Dear Fix My Portfolio,
My husband and I plan to retire in 4 years, shortly after turning 62. He currently makes $97,000 a year and I make $48,000. We’ve been careless with our money in the past, living paycheck to paycheck, in debt and taking loans against our Thrift Savings Plan, so we’re now trying to do damage control and set ourselves on course for retirement. We are empty-nesters.
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We’re at a point where we can really start trying to grow our money, but we’re not sure if we can make any big wins in the next few years. We have just $140,000 saved, and my husband will get around $1,500 a month from a pension, and I will get $1,800 a month. We plan to take Social Security at 62.
I realize I’ve been looking at the magic retirement date and trying to figure out how to have $1 million (impossible with our salaries) and was not considering the fact that our money will continue to grow over the course of our retirement. This brings additional worry, because I want to retire, but now I’m realizing that 30 years of retirement is almost as long as my working life. I know how much money we’ve earned over those years and have blown through.
I’m starting to panic about whether or not we’ll have enough money to last us. What can we do better?
Number Cruncher
Dear Number Cruncher,
Here’s some good news for you: You’re already a millionaire. Congratulations.
Close enough, anyway. If you really crunch your numbers – using an annuity calculator and other tools – you can figure out the present value of your pensions. I ran some basic numbers based on your scenario, and they show that if you and your husband collect on those pensions for 30 years, even at a 1% increase for cost-of-living adjustments, that’s worth about $1 million in today’s dollars.
It can be hard to see that big number when you just look at the monthly amount and think about getting by on that. The amount of your pensions combined at $3,300 a month is not nearly as much as your combined monthly income now, even post-tax. But it does add up, especially if you add two Social Security checks down the road. It should be enough to soothe your panic for now. You can get by on that, and good on you for putting in the time necessary at your jobs to have them pay off with pensions.
If you want to feel more secure, there are some things you can do over the next four years and the first few years of retirement to make your situation even better.
Strategize your Social Security
The first is to think about your Social Security-claiming strategy instead of just both taking it at your first opportunity at 62. “I would defer Social Security, especially for the higher earner,” suggested Stephen Chen, chief executive of Boldin, formerly known as New Retirement, a financial planning platform. The point of this is that every year before your full retirement age of 67, your lifetime benefit is lessened — it’s lower by 30% if you take it at 62. On the other hand, after that age, it’s increased by 8% per year up until 70 .
It might not be fun to think about, but eventually, one of you may pass away, and actuarially, it’s more likely to be your husband, who is the higher earner. In that case, as the surviving spouse, you’d be able to switch to his benefit, which would be larger. Having one bigger check will still be less than having two checks, but it’ll help make up the difference when it matters most.
Save more now
With 4 years left to go, you can maximize your savings from income to boost your nest egg. Given your pensions, having $140,000 saved is nothing to sneeze at. When you have pensions and Social Security to cover your living expenses, you can hold that money in reserve to pay for emergencies and healthcare expenses, or anything else that arises later that you need. This situation has come up in the news lately, as people (including me) have examined the finances of vice presidential candidate Tim Walz, who is in a similar position with little savings and lots of pensions.
While you are still working for the next 4 years, try to max out the amount you save in retirement accounts. You both can put away up to $30,000 in 401(k)s this year, given that you are over 50, and that amount goes up every year for inflation adjustments. If you can swing the tax payments now and your retirement plans have a Roth option, that might be your best option. The goal is to get a diversification of your account types – some pretax like a 401(k) or your pensions, some taxable like in a brokerage account and some tax-exempt like in a Roth. That way you can maximize your tax efficiency when you start to spend the money in retirement.
Stress test your plans
If you’re still feeling a little queasy about your prospects, the best thing to do is crunch more numbers. The technical term for this is to “stress test” your portfolio. You can do this on your own if you’re willing to dig into it, or you can use calculators available on the internet or your account custodian, or you can pay for some help. The key thing you want to do is not think about some big round number like $1 million that you need to save, but focus more instead on what you will spend.
“You need to build a budget,” said Chen. And then? See get a handle on a safe withdrawal rate.
Some people talk about 4%, which is a good number. But you may be able to take more, depending on your situation and economic conditions. With your pension income, you may also be able to take less, and leave your core savings alone for longer, letting it grow.
The next step is to think about your spending in buckets – have one bucket in cash to spend in the next year or two, then another bucket in fixed income products like bonds for 3 to 5 years down the road, and then the rest invested in equities for later on.
“One thing to know is that you’re not alone,” said Chen. “Most people are worried about this problem. There’s a path to this, and that’s through financial literacy.”
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