Q. I am nearly 51. I plan to retire somewhere between 55 and 60. A realistic age for me to retire would likely be age 58 or 59. I have $263,000 in my 401k. My wife has $109,000 in her SEP account. We have a house that is worth $190,000 with no mortgage. We also have $270,000 in taxable savings.
My eldest son is in college and has about two years left. A daughter will start college next year. I will be spending about $30,000 to $35,000 per year for both of them to be in college. I have also supported my parents with an allowance of $500 a month. I earn about $80,000 to $100,000 a year. My spouse makes $40,000 a year. We have been putting 15 percent of our pay into our retirement funds.
Somehow I still don't feel secure because we have expenses for four cars, two kids in college, aging parents and maintaining our house. What do I do, now, to try to retire before 60?
---B.L., by email
A. Don’t confuse your current expenses with your retirement expenses. Your situation is a good example of why the old 70 to 85 percent replacement rate rule of thumb used in most financial planning is generally wrong. The income you need to replace in retirement isn’t the $120,000 to $140,000 you and your wife currently earn. Nor is it 70 to 85 percent of that amount.
The income you need to replace is the money you and your wife spend on yourselves.
It does not include the money sent to your parents or the money spent on your children. Nor does it include the money you save or what you pay in employment taxes. Figure out what your basic couple expenses are and you’ll have your retirement income target. I think you’ll find it’s a fraction of your current earned income, as little as 50 percent.
So that’s your “homework” assignment.
Start tracking your expenses as an adult couple and make distinctions about what you spend for yourself and your wife and how much is being spent on others. That core is the spending figure you need to be able to provide in retirement.
With $642,000 in financial assets, a mortgage-free house, and about $20,000 a year of annual contributions to retirement plans, you are well on your way to being able to retire at 60. Invested for an 8 percent return, those flows could grow to $1,660,000 by age 60. That’s enough to provide a sustainable retirement income of $66,000 a year that would later be supplemented by Social Security benefits.
Q. I am a recently divorced woman who somehow made a home purchase (emotionally, I think, not financially) with a residential loan from my 401k of $32,290 as the down payment until I received settlement money from a quit claim deed from my husband of $57,000 from the refinancing of our home. The 401k loan was disbursed on Aug. 2nd this year. The closing on the home was done on Aug. 4th in the amount of $37,000. I made biweekly payments on the loan of $158 until I received the $57,000. I used that to pay off the 401k loan on Sept. 28. What are my tax consequences from this loan? What should I do with the remaining $22,000 that is sitting in my checking account?
---A. C., by email
A. There are no tax consequences for the loan since it was just that, a loan. It was not an account withdrawal, which would be subject to taxes as income. Assuming the $57,000 from your former husband was a property settlement, it is not taxable as income either.
So you have $22,000 ready to invest. I suggest you get it out of your checking account before it evaporates or suffers the usual fate of readily available cash. In your position I’d put the money in a no-load, index-oriented mutual fund such as Fidelity Four in One Index (ticker: FFNOX), which has a minimum initial investment of $10,000 and an annual net expense ratio of 0.08 percent.
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