also act as a power of attorney to protect Hank if he became incapacitated. Power calls it a “two in one document.”
“The revocable trust can be converted into permanent — irrevocable — trust for his children after Hank’s death, Power says. “If Hank is concerned about protecting his children’s inheritance from creditors, lawsuits and divorces, this would be something he should strongly consider.”
Finally, Power suggests Hank consolidate his assets into one financial firm.
“He can benefit from easier record keeping and potential lower costs,” Power says. “This will also make it much easier on his children to settle his estate.”
This story was first posted in January 2015.
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: $3,700
- Savings: $25,600
- CDs: $46,000
- IRAs: $272,500
- 401(k): $503,100
- Brokerage Account: $81,000
- Mutual Funds: $58,100
- Primary Home: $375,000
- Investment Home: $125,000
- Personal Property: $60,000
- Autos: $40,000
Total Assets: $1,590,000
Liabilities:
- Home Equity Line of Credit: $39,000
Total Liabilities: $39,000
Total Net Worth: $1,551,000
Budget:
Annual Income:
- Salary: $131,600
- Bonus: $8,800
Monthly Expenses:
- Income Taxes: $1,624
- Housing: $1,050
- HELOC: $292
- Utilities: $320
- Food: $550
- Personal Care: $160
- Transportation: $340
- Medical: $410
- Entertainment: $75
- Vacations: $100
- Charity: $350
- Gifts: $100
- Misc.: $100