Mary and Harry Reser, 57 and 62, are looking ahead to retirement early next year. They
are thinking about heading south to a cheaper and warmer state but haven't made a firm
decision. Harry is the sole breadwinner and earns $64,543, plus an additional $8,169
from investments.
The Reser's two main concerns are longevity and taxes. "We want to take income from
investments with the least amount of tax liability and make the money we have accrued
last as long as we do," notes Harry. He also noted a concern about taking money out of
tax-deferred plans in the correct manner to avoid IRS penalties.
The Reser's can be considered "millionaires next door," with an impressive net worth
of $1,065,951. They have absolutely no debt and the following assets: $32,000 in a 2%
bank passbook account, $347,365 in telephone stock; $224,901 in Harry's 401(k);
$31,000 in an annuity; $202,685 in mutual funds; $23,000 in whole life insurance; their
$190,000 home; and $15,000 of personal property.
No information was provided as to the type of mutual funds or the 401(k)'s asset
allocation (i.e., the percentage of the account in different types of assets like stocks and
bonds). Harry contributes 15% of his salary to the 401(k) and appears to have been
doing this for many years. Neither spouse has an individual retirement account (IRA),
however.
The Resers estimate that their monthly expenses total $1,500. They are concerned about
the future cost of health care and note that, in retirement, "the biggest expense not in
our current budget will be medical insurance." Currently, Harry shares part of the cost
of health coverage with his employer but this coverage will end after he retires. His
employer also provides short-term disability coverage and matches his 401(k)
contribution up to the first 8% of pay.
The Reser's car and home have $500,000 and $300,000 of liability coverage,
respectively. They do not own an umbrella liability policy. The Resers are thinking of
tapping their $23,000 of life insurance cash value. "We do not feel that we need life
insurance any longer," says Harry, "and will most likely cash them in."
Taxes were mentioned several times as a major concern. The Reser's taxable income is
$50,543. If their adjusted gross income in retirement exceeds $44,000, 85% of their
Social Security benefits will be taxed. Tax on Social Security is figured on what is
known as "preliminary adjusted gross income." This figure includes all earnings,
pensions, dividends and interest from investments, including tax-free municipal bonds,
and half of a person's Social Security benefit.
The Resers do not have wills. They have no children and it is unclear who their heirs are. What’s a good financial plan for them?