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Three Retirement Scenarios for Couple to Consider
By Karin Price Mueller, Star-Ledger
June 11, 2006
Donna and Stephen of Morris County are nearing retirement age, but they're afraid their assets haven't kept up with their future needs.
"How or will we ever be able to retire," asks Donna, 51. "We had eight years left on our mortgage and refinanced last December because of increasing college expenses and we have no savings. This is killing me."
Donna and Stephen, 49, whose names have been changed, have $3,300 in a checking account, $14,000 in a money market, $4,000 in certificates of deposit, $44,000 in IRAs and $4,000 in a 403(b) plan. Donna can expect a monthly pension from her job, the value of which will depend on how many years she works. They owe $170,000 on their home, which is worth approximately $600,000.
The Star-Ledger asked Joe Leone, a certified financial planner with RegentAtlantic Capital in Chatham, to help the couple assess their retirement needs.
"The family is on course for an age 65 retirement. They will have a difficult time retiring earlier unless they can decrease their expenses," Leone says. "Once the education obligations are out of the way, they want to add that additional cash flow to their savings."
Leone and the couple made several assumptions in analyzing Donna's and Stephen's finances.
As long as Donna continues working, she'll save $2,400 a year to her employer-sponsored retirement plan. And in the next two years, the couple will spend $16,900 for higher education expenses for one of their kids.
The couple think they'll need in retirement -- an after-tax income of about $51,800, adjusted for inflation. They also considered several retirement dates: Donna stopping work in 2015 or 2020, and Stephen, in 2017 or 2022.
If Donna works until age 60 (2015), she can expect an annual pension of $21,744. She can also expect Social Security benefits of $12,468 a year starting at age 62, and Stephen can expect $18,060 a year at his age 62.
Leone ran three scenarios for the couple to see how their retirement assets would differ, depending on the choices they make.
The first assumes Donna stops work at age 60, and Stephen two years later, and they would live on $51,000 after-tax per year.
The second scenario keeps Donna at work until age 65, or the year 2020, which would allow her a greater pension income. The third shows what would happen if Donna retires in 2010, which would make her ineligible for her pension.
Leone ran some probability data to see if the couple's assets would last through Stephen's age 90 under these three scenarios, also considering how different equity allocations would impact their savings.
His analysis found the couple's best chance of not running out of money by Stephen's age 90 was the second scenario -- Donna working an extra five years, until age 65. In this scenario, there was a 99 percent chance they'd still have funds, whether they invested 40 percent, 60 percent or 80 percent of their assets in equities.
The next best scenario would be for Donna to retire at age 60. In this case, the couple's chances for still having assets at Stephen's age 90 was between 87 and 93 percent, depending on their equity allocation.
The riskiest scenario for Donna and Stephen would be for Donna to retire without her pension. The couple would face a probability of less than 75 percent that they could run out of money before Stephen reaches age 90.
Get With the Plan involves readers anonymously divulging their personal financial information in exchange for free advice from a professional. The feature is designed to illuminate personal-finance concepts and isn't a substitute for actual financial planning or dedicated professional advice.
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