When should I retire?
I have $1,000,000 in my 401(k) and am 48 years old. My wife and I have a $550,000 house paid off with no debt. We have $200,000 in CD's and cash. I have a pension that assures I will receive $1,200 per month for life. Currently, I maxed out on my 401(k). We save $35,000 per year on top of both of our 401(k)'s. My wife is 50 and she also maxed out her 401(k), but plans to retire at 52. My question is when can I or should I retire?
It depends on your desired standard of living in retirement. It also depends on how your assets are invested. Just to give you some quick guidance, most people don’t spend as much in retirement compared to their working years. Most retirees’ replacement rates are 60-80% depending on how much you earned while working. For those who find themselves in the top quartile of income earners in America, your replacement is more like 60%. 10-20% of that replacement rate will come from Social Security with the remainder coming from personal savings and pensions. So if you have a household income of $200,000, you will probably only need $120,000 for retirement. Why is this the case? You are no longer saving for retirement and you are no longer paying certain taxes like Social Security taxes. $30,000 to $45,000 will come from Social Security with the remainder ($75,000 to $90,000) being funded by personal savings.
If you invest passively via a globally diversified portfolio of index funds and work with an independent fiduciary wealth advisor, you can expect to afford to safely withdraw 4-5% of your entire retirement asset base throughout retirement. For example, if your entire retirement asset base is $2,000,000 at retirement, you can afford to safely withdraw $80,000-$100,000 per year, adjusting for inflation.
A good first step would be to find out what your individual risk capacity score is as well as take a retirement analyzer to see if you are on the right track. Both of these tools are easily accessible online and will put you on the right foot in terms of determining your retirement readiness.
Good question, though one of the primary items necessary to answer it is still needed: How much money do you and your wife need/want to live off of? Other items that would likely be beneficial in determining your ability to retire: your and your wife's expected Social Security benefit, your wife's 401k assets, expected inheritance (if applicable), personal and/or family health history/longevity, etc.
Example, you could likely retire right now, from what information you shared, if you're willing to live off about $3k-$4k/mo. before taxes.
On a related note, when you do decide to retire, you may be best served to draw off of your CD's and cash for living expenses while converting your pre-tax 401k assets (assuming most/all of your 401k is pre-tax) to Roth. It looks like you've set yourself up very nicely to do some quality tax-minimization.
So, it looks like you have done a good job saving thus far, but there are still to many unanswered questions as many have hit on cash burn in retirement is key but what will have a bigger drag on your retirement will be healthcare, what types of insurance do you have.
It is estimated that an average, healthy 65-year-old couple will need $245,000 to pay for medical expenses for the remainder of their lives. This does not include long-term care costs*
Healthcare cost will be the 2nd largest expense in retirement**
Medicare only covers about half of healthcare costs in retirement***
*Fidelity Investments retiree health costs estimate, 2015. Healthcare and nursing home costs may vary by state.
** Take Control of Your 6 Biggest Retirement Expenses,” U.S. News & World Report, August 2015
*** U.S. News & World Report, Take control of your 6 biggest retirement expenses, August 2016
We have a great planning tool that we use to help understand and meet our client’s goals. Have a look. https://www.mvmadvisors.com/next-generation-financial-planning
Good info, but it's missing some data points; 1. annual spending amount, 2. when the pension kicks in (may be age 55, but could be 60), 3. wife's 401k balance, 4. upstream and downstream family issues, 5. if you really enjoy your work.
To keep the math simple for an estimate: if you add up your annual spending (add health insurance expense), then subtract after-tax pension income and after-tax social security income, you will have an estimate of how much money you will need to draw from your investment accounts. Remember to figure in to your calculation that pension and social security will come in later, so your investment account will have to support the full weight of your spending in the early years.
If you multiply that annual expected draw on your investment account by 25, your invested funds should equal that amount. If not, it's probably a good idea to keep working, adding $48,000 per year to your 401ks ($24,000 x 2), and $35,000 after-tax, till the numbers match up. Every year you work, the closer you get to the pension income stream, social security income stream, and medicare as a base for insurance coverage.
Pulling the plug on a good income stream should not be done in haste, as unless you are in poor health, you may need to support yourself in retirment for 30+ years. If the numbers are too tight, an unexpected event could derail your retirement plan, and things could spiral out of control. Using the 25 multiple as a benchmark, you should in a position start an intelligent conversation about the details, as the math and emotions can get rather complex.
Hope this helps,
Please allow me to rephrase your question, "When Can I Retire and Remain Retired Without Worrying About Having Enough Money to Live On?". Is that what you are really asking? If a client/prospect doesn’t have the CONFIDENCE to retire and remain retired it can be very stressful. This is the second most popular question that I receive from prospects/clients, "Will I outlive my retirement savings?", you will find the #1 most popular at the end of this response*. The initial answer is different for everyone and the ongoing answer depends. Why? Because things change in our lives every day, sometimes in our control (i.e. bad decision making, spending too much too fast, etc.) and sometimes not in our control (i.e. accidents, health issues, etc.). Clients want to know if they can retire and once they are retired they want an easy way to monitor and maintain their lifestyle. Also, most folks don't want to rehash it every quarter with their financial advisor, they want to spend about two minutes or less a week, monthly, quarterly or annually and know that they are still on track.
That is why I use the Retirement Number. It takes only a couple of minutes and it tells you in numeric form if you have arrived at your destination (>= 95) or you got some more work to do (<95). If you have more work to raise your number to a 95, I will layout a simple multiyear plan for the client to follow. If you have arrived, then the real work begins.
No not planning your retirement party. The next critically important decision is, "What are you going to do to fulfill your daily mission?". For some people, its traveling, for others its spending more time with family. It really doesn't matter, but you to have purpose in retirement or you will wither away in a short amount of time or just be miserable the rest of your life (and probably making your spouse miserable too!). Once you have nailed down your purpose, now you can start gazing at the calendar.
A huge service for clients is not only knowing what retirement investment and sources of retirement cash flow (i.e. social security, pension, annuity) are available. One common question that pre-retirees ask, “Will it continue to last throughout the rest of my retirement?” Your Retirement Number is updated frequently, so that the advisor can track if the value of your Retirement Number. If it drops below a 95 throughout your retirement, we are to help to get you back on track. I hope that this made sense and could serve as another tool in helping with your pre- retirement planning decisions.
*Most common statement from both clients and prospects: “Create an investment strategy that provides me with all the profit from the market but none of the loss”.