Jack & Jill Save for Retirement

A couple wades through all the Retirement Savings Options

Jack and Jill recently moved to the area and sought out financial advice to determine if they could achieve their goals of retiring in 10 years and building a second home at the beach as they have always dreamed.  Jill accepted a job as a professor at a nearby university and Jack is an engineer for a national software company.

In addition to their retirement goals, they are also seeking guidance on choosing investments in their various employer sponsored plans and reducing their tax liability.  Since Jill is a new hire at the university, she has several different retirement programs to choose from, including the state pension system, an optional retirement plan (457), and a 401k or 403b. She’s overwhelmed with which options are best.

Questions to Answer

• Is their retirement goal feasible?
• How much should they defer to retirement plans?
• What retirement plan option should Jill choose?
• What tax-saving strategies are available to them?

Planning

Since they both have high incomes and live a fairly modest lifestyle they have accumulated a significant net worth in their current and former 401k plans by maxing out their contributions every year.  While this has reduced their taxable income, they would like to defer more of their income from taxation, if possible. They have also built up significant cash reserves in CDs and a money market account and are not sure if it’s too much to have in cash.

As a faculty member at the university, Jill has the option to opt out of their defined benefit pension plan.  As an alternative she can participate in their optional retirement plan (ORP/457) which also offers an employer match.  With either plan she can also make unmatched contributions to a 401k.

Since Jill may not be with the university long term, and is comfortable with investment risk, she decides to opt out of the pension plan and contribute to the ORP instead.  This will allow her to defer the maximum contribution limit and “double dip” by also contributing the maximum to the state’s 401k plan.

Jack will also plans to max out contributions to his company’s 401k plan.  By choosing the ORP, Jack and Jill can reduce their taxable income considerably, while saving aggressively for early retirement, keeping them on track for their target date and the beach house.

Implementation & Monitoring

• Decide on a process to monitor spending using the targets set in the planning process.
• Determine regular schedule or rules to rebalance and adjust their 401ks and retirement accounts.
• Consider rolling over most of the plans from previous employers into an IRA to consolidate those accounts and offer a greater investment selection.  On some occasions, a plan may have wide investment selection and low cost investment options, so would want to leave that account where it is.
• Investigate adding a joint brokerage account to hold cash reserves and incorporate those funds into a comprehensive investment strategy. This adds flexibility to invest if their risk capacity and risk tolerance allows for it.