I am 56 and my husband is 57. He spent 26 years in the military and is now retired from active duty. I continue to work full time.
My husband’s current income is a retired military pension of net $2,788 and a disability payment of $3,321. I earn $108,000 per year.
We have a modest savings account with $20,000, as well as $650,000 in my 401(k) plan at work and $75,000 in my pension at work (which my employer no longer contributes to).
We have five excellent vehicles between us and do not plan on having a need to purchase a car anytime in the next decade. Our only debt is our mortgage which is $2,700 per month.
I’d like to know if I can plan on retiring from my very stressful job at 59-1/2, living off my retirement savings until I reach age 67? I would like to claim Social Security then. My husband also wants to wait until he’s 67. I am not sure if the exact amount we will receive monthly but I estimate $3,000 each.
I have an adult son, who still lives at home, contributes minimally and is in school. I carry his medical and dental insurance through my employer but once I retire my husband and I will have military retiree medical and dental insurance.
Thank you in advance,
Tired of Working in America
Dear Tired of Working in America,
The good news: That pension and your savings are and will be great assets for you in retirement, so congratulations on that!
The less-than-good news: I would proceed with caution if you plan to retire in three and a half years. It’s not that this goal is impossible, but you should get all of your numbers and plans straight before leaving the workforce.
There are many factors that go into knowing how much you’ll need for retirement, and a few ways to break down these annual estimates. For example, if you were to use the 4% rule, which is a traditional rule of thumb that suggests you take out 4% of your retirement savings every year to live on, you’d generate about $30,000 to $35,000 a year, said Morgan Hill, chief executive officer of Hill and Hill Financial.
Although that amount of money would hardly replace your current salary, you are fortunate to have other income sources in retirement, such as your husband’s pension and disability, as well as your own pension.
Instead of trying to guess if how much you have saved is enough money to live on, try working backwards by seeing how much you can reasonably expect to need every year in retirement. Take into account all of the mandatory spending — housing, taxes, utilities, groceries, medical and whatever else is necessary for you — and then be honest with yourselves about your discretionary spending, which may include vacations, gifts and hobbies. You’ve both worked hard for so long, and you should enjoy your retirements — it’s just important that you also plan to pay for whatever fun you have.
“Estimating total monthly or annual expenses including discretionary spending or irregular bills as accurately as possible is a key step, especially when retiring early,” said Eric Shapiro, a certified financial planner at Southwestern Investment Group.
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
As it stands, the disability income basically pays for the mortgage right now, Shapiro said. Once you’ve added up all of your other expected expenses in retirement, see if there would be a deficit once you retired and how much that deficit might be. Can you manage to withdraw only 4% or less from your retirement savings? You don’t want to be too aggressive in distributing from these accounts for fear of draining them too quickly. Even when you begin claiming Social Security, having money in the bank would be a relief.
Your goal is to retire in about three years, so use this time — and that salary — wisely. “If the mortgage can be paid off before retiring, that would be ideal,” Shapiro said. “If not, then I would recommend building up cash for 6 to 12 months of expenses by the date she retires.”
Advisers typically suggest not having too much money in cash because inflation erodes the purchasing power of those dollars, but having easily accessible, liquid assets will relieve you of any stress. It will also help you avoid withdrawing from investment accounts when the markets are volatile, which can also erode future returns, Shapiro said.
Understanding what you expect your budget to be in retirement is key, but so is mapping out your income strategies, including Social Security, Hill said. Once you begin claiming those benefits, you’ll be able to back away from distributing so much from your investment accounts. You should be fine to stick with waiting until your full retirement age to file for Social Security, Hill said. That’s a great way to get at least 100% of the benefit you’re owed.
You might want to try drawing out a timeline of your biggest inflows and outflows in the next few years, Shapiro said. He does this exercise with his clients by drawing out a straight line on paper and jotting down important financial events, such as when Social Security kicks in, when you leave the workforce and no longer receive your current salary or when you anticipate paying off the mortgage. “Sometimes the low-tech approach is a great start, and calculations and more detail can be added later,” he said.
Also have an estate plan for you and your spouse, but also your child. Talking about these sorts of topics can be hard, but having an estate plan and backup plans in place help people keep their financial stability when in the midst of an emotionally trying time. For example, one risk to discuss is what happens to those military benefits should something happen to your husband, Shapiro said. Know what survivor benefits there are, and what avenues you should take to preserve and conserve your assets.
Look into wills as well as powers of attorney for healthcare and finances, too.
This isn’t exactly an estate issue, but you may want to look into healthcare options for your son when you retire. He may be in a different situation by then, perhaps with an employer that offers health care, but have him make some plans of his own so everyone is covered and comfortable.
Of course, as I always say in these letters, a financial planner — if even only temporarily — can help shed some light on your finances, and what may bring you the greatest sense of security in retirement.
One last point. Use your time, but also your assets to their fullest potential as you prepare for an early retirement. Take your five cars, for instance. I’m not sure if they’re your everyday cars or if you have them as part of a collection, but if they’re the former, try preserving at least a few of them for later use, Shapiro said. I know you mentioned you won’t need to purchase another car for another decade, but as we all know, cars can be finicky and anything can happen!
If you don’t need all five cars, and also don’t plan to use them and they have no substantial significance to you, you may want to consider selling them to fund some of your retirement goals as well, Shapiro said. “Cars traditionally depreciate faster than cash and it is a good time to sell a car if you don’t need it.”
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