By Scott Burns
Q. This year, I will turn 52 and my wife 51. Two of our three children are still in college, but the last tuition payment should be in 2015. I am in sales, with a base pay around $100,000. Commissions and bonus have added another $20,000 to $80,000 a year over the past several years. We moved last year, purchased a 5,000-square-foot home for $850,000 (cash) and banked $80,000 from the sale of our previous home. We have these assets: $450,000 in several 401(k)/IRA programs from various jobs; $180,000 in mutual funds; $225,000 in various CDs/cash accounts; $35,000 in a 529; $60,000 in Mexican timeshares.
We have about $120,000 in college expenses left, plus a wedding and rehearsal dinner ($40,000). Property taxes, car/home insurance and HOA dues are about $23,000 a year. No debt or spousal income. Good health. What do I need to do to retire by 60? —T. S., by email
A. It’s all about the glide path you choose. The good news is your glide path is all about relative comfort, not a possible crash.
The biggest lever anyone has on retirement is flexibility about spending and standard of living. Lots of readers, for instance, would retire today if they had your $835,000 in financial assets and an $850,000 house with no mortgage.
That is, after all, $1,685,000.
They’d sell the house, quit the job, reserve some more money for the kids’ college, urge your daughter to elope, and head for the timeshares in Mexico. They’d figure that with about $1.5 million, they could easily live on $60,000 a year. They’d know it would go up a bit more when they turn 62 and take Social Security benefits.
The real issue is how much can you improve your standard of living over the next 9 years? Can you improve it enough to sustain the ownership costs of an $850,000 house? That’s a nearly 100 percent pure crystal ball question. So let’s look at some of the main variables.
Your house. Since it takes about $1,000 in financial assets to support the operating costs of $1,000 of house (that’s a very rough rule of thumb), you currently have the resources to support your house. But nothing else. Move to a $425,000 house, invest the remaining equity, and you’ll have your shelter costs covered for life.
Your existing investments. A lot will depend on the return your existing assets earn over the next 9 years. If they earn 8 percent, they will double. You’ll be able to support your current house and have about $35,000 a year to spend on everything else, including income taxes. If you downsize and double your $835,000, you’ll have your shelter covered and about $66,000 a year for everything else, including income taxes.
Your continued saving. Make full use of 401(k) plan provisions for workers age 50 and over, and you can save $22,000 a year. That could add another $288,000 to your nest egg and perhaps another $12,000 a year to your pre-tax income.
Add your eventual Social Security income— which is estimated on the annual report you get from Social Security— and you’re likely to be able to sustain your current standard of living in retirement, house and all, if you just keep on truckin’. If the job leaves you, your health goes, or investment returns disappoint, you’ll need to adjust downward. Pick the right beach and it may not bother you at all.
Q. I have been laid off for the second time. Both times, my job has gone overseas. Now money is getting tight for my family. I am considering drastic actions. One action is to withdraw part, or all, of my Roth 401(k). I am not sure of the ramifications. Is it a viable option, under the circumstances? I suspect many Americans are facing the same problem right now. —J.W. by email from Austin, TX
A. Roth IRA contributions are after-tax dollars. Withdrawals are treated on a FIFO basis— first in, first out— and there are no tax or penalty consequences for withdrawal of your original deposits. If you withdraw more than your contributions (original principal), you will be withdrawing earned income. That money would be subject to penalty if it has been in the account for less than 5 years. Before doing this, I suggest a visit with a good tax accountant.
