Nick, 60, and Nora, 55, want more discretionary income than they have.
The couple plans to sell their current home in New Jersey to move to a smaller place in Pennsylvania in about five years. They just want to make sure they can afford the retirement lifestyle they desire.
“We want to spend more time at our Florida townhouse, travel and spoil our children and grandchildren the best we can,” Nora says.
The couple, whose names have been changed, have saved $65,800 in 401(k) plans, $64,400 in IRAs, $34,300 in mutual funds, $147,800 in savings bonds, $25,400 in savings and $102,000 in checking.
Savings Bonds: $147,800
Mutual Funds: $34,300
Primary Home: $375,000
Florida townhouse: $95,000
Personal Property: $40,000
Total Assets: $$974,700
Car Loans: $15,000
Total Liabilities: $107,300
Total Net Worth: $867,400
Nick pension: $49,000
Nora salary: $54,250
Income Taxes: $1,278
Second home: $225
Personal Care: $250
Pet Care: $25
Jerry Lynch, a certified financial planner with JFP Total Wealth Management in Boonton, reviewed the couple’s situation for NJMoneyHelp.com.
“They want what everyone wants to know: Can I retire?” Lynch said. “Let’s just keep things very basic. You are financially successful and can retire when your passive income — that comes without you working — is greater than your expenses.”
So Lynch set out to see if that will be the case for Nick and Nora in the long term.
The couple’s current expenses come to $4,500 per month, or $54,000 a year.
Nick’s pension pays $4,083 per month, or $49,000 a year.
Then there’s Social Security to consider. At age 62, Nick would receive $1,690 per month, and at the same age, Nora would receive $1,428 per month.
Add it all together and at Nick’s age 62, they’ll have guaranteed monthly income of $5,773, which will boost to $7,201 per month when Nora turns 62 in seven years. That amounts to $86,412 per year.
So the couple has to find a way to fund the two years until Nick receives Social Security from their savings. At that time, just with Nick’s pension and Social Security, the couple will have $1,000 a month more than their stated expenses.
“When Nora’s Social Security kicks in another five years, they will be $1,700 per month above what their expenses are,” Lynch said.
He said they already have enough cash to fund those two years in their bank accounts, so they can simply spend down the money there until Nick takes his Social Security.
But, it will be essential to review and stick to their retirement budget, Lynch said. He fears their expenses are understated, which could lead to some ugly spending surprises in retirement.
Nick and Nora need to consider the smartest investment strategy going into their retirement years.
Lynch said because their guaranteed income in retirement — the pension and Social Security — will be greater than their expenses, they really do not need to be overly conservative with their investments.
That’s not the case for many other retirees.
“You need to be very conservative if you need the money in a short period of time,” he said. “I believe in statistical averages, provided that you have the time to allow the averages to happen.”
You should set aside a certain amount to make sure you have cash if something goes wrong, Lynch said, especially in the early years of retirement when you are in the best financial shape of your retired life.
But sometimes, too much conservatism can work against you.
“Most of their money is in cash or government saving bonds that are guaranteed to lose money on an after-tax after inflation basis,” Lynch said. “We do not need to get crazy here in terms of stocks, but reasonably, they could be 50 percent in stocks and I would not be concerned at all, mainly because all their expenses are covered by the pension and Social Security.”
If they invest more, the other 50 percent of their portfolio — the cash and bonds — can be used for expenses, and if the market drops, they won’t need to worry about selling stocks at a loss. Then over time, the stock investments will come back, he said.
Lynch also had some thoughts about their $90,000 mortgage, which has an interest rate of 3.75 percent.
Instead of having almost $300,000 invested in cash and bonds earning on average, say, 1 percent — and Lynch says he’s being generous with that rate of return — they could pay off the mortgage. That would essentially give them an additional 2.75 percent rate of return (3.75% – 1% = 2.75%), risk-free.
The couple said their adult kids do not need their help financially, they may want to consider setting up a 529 Plan for college savings for their grandkids and future grandkids.
“You will see this as a longer term investment that can be more stock-oriented,” Lynch said. “The fund would grow tax-deferred and can be used tax-free for college.”
Lynch likes the 529 Plan idea because the couple could over time, if needed, change beneficiaries of the account, and they’d still have control over the funds, even though the money is considered a completed gift for IRS and estate planning purposes.
“So let’s say that Junior comes home one day and says to his grandparents, `Guess what? I do not want to go to college I want to get a Porsche and go to California with my buddies with my college money,’” Lynch said.
If Nick and Nora had put money in a Uniform Gift to Minor Act (UGMA) account, the money would belong to the grandchild and he could take his Porsche to the beach.
But with a 529, Nick and Nora would still own and control the account.
“Junior can still go to California, but he will driving his bike and the 529 money can be used for their other grandkids who are going to college,” Lynch said.
Finally, by funding college for the grandkids, Lynch said they’d be helping their adult children by taking some of the burden of college costs off their shoulders.
DOUBLE HOME OWNERSHIP
Nick and Nora are planning to retire by splitting their time between Florida and Pennsylvania, with Pennsylvania being their state of residence.
Lynch said this is a good idea for retirement planning purposes.
“Only two states, Pennsylvania and Mississippi, exempt all retirement income from state income tax,” he said. “Only nine states exempt Social Security benefits from income tax, and Pennsylvania is one of them.”
Plus, the combined property taxes on the two properties they’d own will almost certainly be lower then what they pay just for New Jersey right now, Lynch said.
One strategy to consider with the move, Lynch said, is that it’s possible for spouses to have residency in two different states. The general rule is that you need to be in your state of residence for six months and one day.
“Let’s say one of the spouses is a Florida resident and the property is in their name. They are now able to be `Homestead’ in the state,” Lynch said. “This means that your property tax increases are limited to a maximum of 3 percent or the Consumer Price Index.”
He said a non-resident can be subject to substantial annual increases that are not limited to anything other than the reasonable value of the property, which can make a substantial difference in tax rates over a 20-plus year time horizon.
While owning two properties may sound great, it can get expensive, Lynch said.
“Even when they are in Florida in the winter, their Pennsylvania home will need to have the driveway plowed and the home heated,” Lynch said.
It also locks up a lot of cash that isn’t really getting any rate of return, he said.
“Finally, do not take this the wrong way — unless you have a ski, lake or beach house, your kids and grandkids will generally limit vacations at your home to holidays,” he said.
So instead of owning two homes, Lynch recommends they consider a different plan.
Instead of buying in Pennsylvania, they could come up from Florida for a month or more each year, renting a beach house where the kids and grandkids may want to visit for a few weeks.
“You save your kids the expense of paying for a beach house, your grandkids will love it, and you will spend more time with them then several years of holiday dinners,” Lynch said. “From a cost standpoint, it will free up all the cost of maintaining the home, plus we get the use of the money that would have been locked up in the home.”
So to their original question: Can they afford to retire?
“The answer is yes,” Lynch said. “Their expenses are rather moderate and their pension and Social Security are way above their expenses. It will take a few dollars from their pocket to fund the pre-Social Security time, but they have enough to make this happen.”
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