04 May When can we afford to retire?
Elle, 65, and Emmett, 80, want to be fully retired, but they have big concerns about their outstanding debt.
When they first contacted NJMoneyHelp.com, they owed $38,800 to credit cards, another $25,400 on a home equity line of credit and still $29,500 more for car loans.
“We want to find a way to pay down our credit card and other debts and find a way to successfully retire,” Emmett said.
The couple decided to refinance their mortgage, taking out cash to pay off the bills. Now they owe $187,000 on their home and they have no other debt obligations.
The move also kept their monthly budget the same, but it significantly reduced the amount they’d pay in interest.
For assets, the couple has saved $90,800 in IRAs, $855 in a 401(k) plan, $77,100 in SEP-IRAs, $1,800 in a brokerage account, $370 in a money market and $12,100 in checking.
Eric Furey, a certified financial planner with RegentAtlantic Capital in Morristown, reviewed the couple’s situation for NJMoneyHelp.com.
He said the objective of their plan was to figure out how soon Emmett can stop working and determine the type of lifestyle they can afford in retirement. Then they’d discuss Elle’s work situation, including her earning potential and how much longer she’d like to work.
WHY AGE DIFFERENCES MATTER
“Emmett and Elle have some savings built up, but they will need to rely heavily on their income sources and earning potential to help get them through retirement,” Furey said. “One of their biggest challenges is the 16-year age difference between the two of them.”
Furey said this represents a challenge is because only 50 percent of Emmett’s pension will be paid to Elle after Emmett dies.
As a positive for their situation, Furey said, Elle really enjoys the work she’s doing and she doesn’t see herself slowing down in the near future. In fact, she wants to increase her earnings as she looks out to the next couple of years.
As for Emmett, he’d be okay with working through 2015, and then slowing down so he can stop all work-related activity at the end of 2016.
To make that work, Furey ran several scenarios:
1. Scenario One: This is the current scenario, in which Emmett stops working at the end of 2016. They’d spend $80,000 a year in retirement, and Elle would continue to work, earning $15,000 a year through 2021.
2. Scenario Two: Emmett stops working at the end of 2016, they decrease their annual living
expenses in retirement to $72,000, and Elle works through 2024 earning $35,000 a year.
3. Scenario Three: Emmett stops working at the end of 2016, they decrease their annual living
expenses in retirement to $68,000, and Elle continues to earn $15,000 a year through 2022.
WHICH WAY TO GO?
“Scenario One resulted in a 60 percent chance that they’d need to change their lifestyle in the future, which is not comfortable enough to rely on in retirement,” Furey said. “Knowing that their primary objective was for Emmett to stop working as soon as possible, this left only two real variables to change – Elle’s earnings and their living expenses.”
After reviewing these scenarios with the couple in more detail, Scenario Three — where Elle stays at her current earnings level and the couple drops their annual expenses to $68,000 in retirement — seemed like the most realistic scenario for the two of them, Furey said.
“The question now became how they reduce their living expenses,” he said. “The answer is to likely rent somewhere other than New Jersey. The state that would be most advantageous for them is Pennsylvania.”
Furey said renting in Pennsylvania would offer their plan several improvements.
It would replace the mortgage, property taxes, home insurance, and home maintenance expense with rent, which should be lower than the combination of all current expenses related to their home, Furey said.
The change in state would offer additional tax savings.
“Unlike New Jersey, Pennsylvania does not tax retirement income,” Furey said. “This includes distributions from IRAs, Social Security, and pension income.”
If they moved, they would have access to approximately $120,000 of equity from their home, which could be invested or accessed for living expenses.
He said changing their state of domicile would likely occur after Emmett stops working in 2016.
“Elle and Emmett’s income sources, desire to continue working, and willingness to make a few adjustments to their plan and lifestyle in retirement are what’s going to allow them to have a happy retirement,” Furey said.
This story was first posted in May 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: $12,100
- Money Market: $370
- IRAs: $90,800
- 401(k): $855
- SEP-IRAs: $77,100
- Brokerage Account: $1,800
- Primary Home: $300,000
- Personal Property: $20,000
- Autos: $32,000
Total Assets: $535,025
Liabilities:
- Mortgage: $187,000
Total Liabilities: $187,000
Total Net Worth: $348,025
Budget:
Annual Income:
Elle Part-time: $15,000
Elle Social Security: $10,500
Emmett Part-time: $24,805
Emmett Pension: $39,772
Emmett Social Security: $23,806
Monthly Expenses:
-
- Income Taxes: $1,189
- Housing: $2,361
- Utilities: $869
- Food: $875
- Personal Care: $350
- Transportation: $1,226
- Medical: $275
- Insurance: $610
- Entertainment: $160
- Vacations: $50
Charity: $75
Gifts: $45