AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

Hey Scott;  Great website.  Not sure where to start, but am planning to retire from a career of 31 years with megacorp early next year.  I'll be 56, and wife will be almost 58. Currently we have $920k in IRA, and $430k in 401k accounts, and 90k in taxable money.  Am trying to figure the best way to obtain $55k a year without resorting to a 72T.  I can take a one time distribution of a portion of the 401k account, and the rest must roll over into the IRA.  Our 401k plan does not allow periodic distributions.   Home is worth $230 (owe $68k) but plan on selling it at retirement, and build a new home on several acres of land we already own with no liens. New home will cost $175k.  We have a second home where we plan to live while retirement home is being built, and then either rent it or sell it.  It's worth $50k. 

My initial thoughts are to spread the $90k out somewhat evenly providing aprox $26k per year;  take a one time distribution from the 401k of $100k, pay the taxes of $23k (+/-).  This will provide another $21k per year.  My wife has an IRA with $15k which we can touch at her age 59.5, my age 57.5.  Rental income of $6000 will help pay bills, and if needed, I'll pick up part time work to make up the difference.  

My largest single fear is how to manage the balance of my accounts so that they will provide income after 59.5.  SS for me will be $21k in todays dollars, and $8k for wife - at my age 62. 

I never realized how frightening retirement would initially be.  I'm so scared to walk away from a $115k a year job, because I will not be able to return, and couldn't duplicate it.

I would appreciate any and all opinions/suggestions on the above pitiful plan. 

Bentley,

It's silly for me to tell you not to worry since you will anyway. This is a big event. Everyone worries when the paychecks from work stop and the checks from investments begin.

I say this from personal experience as well as years of reader letters. Humberto Cruz, a fellow syndicated columnist, continues to write his column even though he has no financial need to do so. I'm doing the same thing and I have no financial need to continue writing, either. I joke that I continue writing because I never learned to play golf. But the truth is I'm not ready to assume my new identity as Mr. Leisure.

 All I can do is remind you that worry won't change anything. Better still, you're in very good shape.

Indeed, you're in better shape than you think. And your standard of living in retirement, even early retirement like yours, can be higher than the $55,000 of spending that you're thinking about. You sent enough data that I was able to make a basic consumption smoothing study using ESPlanner. That's the software that Kotlikoff and I used as the foundation for "Spend 'til the End," our trade book on financial planning.

You can learn more about ESPlanner at the website, www.esplanner.com. For the record, I have no financial stake in this firm. It just happens to offer the best tool for consumption smoothing, an approach to financial planning that I have been interested in since before I wrote my first book on personal finance way back in 1971. My hope is that it will change the standard of care for financial planning and prevail over some of the idiocy that is passed off as financial planning by the financial services industry.

Using your input data, I assumed a future inflation rate of 4.0 percent and an investment return of 7.5 percent. That's a real return of 3.5 percent, so it will require taking some risk. It's a set of assumptions, however, that most would regard as pretty conservative. I explored options of (1) buying or mortgaging the new home, (2) investing all your money or buying a life annuity with 25 percent of your financial assets, and (3) delaying taking Social Security benefits until you are 67 and your wife is 65.

The smoothest path I could find was to take Social Security benefits at 62, not take an annuity, and mortgage the new house for its construction cost for about 15 years. That would provide you with lifetime consumption income of about $65,000 a year. This is over and above the income taxes you would need to pay, your future Medicare premiums, and any money (including mortgage) that you would pay for the cost of your primary home.

Delay taking Social Security benefits until you're 67 and she's 64 and you'll lose a little spending power today but gain more when you take Social Security benefits. To be specific, your current consumption will have to drop to about $58,000 while your future consumption will rise to a bit over $73,000. Basically, you'll give up about $7,000 a year for 10 years to gain $8,000 a year for at least 35 years. (Note: all these figures are in constant value dollars.) If you are seriously thinking of working part-time in the near future, this is definitely the route to choose--- your standard of living will be higher than you currently expect and still higher in the future.

In all cases I assumed that you and your wife would each live to age 100. You would be 'spending 'til the end' in that at that age you would have no financial assets left and your only asset would be the value of your house. Since this is assuming that each of you will live more than 40 years, a substantial margin of safety is built-in. One of you might live to 100 but the odds are very much against it. Your estate will most likely have both your house and financial assets.

Lots can be done to refine this, including Monte Carlo analysis to estimate the risk of future spending declines, but this should reduce your worry a bit.

Scott 

 

one issue neither of you refer to is insurance coverage/health care costs--outside of Medicare-- which neither he nor his wife will be able to access at retirement... if he has insurance coverage from his megacorp pension does he feel that it is safe until he will be eligible for Medicare? if he will have coverage what are his premiums/deductables--- is his company likely to cancel benefits or significantly raise the rates after he is retired (that he can anticipate)? are there health issues to be considered for either himself or his wife? Most financial analysists consider health expenses to be the unknown factor than can wreck a retirement train... I can sympathize with you and your wife--my husband is considering very strongly retiring from his job at the end of the year. Although we have more financial assets--what most people would consider more than enough--we hope not to cut back on our lifestyle significantly at this early stage (not that we are profligate) and do want to leave something for our children. I think the current investment cycle is going to be much more iffy for consistent return on investment for variety of reasons so a 7% return before inflation might not be that easy to achieve... And there is nothing easy about the idea of basically shelving your identity -- since most men are "known" for what they do...and learning how to live a different lifestyle... I hope you find this next stage you are moving to is not as fraught with difficulties as you imagine now...

Hey Scott;  Thanks for the reply.  Thanks for the positive feedback.  Actually, my wife is almost two years older than I.  Had I done a better job of planning, I would have placed more money in her IRA than my own, since she will reach the magic age of 59.5 earlier than me.    I think I have run every Monte Carlo calculator available, and they almost all tell me that I'm fine.  I am still concerned especially with the recent spell of "out of control" inflation.  

A couple of additional comments;  You are the second advisor to suggest considering an annuity with 25 to 30% of assets, and I am considering this, just to establish a solid income stream from which to budget.  That will also help get us from my age 56 to 59.5.  I'm currently considering a vanguard/aig annuity with a 25 year term.  For $400k, they quoted $29,172/year for life with a 25 year guarantee.

I really prefer to not have another mortgage.  I do plan on paying the new home off as it's built.  My thinking is that a mortgage becomes another monthly bill that requires additional income, and I want to be free of that, plus the interest which doesn't even help at tax time anymore.  A mortgage also requires all those nasty closing costs which feel like wasted money, and I'd prefer to put that $3000 into the home.  

We do have retiree health insurance from megacorp which "I believe" to be fairly solid, by virtue of how retiree health insurance is set up.   What they have done recently is implement a program using a calculation that uses a constant of aprox $3500 times years of service;  times two if your spouse is covered.  So, 3500 x 30 = 105,000 x 2 = 210,000.  This bucket of money is used to pay "their" half of the insurance cost which is currently estimated at $980/month.  This is essentially the plan.  If the retiree or spouse passes, then the company re-captures that persons "half" of the bucket.  But even with increases in premium costs, that fund will pay half the insurance for 15 years or more, which easily gets us past the age of medicare coverage.  

One thing I'm wrestling with, even if I purchase the annuity with say $400,000, is how to invest the remaining million.  There are several vanguard balanced and income funds that look promising.   

Thanks again for your input/comments/advice.

  

 Thank you worriedinTX for your thoughts.  The health insurance is covered re my last post.  I do agree that obtaining a 7% return might not be as easy in the future as it has been in the past, and in all my calculations and simulations, I always use 5% or 6% return assumption, just to be on the safe side.  And inflation can ravage the best plan, which is a huge concern, but, that concern will NEVER go away.  We just have to deal with it, and cope as best we can. 

I think I'll be able to "shelve" my identity with no problem.  Although I enjoy my current job, I'm anxious to shed the daily stress and routine.  I may seriously look for other employment opportunities in a year or so, but I would like that decision to be one of choice and not a requirement.

Again, thank you for your input.  You thinking is wise.

b