Some Have Enough To Retire, Some Don’t
December 17, 2014

Some Have Enough To Retire, Some Don’t

Q. My question is very simple. I am 55 years old. I have a government job from which I can retire and have about a $4,000 a month annuity. I also have a house payment of $1,600 (still owe 25 plus years), no other major debt. And I have saved $450,000 in a 401(k) account. Can I retire based on this scenario? —T.H., by email

A. With an income of $4,000 a month, some home equity and $450,000 in savings you can retire if you are willing to do what it takes to live on the given resources. Lots of people do it. And they do it without moving to Mexico, Thailand or Panama. It’s really a question of how much you want to stop working and what you are willing to do to achieve that goal.

But if you want to maintain your current lifestyle, shelter arrangements and medical insurance coverage, it’s probably too early for you to jump off the good ship Wage Slave. The reason is your age. At 55 you have a very good chance of living another 30 to 40 years. The resources you have are likely to look pretty limited.

Q. I turn 65 in December. My wife turns 61 in November. We are considering retirement. Here is our situation:

  1. No credit card debt. We pay off every month.
  2. No mortgage on a $675,000 home.
  3. Two late model cars that are paid off in full.
  4. We have $50,000 in our checking account.
  5. We have $20,000 in a Vanguard taxable account.
  6. Our combined estimated monthly Social Security benefit will be $5,000.
  7. Our combined monthly pension benefits will be $3000.
  8. Our total 401(k) balance is $3,000,000

Can we retire now and be financially secure that we will not run out of money? —R.W., by email
A. Of course you can retire! In fact, let’s put it another way: If you can’t, who could? But let me tell you why. Trust me, you aren’t the only person with lots of assets who can’t make the jump because they don’t know how much is enough.

The one figure missing from the facts you sent is your anticipated retirement spending. But we can squeeze it out of the information you sent. Here’s how. The biggest single expense for most Americans after retirement is the cost of shelter, their home. A recent report from EBRI, the Employee Benefit Research Institute, found that Americans age 60 to 64 devoted 42 percent of their spending to shelter. The proportion remains stable as people age, including for people 75 and over.

How much it will cost to support a $650,000 house will vary greatly from state to state. In New Mexico, a state with an extremely low real estate tax, the cost would likely be less than 3 percent of market value. In Texas, where a high real estate tax functions as a substitute for an income tax, the cost would be about 5 percent. If we take the higher amount, you’d need about $32,500 a year to support your house. That implies total spending of nearly $80,000 if you accept the EBRI 42 percent shelter-spending figure. If you are more conservative and assume 25 percent of spending is on shelter, you’d need about $130,000, after Federal Income taxes.

So that establishes a range: $80,000 to $130,000 a year of after-federal income tax spending. This would require pre-tax income of about $90,000 to $170,000 a year.

Do you have it?  Yes, in a walk.

You know you’ve got guaranteed income of $8,000 a month or $96,000 a year. So the low end of the range is covered by guaranteed income alone, leaving your $3 million 401(k) account to cover discretionary spending over that. At a very conservative 3 percent draw rate, you’d have an additional $90,000 a year (pretax), bringing your total income to $186,000. That’s more than the $170,000 top end of the range.

It’s important to note that the 3 percent draw rate from your 401(k) funds is less than the 3.65 percent rate you’ll be required to use in the first year of required minimum withdrawals, so these figures are genuinely conservative. In addition, your consumption spending is likely to decline as you age.

What could go wrong? Take your pick from a Menu of Worry that makes the menu at Denny’s look short and bleak. But considered against the human condition, you’ve got it made. So enjoy it. Think about others. Help others. The more you do, the deeper you will understand, and enjoy, what you have.

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