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I’m 59 & Divorced. When Can I Retire?

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Christine*, 59, is planning for her retirement. She’s been divorced for 15 years and she’s helping her son pay for graduate school. But now, she says it’s time to plan for herself.

“I want to make sure that I have enough money set aside and that I know what to do with it at the right time,” Christine said. “I have a lot of different investments, though, like real estate investing, stock or mutual fund investments. I think I just need a long-term plan and have the discipline to stick with it.”

Christine isn’t sure if she wants to stay in her current home or move to the Jersey shore.

So far, Christine has saved $150,700 in 401(k) plans, $164,500 in individual retirement accounts, $112,600 in mutual funds, $89,000 in a brokerage account, $17,000 in savings bonds, $12,000 in savings and $2,000 in checking.

Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield, took a look at Christine’s financial situation.

“Under the current assumptions regarding her savings and expenses, Christine is able to achieve her retirement and financial goals,” Gobo said. “We have used a retirement age of 66, at which time, under a conservative investment return expectation, and we forecast Christine should be able to live till age 90 without asset depletion.”

In fact, Christine might be able to retire earlier.

Spending Plan Needed

Gobo said the numbers show Christine could potentially stop working at 60, assuming a 4% portfolio return.

But for Christine, waiting until age 66 increases her chances of success, in part because that’s when she’s at Social Security’s full retirement age. That will help Christine maximize the probability of a successful retirement period, he said.

“Christine does not need to save more to meet her retirement spending needs, but more savings increases the margin of safety that can be built to weather adverse market conditions,” Gobo said.

He said there are two reasons why a spending plan is an important consideration in retirement years.

First, when spending is far in excess of the level of income, the retiree begins to erode the capital base and in return, he or she loses the growth of capital that would have been accrued.

“At some point, the capital will deplete fully and the lifestyle cannot be sustained,” Gobo said. “A consistent spending plan is necessary to ensure that the retiree does not run out of money.”

Second, while Gobo assumed a 3.7% rate of inflation, a spending plan that grows faster than the portfolio growth will sustain enters an asset-liability mismatch. Once again, capital becomes depleted and severe lifestyle changes may be necessary exactly when such changes are not feasible, he said.

So, can she afford to stay in her home?

Gobo said Christine’s expenses relative to her income are reasonable and she continues to save a substantial portion of her income. As such, she does not need to downsize at this time, he said.

“With about 10 years left on her mortgage, she should be debt-free around the time she retires and not be a burden during retirement,” he said.

Investment Changes

Looking at Christine’s investments, Gobo said she has too much in cash.

“There are several portfolios including the IRAs and the mutual fund portfolio that hold sizable cash or cash-equivalent positions,” he said. “Today, cash has little to no return. And cash has a negative return when adjusted for inflation, which is averaging between 1.5% and 2.0% and is expected to increase over time.”

He said investing this cash in an appropriate risk-matched portfolio, especially within the qualified accounts, allows some growth or income to be generated.

Christine should consider further diversifying her portfolio by adding developing markets stocks, Real Estate Investment Trusts (REITs) and managed futures, which Gobo said would increase portfolio diversification.

Then as she nears retirement, Christine should consider lowering her equity allocation, Gobo said.

“This lowers the return distribution function her portfolio is exposed to,” he said. “We would note that as Christine increases her fixed-income exposure, she should consider multi-sector and unconstrained strategies which are expected to generate positive return regardless of an increasing or decreasing interest rate environment.”

Long-Term Planning

Long-term care is a common concern for pre-retirees, and care in New Jersey can exceed $100,000 a year.

Gobo said Christine would have to deplete all her assets before she’d qualify for Medicaid. So if her intention is to leave an inheritance to her child, she may want to consider a long-term care insurance policy to preserve some of the estate value.

“The trade-off is if she never uses the policy, she paid premiums for nothing,” Gobo said.

He said another approach is to purchase a life insurance policy. If Christine requires long-term care, she can pay for care from her estate. Upon her death, these assets would be ”replaced” with the life insurance proceeds, Gobo said.

“If she never requires LTC benefits and the estate is not depleted, the life insurance proceeds become a ‘windfall,’” he said.

Christine’s estate is currently below $5.34 million, so it’s not subject to the federal estate tax. But, she will potentially owe estate taxes to New Jersey, because the threshold is only $675,000, Gobo said.

She needs to establish a will to be sure her estate is distributed the way she wants it to be, and she also needs to make sure the beneficiary designations on her qualified accounts reflect her wishes.

*To protect her identity, the subject’s name has been changed.

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