Help a Reader: Can We Retire?

Here's an email I recently received from a reader:

I want to know if we're anywhere CLOSE to being able to retire comfortably.
 
Here's our story:

Spouse and I are in our mid-50's.  We've got no debt - except our mortgage.  Our mortgage is at $130,000 - 15 year fixed at 3.25%.  We're planning on paying that off in the next 3 years by throwing $4000/month at it.  We're just going to suck it up and get it done. (The house has been appraised at $375,000).
 
Our take home pay is $6600/month - that's after health ins/taxes/investment $ comes out of our checks.  We've got $650,000 in 401(k)'s, a 3 month emergency fund and $20,000 in easily accessible savings accounts.  Spouse makes $116,000 gross a year and I make $50,000 a year.  She wants to retire in 3 years (just as soon as the house is paid off). 

The kids are grown and educated (debt-free) although the youngest wants to go on for his masters and doctorate degrees - out of state - so we will be helping him with day to day living expenses (although his tuition is going to be on his own dime).  He should be finished with these degrees in 4 1/2 years.  We'll probably be sending him $12,000 a year.
 
Are we even close to being able to retire?  We'd like to travel a bit, but mostly want to ensure that we will never be a burden on anyone (parents/grandparents on both sides lived into their 90's and needed a lot of assistance - parkinson's/alzheimer's etc).
 
Thanks for any insight you may be able to offer.

What's your advice for him?

Comments

[so]

Yes, at 59.5 for sure. Expenses appear low, although not sure what "investment $" is.

They appear to have a lot of assets, but all their $ is tied up either in a house or retirement plans. If they want to retire and start drawing down @59.5, they are good, but if they want to retire earlier, they should build up a bigger cash cushion. I'd just save the $4000 / mo in cash and pay down the mortgage according to its terms (or with a chunk out of the retirement plan after 59...)

[Matt]

You are better off than most people but I am wondering about a few things as to what you are doing now and what you could be doing that would improve the situation.

Key questions.
Are you maxing out your 401k savings at $22500 for each of you and Roth IRA of $6500 each? This would equate to $58,000 a year going to retirement.
Next is do either of you have a pension?
Next is how will you handle healthcare until you are eligible for medicare at 65?
Define travel? Is thise a cruise travel? Cheap hotel travel? Living out of a camper travel? All have different layers of cost.

My suggestion is to save as much as you can, for as long as you can over the next 5 to 7 years assuming you both are around 55 and then evaluate at the 5 year period.

If you still feel you can't keep working look into working part time or a whole mess of other options.

[JP]

What is their annual spending? 2600/mo without counting mortgage payments?

[John S @ Frugal Rules]

I think they can...assuming they wait until 59.5, have the mortgage knocked out and are maxing out all of their retirement vehicles now. With the mortgage gone they should have minimal living expenses and I would save as much as they can now. Knowing their family has lived into its 90's likely means they're going to need a nice sum saved up.

[MrAtoZ]

The short answer is not yet. Not till you have the mortgage retired, and college loans paid for. Absent an annuity or pension (since none were mentioned), you have to figure out how you will live on 4% of $650k, which comes to $26,000 per year. At least you'll have to live on that till SS kicks in, but that's probably at best another $50k per year if you both start claiming at 62.
So the question is, can you go from making $166k to perhaps one-third of that? If and when the answer is yes, then you're ready.

[getagrip]

We can't tell what is "close" to you. You've given no indication of how much you plan on spending when retired. Nor have you indicated how much you are putting away in savings and retirement now. Matt's comments had some good questions you need to consider in coming to those numbers.

That said I'll take a WAG at one possible "close" consideration. It's implied your monthly spending aside from the mortgage is $2600 (6600-4000), but since you'll need to be paying health care out of your retirement you should be adding that back in as well as taxes you'll be paying on the retirement withdrawl. For sake of argument lets say $4000 a month ($48K a year) is necessary current income needed prior to taxes and health insurance to maintain your standard of living. We'll also provide two "travel" vacations a year at $3000 each so you'll need a total of $52000 a year or about $4500 a month.

Assuming a 4% withdrawl from your retirement savings you need to have $1.3M available, or double what you have now. Using a 3% withdrawl you need $1.73M, nearly three times. In three years, assuming you saved $45K towards retirement each year (I'm thinking max minus the $12K or so to your child) will give you about $135K added to your retirement nest egg. Plus $650K earning 4% above inflation if we're lucky yields $730K in three years. So you'll have about $865K to draw from in three years. That's $34.6K a year or about $2880 a month at a 4% withdrawl rate. At least $1620 a month short.

Now let's say you're 3 years from 62 when you retire and are willing to take your Social Security at that time. I'll figure your spouse will be able to draw at least $1800 and you can draw at least $900 (i.e. half of hers) for a total of $2700. So, if your three years of vacations comes out of your current $20K savings, and you just draw $48K from you nest egg a year instead, you'd lose about $15K a year from your nest egg before being eligible to collect SS, and have around $820K available at age 62 (I am assuming the nest egg is also earning 4% a year equivalent, so you are drawing off the money the nest egg earns and taking a 15K loss each year). That $820K at a 4% withdrawl yields $32.8K a year or $2700 a month. Add that to the other $2700 from SS, and you have $5400 a month. Which is $900 above your estimated need of $4500 a month.

So as a WAG it looks like you should be able to retire when you want. Keep in mind, this is really rough, and is basically assuming you can live comfortably off of about 32% of your income, which seems reasonable in your case because with putting $4K towards your mortgage every month that's what your effectively doing. On the positive side this doesn't involve selling your home and downsizing, either of you working another year or two, the market actually doing good, etc. On the negative side it's assuming you have no major financial issues, the market does well, and you understand the 4% rule isn't a set number carved in stone, etc. I would suggest paying a one time fee to a good financial planner to run your numbers and give you a better estimate at some point before you retire to make sure you're okay.

I will finally say this, I'd rather take some kick butt vacations now, with two months a year towards the house kicking me out another six months (e.g. $8000 a year) past my 3 year retirement date than wait until I retired. But that's just me, and I don't know your situation.

In either case you are definately on the right track in my eyes and the worst that should happen for you is you need to work a few more years. Best of luck.

[Mike Hunt]

My answer is not yet.

Need to wait for medicare to kick in plus SS payments. And hopefully the 401k will appreciate. If the market does a repeat of the last 6 years then you may need to wait longer.

You are doing ok but need to be patient.

IMHO.

-Mike

[Apex]

"We'd like to travel a bit, but mostly want to ensure that we will never be a burden on anyone (parents/grandparents on both sides lived into their 90's and needed a lot of assistance - parkinson's/alzheimer's etc)."

Given that criteria the answer is NO. Now of course the question can't be fully answered without a pretty good estimate of your future expenses which you did not provide but given your high incomes and current assets it seems you must be spending a decent amount of money.

As others have said you are doing better than many, but to retire prior to 60 with investable assets less than 1 million cannot meet your above stated criteria. You may be able to make it work but to "ensure" the answer is no. I suspect the odds are greater than 50% that you wouldn't make it to 90 on those funds especially if health concerns kicked in. Do you have long term care insurance? Without it you could suck down your assets real fast.

Your biggest risks would be:

1. Inflation. This is a big unknown. Who knows what it will look like, especially medical inflation as that will become more important to you.
2. Poor return on your assets.
3. Health risks.
4. Lifestyle creep. You will have all this free time on your hands and close to 1 million in assets that you can just draw out an extra 10K here for a trip and 10K there to help children or grandchildren, and another 30K for a new vehicle because you have worked your whole life and deserve it etc. The funds can draw down pretty quickly and there is no way to replace them when they do.

Here is the thing. You are facing potentially 35 years with no external source of income (outside SS). That's just as long or longer than your entire working life thus far. What do you want those 35 years to look like? 10 years of enjoyment followed by 25 years of penny pinching because the money drew down faster than expected? Because that is a possibility.

You could go for it and maybe make it work. I suspect you will find out that the second half of your retirement is low on funds.

I would personally like to see investable assets of about 1.5 million for you with no debt or mortgage.

Your wife brings in the bulk of the money so if she quits in 3 years that will drastically reduce your ability to build assets. My advice would be to start trying to cut back and save more now. Keep working for 6-8 years instead of 3 and try to sock away as much money as possible. If you can get investable assets up to 1.5 million with your house fully paid for, now you are looking at something that is pretty secure after you add SS on top of it. Those extra 3-5 years will make a huge difference. Also DO NOT DRAW SS EARLY! I saw that suggested above as a means to bridge the gap but it is a big mistake. It's a crutch people use to justify quitting earlier. If you need to do that to quit early then that is a huge sign that you are not there yet and it almost ensures meager means in your later years. Don't draw until at least 67. Especially if there is family history of living into the 90s. You are money behind by about age 77 by drawing early.

You can think of it like pulling a boat into the dock. You have been doing that for the past 30+ years. You are getting close to the dock now and you want to disembark as soon as possible. When you get close enough to jump you are thinking about going for it. I know it's been a long time coming, but you may misjudge the distance and your jumping ability, and find yourself dangling off the edge of the dock as you come up short. Wait until you are close enough to just step over the water to the dock. Leaps are inherently dangerous. You are almost there, jumping a little too early could ruin everything you have built the past 30+ years.

[Old Limey]

We have been happily retired since September 1992 when I took a Golden Handshake from my employer, Lockheed/Martin, at age 58, after a 32 year career as an aerospace engineer.
Now at ages of 78 and 79 we can look back and say that everything turned out beautifully for us.

We retired debt free, own our home in an exclusive development in Silicon Valley and a condo overlooking the ocean near Santa Cruz. Our investment portfolio was $320,000 and I had consolidated each of our accounts at Fidelity Investments. We each had a pension coming in which made all the difference in the world. We also took SS at age 62 and have pretty much lived on our SS and pension income and only used investment money occasionally for a lengthy overseas vacation or a major expense on our home.

The two most important factors in the success of our retirement are as follows.

1) ACTIVE INVESTING. I made it a priority to learn everything I possibly could about investing and devoted a lot of time to it early on until I was up to speed. Even now that our investments have grown to over $7M and I am in a private client group at Fidelity I make all of our investment decisions myself and have never had a losing year since retiring. This alone has allowed us to empty our large Bucket List of trips around the world and to lead a very comfortable life without a single money worry.

2) HEALTHCARE. This was a huge issue in 1992 but is a far bigger issue today. You MUST retire with a great healthcare plan. I was very fortunate in being able to stay in my employer's group insurance plan and even though we are now in Medicare we are in my former employer's Senior Advantage Health Maintenance Organization operated by United Healthcare. Our actual provider is the Palo Alto Medical Foundation, a non-profit that provides exceptional services. Senior Advantage HMO's are only available when you live in a large population area so forget about retiring to some quaint little village in rural America.

Over the years my wife has needed a colon surgery and two hip replacements and I have needed two cataract surgeries and an arthroscopic repair of a torn meniscus in one knee. Everything has been covered and we have never received a bill. In December however my wife, now 79, developed an intestinal blockage and was in the hospital for 14 days, followed by a further 5 weeks of recovery at home where a nurse came 3 times/week to change the dressings on the incision wound. They used the latest hi-tech device called a mobile, light weight, Wound Vacuum Pump that the patient is attached to by a tube at all times. The pump promotes wound healing from the inside out rather than the old way where external stitches were used. To cut a very long story short, the charges for my wife's complete surgery and home recovery were $140,130. Our share of these charges is $0.00. The only payments we ever make are co-payments when we visit a doctor, these are $10 for our primary care physician and $40 for a specialist.

[Mark]

I think all of the points brought up so far were very good. One thing I'd add...A lot of times PhD programs take longer than people think they will...so if you are going to help out your son with that, you need to either be clear about a time limit for plan for extra savings if it takes longer than anticipated.

The other issue is that Alzheimer's is largely preventable. Not 100% of course, but there is a very good and readable book on the subject called:

"100 Simple Things You Can do to Prevent Alzheimers" by Jean Carper. I highly recommend it.

http://www.amazon.com/Simple-Things-Prevent-Alzheimers-Age-Related/dp/0316086851/ref=sr_1_1?ie=UTF8&qid=1362176346&sr=8-1&keywords=100+things+you+can+do+to+prevent+alzheimers

[jim]

Wow! Thanks guys/gals for all of your very hard earned insights. Really appreciate it. I'm new to the pf blogs so sorry if I didn't give you enough info. Nonetheless, we really appreciate all of your frank comments. Thanks so much.

p.s. in particular, I'd like to thank both mike and "old limey" for laying it on the line. addtionally, I'd like to thank every one of you other commenters for giving us the benefit of your hard earned insights - seriously - thank you all very, very much!

[jim]

apex,
GREAT illustration - thx so much.

[jim]

Thank you ALL very, very much for your input. Your willingness to share your life-experiences/wisdom is much appreciated.

[Steve]

A general retirement guideline is that you can spend 4% of your retirement savings on an annual basis. To match your current spendable income of $79,200 you would need to have a retirement account balance of $1,980,000. Your current retirement savings could realistically provide you with $26,000 per year ( $650,000x4%).

In addition, it is very important to have something to “retire to”. You mentioned some travel and not wanting to be burden during retirement, but if you really don’t have plans for your retirement, you may want to keep working. Remember, your highest income potential is usually in the later years of your career. Also, explore some options “outside of the box”. Instead of being an employee you could do some consulting work, which usually provides you with more flexibility. What about working for a charity or non-profit? The pay may be less, but the rewards may be great.

You have done a great job to get yourself where you are. Keep up the good work and keep on planning!

[jim]

Wow - thanks to everyone. I actually did think that we were rather highly educated and pretty well set on a plan - ha! It appears there is no good answer and you just have to take your chances - ugh!

Nonetheless, we appreciate all of your insights - but it does seem to be a bit of a crap shoot - does it not? Are we missing something here?

Thanks again to all of you who are willing to share!