Unemployment and underemployment can have major implications on a person’s ability to retire. This week we look at a couple that has their sights set on retiring at age 66 but worry they are not prepared with one of them just restarting their career.
The situation
Gloria and Ray, both 59, live in Bailey and have stuck to a tight budget for the past seven years. In 2008, Gloria was hit with a layoff and has only been able to secure small contract projects until recently. During this time Ray, an X-ray technician, was the sole source of income earning $63,000 per year.
The couple has lived very conservatively and had, thankfully, very little debt when the layoff began. Gloria just got a full-time job at a hospital in Denver earning $80,000 per year, and the additional cash flow has allowed the couple to breathe again. They’ve been so frugal for so long, they’d like to cut loose and spend some of their newly increased cash flow, but they worry about how that will affect their future.
They own their home, with a mortgage payment of $1,100 per month and 15 years left to pay. Gloria’s 401(k) is currently valued at $38,891, and she is investing 5 percent every paycheck with a 1.5 percent company match. Ray has $201,404 in his retirement account and receives an extremely generous contribution of 6 percent of salary from his employer. At the couple’s full retirement age of 66 and 4 months, their monthly Social Security income will be approximately $2,017 for Ray and $1,845 for Gloria.
Gloria wrote in to What’s the Plan because she was very concerned that she “should be at the top of her earning potential and saving big at this stage in my life, and instead until recently has been living paycheck to paycheck.” Her 401(k) took a substantial hit in 2008 as well, and rebuilding this reservoir seems nearly impossible. The couple recently heard they needed “$1 million in their retirement accounts in order to retire” and this gave them both great pause as to whether retirement with their income goal of $4,500 per month at age 66 is a realistic possibility.
Recommendations
Gloria and Ray did a great job saving early in their careers and avoiding debt during their joblessness and underemployment. With their increased cash flow, now is the perfect time to forge a plan for their future.
It’s natural to want to indulge themselves with some of their new cash flow after such austerity. We recommend they allow themselves some money for fun and caution against loosening their tight grip on spending just yet because unfortunately joblessness and underemployment are common challenges for today’s mature worker. It could even happen again, so we suggest they save the majority of their increased cash flow in a bank savings account to build up a hefty emergency fund of two years of expenses.
We would then recommend they continue to save money in an account earmarked for paying off the mortgage seven to 10 years from now. They should not send the money to the mortgage each month but keep it in a savings account for use should they have another reversal, yet the funds will be available to pay the mortgage down or off as they near retirement.
If the couple continues to invest in their company plans for retirement, our projections show that their portfolio can provide them approximately $4,300 per month after taxes, adjusted for inflation, if they stop working at age 66. If they work until age 67, we project their assets can provide the amount they desire of approximately $4,500 per month after taxes. Although not ideal for either of them, working until age 70, would give them more cushion with $5,400 per month.
Currently the couple has made a very common mistake in their account beneficiaries. They named each other as primary beneficiaries but their three minor grandsons as the contingents, which would present an expensive legal problem for their family should they both pass away.
I recommend they both check with their employers to see if they have any prepaid legal services as a part of their benefits package. If not, a good use of their increased income would be to visit an attorney and both get their wills and powers of attorney in place and determine the best way to leave money to their underage grandchildren in the event of their passing.
It’s some small comfort to know that the challenges they faced are common in this generation. We commend them for rising to their challenge by making uncommonly tough decisions, saving early, curbing spending. Kudos to them! Despite their setbacks, they can still accumulate enough to enjoy a comfortable retirement.
Pam Dumonceau has 22 years of experience and is the principal of Consistent Values, a registered investment advisory firm in Greenwood Village. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s the plan?
Ask Pam what you should do — e-mail whatstheplan@consistentvalues.com to get advice. Names and identifying information are changed to protect
confidentiality.
