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Dear Fix My Portfolio,
Intellectually I feel well prepared for retirement, but in my heart I have an irrational fear that I will not be financially prepared to retire. I think my fears center around the uncertainty in the market and not having an income stream (I’ve been working since I was 14). I am currently 57 years old and my wife is 60. I am thinking of retiring in three years at most. My wife thinks she might want to work part-time to keep busy, but I’m pretty convinced I don’t want to spend my retirement working.
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Can we really retire in a couple of years and live a reasonable lifestyle without running out of money? Do we need to change our portfolio settings? How should we withdraw our retirement funds, especially while we wait for Social Security?
Our annual expenses, including the expectation of having to purchase health insurance, and our entertainment and travel expenses, are approximately $70,000 in 2024 dollars.
We have no debt, other than a $20,000 loan from a retirement account, listed below, that will be paid off within the year; two vehicles, each less than five years old; and a house and cabin that together are worth approximately $650,000. Our combined Social Security income is projected to be $5,700 per month at age 67 and $7,400 per month at age 70.
This is what we have:
Head versus heart
Dear Head vs. Heart,
You are the type of retirees that the bucket strategy was created for. You have a lot of different accounts of different types and it looks like a big mess when you list them all. It’s definitely hard to handle things that way.
The cube strategy is a type of mental accounting that allows you to visualize your holdings in a way that might make the most sense to you. Start by organizing your categories based on tax efficiency: tax-deferred savings, tax-free growth, and taxable savings. That will help you see if you’re saving in the right places over the next three years until retirement. The goal is to have a diversity of income sources, so you can choose where to get the money to minimize your tax burden.
When you start spending money, you can start thinking about time frames: one for the short term that is mostly cash, one for the medium term that is more conservative, and one for the long term that is more aggressive. That’s when you’ll want to adjust your investments to make them work for you. You don’t want individual stocks in the short-term bucket and cash in the long-term bucket, for example.
I would suggest checking that expected inheritance off your list. You never know what could happen and it’s not something you can count on. If you eventually receive a sizable inheritance, you can adjust your plans accordingly, without counting your chickens before they hatch.
Tax-deferred bucket
Group all of your tax-deferred retirement accounts into one pool: the 457(b), 403(b), and employer-sponsored plan, which currently total about $943,000. You have another two and a half years before you can touch that money without penalty, but your wife can now start drawing from her savings if she needs to. That said, when you start using that money, you’ll have to pay taxes on it as ordinary income.
You’ll also have to start withdrawing money from these accounts when you’re 73, under current required minimum distribution rules. When you reach that age in 16 years, those savings could be worth more than $2.5 million, assuming an average growth rate of 7%. You could keep adding money to that deposit for years to come or start spending it sooner, but that’s up to you.
Duty Free Bucket
Your Roth IRAs are for tax-free growth. Those accounts are now worth $260,000, and no matter how much they grow, it will never affect your taxes, because you pay the tax on Roth contributions up front. You can withdraw the money you have contributed at any time, but you will have to wait until age 59 and a half to withdraw the growth without penalty.
That makes this segment good if you need a cash injection in the next few years, but otherwise, you may want to spend from this segment last, because the growth is tax-free. If you leave that money alone, it could be worth $1.2 million by the time you’re 80.
You didn’t mention heirs, but Roth accounts are also the most advantageous to leave when you die, because your beneficiaries don’t have to pay taxes on the balances for 10 years.
Taxable Bucket
With your holdings in brokerage accounts and cash, it doesn’t seem likely that you’ll need to touch that Roth money ahead of time. The goal is to have enough cash on hand to cover your expenses from the time you retire until Social Security kicks in, followed shortly by RMDs. For anything you need after that, you can choose which account works best.
If you retire at age 60, that leaves you with approximately 10 years in which you will need to cover $70,000 in annual expenses.
This is where good financial planning software comes into play, because it allows you to calculate exact numbers and include all of these variables and timelines. But just by looking at the cubes, you can do a little detailed analysis and see that the $1.25 million you have now would certainly cover your projected expenses; in fact, you’d mostly be taking out the top. meaning your accounts could grow over that period, even with a modest 7% return.
However, retirement spending projections are not an exact science. Maybe $70,000 a year is really not enough for you, especially if you don’t take into account future costs for healthcare or other emergencies. Or maybe once you retire, you decide to spend a little more freely at first, while you’re healthy and can enjoy it.
And when it comes time to hang up your spurs, you may decide that’s not what you want to do. There may still be some kind of work in your future, but it will be driven by your passion, not your bank balance.
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