Preserving retirement assets and creating a plan is top of the mind for many. This week we look at a couple positioned well for retirement and determining the best exit strategy from working full-time.
The situation
Angela, 52, and Jeff, 55, are native Coloradans and have lived in Evergreen for 21 years. The couple has two grown children: One is completely financially independent, and the other has two years left of college. Jeff is approaching his 30-year mark in sales with his software company and earns $200,000 per year. Angela just marked her 28th anniversary as a finance director and hopes to continue for another six to seven years. Jeff would like to work for the next four years to be sure both kids are launched and retire on his 30th anniversary with the company.
The couple has six rental properties with a combined value of $1.2 million. They owe $653,340 on the mortgages. They also have a vacant lot, valued at $41,000, that’s for sale. Their primary residence is valued at $382,000, and they owe $114,985 on the mortgage.
Jeff’s assets include: $824,007 in his current employer’s 401(k), $26,868 in a Roth IRA; $10,157 in a traditional IRA; and a pension valued at $57,000. Angela has $695,500 in her 401(k); $26,881 in a Roth IRA; and $31,000 in a traditional IRA. The couple has two joint investment accounts valued at $10,200 and $12,450, in addition to $400,000 in CDs, checking and savings.
Jeff wrote in to What’s the Plan with the question “How do we limit major loss of investment net worth should the stock market experience a large percentage drop?”
This is a very common concern when workers have accumulated significant wealth in their company plans and have very limited downside protection options in their company’s investment menu.
Recommendations
Angela and Jeff have created a wonderful opportunity. They could retire today but are choosing to phase out of their current positions and leave their careers and their companies on a high. Each has a few more career accomplishments and mentorships to finish before they exit.
Their primary concern is, and should be, capital preservation. We asked them to research with their plan administrators the possibility of remaining employed, but doing an “in-service, nonhardship, direct rollover to an IRA” so they could diversify their assets in more protective positions than their company plans offer. Although many companies do allow a rollover while still employed, unfortunately neither of their companies does. Therefore, we recommend the assets they can control outside of company plans be invested conservatively to counterbalance their plan assets.
We recommend they set aside six months of their monthly expenses, approximately $60,000, from their savings account to use as an emergency fund. Currently, they have $400,000 in bank accounts, over the $250,000 FDIC insurance limit against bank failure, earning less than 1 percent. We recommend they invest the remaining $340,000 in a conservative mix of stock and bond mutual funds. This kind of investment has the potential for protection and slow growth.
Angela and Jeff haven’t updated their estate documents since their kids were minors. They have legal counsel benefits through work so can update their estate planning documents for free. They just need to put this on the to-do list and get it done.
Long-term care is another concern they mentioned, but they haven’t liked the “use it or lose it” types of policies they’ve looked at in the past. They have life insurance policies with $61,000 and $20,000 of cash value in them. They can explore combining those values with their cash to self-insure or to purchase a hybrid life/long-term care insurance policy.
We project Angela and Jeff can spend about $8,600 per month after taxes, adjusted for inflation, from now until Angela’s 95th birthday. They estimate their monthly cash need to be only approximately $8,000 per month, so if they only spend that, we project they may have up to $500,000 (expressed in today’s purchasing power) to leave for their children at Angela’s age 95.
I relate to this couple wanting to exit their careers on a high. Now that they know financially they can retire, they’re liberated to work for fun as long as they like, while planning for the next chapter of life.
Names and identifying information are changed to protect confidentiality.
Pam Dumonceau has 22 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
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What’s the Plan? By Pam Dumonceau
