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Divorced woman, unemployed, faces unplanned early retirement

At age 56, Claudine wasn’t quite ready to retire, but she lost her job eight months ago, and she hasn’t found work yet.

The divorced woman has been living off her savings because her unemployment benefits have ended. She’s concerned about what her savings can do for her in the short and long term.

And, it’s not just about her. She has a 20-year-old child who goes to college, and Claudia has been paying the college bills. She has an expected $21,000 expense for tuition, and those payments should be done by January 2016.

Claudine has accumulated $506,800 in 401(k) plans, $99,200 in an annuity, $30,300 in IRAs, $25,700 in a brokerage account, $61,200 in mutual funds, $16,000 in options and $500 in checking.

Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, reviewed Claudia’s prospects for NJMoneyHelp.com.

This thing is a foot race to see if she can get to Social Security before she runs out of money,” Lynch says. “My concern for her is that she is almost 100 percent in stock. I have seen this happen before where they go for it as they feel that they have to”.

She is not in a bad place yet, but if she does not find employment, it is going to get bad rather fast,” Lynch says.


Net Worth:


Checking: $500

IRAs: $30,300

401(k): $506,800

Annuity: $99,200

Brokerage Account: $25,700

Mutual Funds: $61,200

Options: $16,000

Primary Home: $425,000

Personal Property: $15,000

Autos: $20,000

Total Assets: $1,199,700


Mortgage: $182,000

Car Loans: $18,000

Total Liabilities: $200,000

Total Net Worth: $999,700


Salary: none

Income Taxes: $530

Housing: $1,640

Utilities: $702

Food: $450

Tuition: $1,220

Personal Care: $30

Transportation: $727

Medical: $875

Entertainment: $30

Charity: $120

Lynch says you are financially successful when your passive income — income that does not require you to work — is greater than your expenses.

So he took a look at the expenses Claudine will not have when she’s retired — per Social Security’s guidelines — at age 66 and 8 months.

When you remove her COBRA health payments, the college payments and her mortgage, Claudine she would have expenses of around $2,250 per month. To make sure it’s not too con

servative, Lynch boosted that monthly number to $3,000.

Her Social Security benefit at normal retirement age is $2,389, so we are pretty close to being there,” he said.

Claudine has $250,000 in equity in her current home, and retirement accounts are worth about $640,000. She also has taxable investments worth about $100,000.

Assuming that she moves out of New Jersey for retirement, she can buy a home with no loan, her property taxes will be much lower, and it frees up here money to spend on herself in retirement,” Lynch says. “So in my mind. the challenge is: how do we get from age 56 to age 66 without spending all her money?”

Lynch says at a 6 percent growth rate, Claudine’s portfolio would be worth around $1.14 million at age 66.

That should reasonably generate somewhere in the range of $34,000 to $45,000 annually, plus her Social Security, and that should cover her cost in retirement — and then some,” he says. “The key in not making any really big mistakes and she should be able to have a great retirement.”


First, she wanted to know what would happen if she couldn’t get another job at a similar income level. Then she wanted to know if her investments were too aggressive, and finally, she wanted to know if she’d be ready for retirement.

Let’s focus on what happens if she can’t get a job.

You do what you must to get by,” Lynch says. “Everything is on the table to potentially be cut.”

One area to consider is college.

“You can get a loan for college but not for retirement,” he says. “College should be an investment, so if her child takes on reasonable debt, I’m okay with that. This frees up money.”

Next, Claudine should consider her home.

“New Jersey is an incredibly expensive place to live,” he says. “Moving out of state would probably cut her property taxes by 70 percent or more.”

Lynch says a move would also allow her to pay cash for a new home so she wouldn’t have to worry about a mortgage payment. This would free up around $20,000-plus a year, he said.

Changes like those mean Claudine wouldn’t need to find a high-paying job.

Even if she found a position that only paid $35,000 per year, it would allow her money to continue to grow,” he says.


Lynch says he has serious concerns about Claudine’s asset allocation. She has 96 percent of her investments in stocks, and of that, 32 percent is in international equities. Lynch calls that “incredibly aggressive.”

For the past five years, Lynch says, Claudine’s portfolio has averaged over 17 percent.

“That’s great, however, in 2008, the portfolio was down 45 percent,” Lynch says. “Claudine should not put herself be in a position where she can lose almost half her money. That would blow up the plan and keep her from retiring.”

So what should she do? Lynch recommends Claudine take down her stock allocation substantially. He suggests a range of 40 to 60 percent in stocks, tops.

“It is more important to protect what you have then to continue to invest that aggressively,” he says.


To Claudine’s question about whether or not she’s okay for retirement, Lynch says the answer depends.

“As long as she does not make any really big mistakes between now and then, she should be fine,” he says.

So what is the biggest mistake she could make at this time? He says it would be investing with a 90-plus percent stock allocation.

“If she is that aggressive and she is right, she will probably not spend more in retirement,” he says. “However, if she is wrong and loses half her money, she will not be retiring. There is too much to risk with very limited upside.”

Lynch says one of the hardest things to do as you prepare for retirement is to reduce the stock allocation in your portfolio. For the past 30 or 40 years, you’ve tried to get the highest rate of return that you could, he says, and now you are supposed to focus more on not losing money, than on higher returns.

“It is not natural!” he says. “One of the common questions that I hear in our client review meeting is that the S&P was up 14 percent in the past year, but our portfolio is only up 8 percent. What is wrong with our portfolio?”

Nothing is wrong with that kind of portfolio, Lynch says. If your portfolio is 40 percent stock and you still returned almost 60 percent of the index, you actually did incredibly well based upon the risk that was taken.

Lynch says when he reviews performance, he generally breaks out performance into a variety of different sectors. This may include U.S., international and emerging markets stocks, U.S. and international fixed income, and so on.

“After we have broken out the performance by sector, we then compare it to the indexes that are the sectors that you are invested in,” he says. “This is really the only way that you can really tell if your performance is good, bad or indifferent.”

Lynch wanted to add to the conversation a quote from economist John Maynard Keynes: The market can stay irrational longer than you can remain solvent.”

Lynch says he believes in the law of averages and that over time, the stock market will return the 10 percent-plus that it has historically returned. But, you can’t count on that over the short term, he says.

“If you are fortunate where your retirement dream is possible, take the risk out of the portfolio,” he says. “Even if you can afford to lose 45 percent of your money — and Claudine can’t — I guarantee you that it will make you miserable.”

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