Q. My wife and I are 60. We own our town home, worth $400,000 in this market. She has $167,000 in her IRA. I have $400,000 in my IRA. She also has a $2,000-a-month pension from one of the remaining airlines. We have no debt. I generate $50,000 in any given year consulting.
We are trying to figure out where to put our money to generate the largest income. We are ready to sell the town home and either downsize or rent. We like to travel economically. We plan on taking Social Security as soon as we qualify--- while it still lasts. Any suggestions or direction would be greatly appreciated. ---G. G., by email from Dallas
A. Putting a major emphasis on current cash generation will result in a rapidly falling standard of living as you age. At age 62 your life expectancy will be about 19 years. At the same age, your wife has an expectancy of about 22 years. When two 62-year-olds live together, however, one of them can be expected to live 29 years.
However you cut it, retiring at 62 means you're planning on surviving on something other than work for a really long time.
That's why most people should be thinking about retiring later--- at age 65, 66 or 70 rather than ASAP. So don't focus on the highest possible income you can generate at this moment. Instead, I suggest that you play with ESPlanner/basic. This is the financial planning software I have written about in many columns and in "Spend 'til the End" (Simon & Schuster, 2008) with economist Laurence J. Kotlikoff. A simplified version is now available, free, online at http://basic.esplanner.com
Using it and the data you provided, I found that you and your wife may be able to sustain annual spending after taxes, Medicare, and current shelter of nearly $40,000 a year--- if you can earn a return of 3 percent a year over a 3 percent average rate of inflation. That’s a conservative total return of 6 percent.
This took about 10 minutes. The output included tables of constant dollar expenses, state and federal income taxes, rising Medicare premiums and changes in net worth until death at age 100. (Just to be on the safe side.)
You may want to play "what if" and fine-tune things. One exercise would be to see what happens to your lifetime $40,000 of spending power if you sell your house and rent. I hope you and other readers will start thinking about smoothing your living standard over your (long) remaining years of life.
It's easy--- now you can become your own financial planner online. (Collection of columns on ESPlanner)
Q. My husband, age 66, just signed up and started receiving his Social Security benefits. He assures me that because of his age, he can work and earn income without his benefits being taxed or affected in any way. I assume he will pay taxes on any work-related income. Is this correct?----M. C., by email
A. Your husband is in for a surprise. If he was born in 1943, his "full retirement age" is 66. All those born between 1943 and 1954 have 66 as their full retirement age. Since he took his benefits when he reached full retirement age, he doesn't face what many early retirees face--- the possibility of having to return a portion of his benefits if he earns too much wage income.
Unfortunately, that has nothing to do with the taxation of Social Security benefits. If your household income from any source--- wages, dividends, interest, pensions, rents, capital gains, or even tax-free bonds--- exceeds certain limits, up to 85 percent of your combined Social Security benefits can be added to your taxable income. As a result, your income tax bill in retirement can be a lot larger than you thought it would be.
Suppose, for instance, that your combined Social Security income is $30,000. If your other income sources exceed certain amounts, you may have to pay income taxes on as much as $25,500 of benefits that would not be taxed if your other income was lower. It is little complexities like this that make using software like ESPlanner (mentioned above) essential. The software knows the tax law and calculates accordingly.