I am 60 years old, married, with no mortgage. We also have $1.1 million in liquid cash and $880,000 in a 401(k). I will have two pensions, which have not started yet, and my wife will have one pension, all three adding up to approximately $3,500 a month if we took them today. Also, we have paid into Social Security. At 65 years old, we’ll pull in roughly $5,000 a month combined. I will have medical and dental insurance through my state government for me and my wife as long as we live. Not sure if I can retire now or wait a few more years to build on my pension?
-Fred
The answer to questions like this is always, “It depends.”
Yes, there is certainly a heavy dose of math involved in arriving at your answer. But you still need to interpret that math and its conclusions in a way that you are comfortable with based on your own situation and attitudes toward money, security and risk.
I’ll highlight some of the things you should consider as you work through your decision, but there is no way to give you a concise answer here. I strongly encourage you to do a significant amount of research if you plan to do this by yourself or consult a financial advisor.
Your Expenses in Retirement
Incomes and expenses are different for everyone in retirement, so we can’t know if your income is sufficient without knowing your expenses. Regardless of income streams (pensions or Social Security) and the savings you have to supplement them (cash and 401(k)), it’s important to also estimate the amount you’ll need to spend each month.
Doing this allows you to compare your income and expenses, just like you do while you’re still working.
One way to get a rough draft of your retirement budget is to start with what you currently spend each month. From there, you can adjust based on any planned or expected changes once you retire. This might be buying a new car, taking a celebratory vacation or accounting for changes to your health insurance premiums.
The fact that you have paid off your house is a major plus.
Sources of Income
Once you’ve estimated your expenses, consider the different sources of income you have in retirement. Some are guaranteed, while others are subject to risk through market volatility. Here’s what to look at.
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Pensions and Social Security
I like to look at guaranteed income first. For you, that would be pensions and Social Security. Rather than dig into the nuance of when you claim your benefit (although claiming strategies are certainly something to consider), let’s go with the numbers you mentioned. At 65, you’d have about $8,500 per month coming in from fixed sources. As a side note, check to see if your pension includes an annual inflation adjustment.
Compare that with your expected expenses. How much does it cover? One third? Half? All? Of course, the ability to cover a larger portion of your expenses means more security. If you can cover them entirely, you are in a really good position, although for most people that isn’t necessary.
At this step, you might also divide your expenses into necessities and wants. Separately think about how much of your necessities might be covered. If you can cover all of those with fixed sources, great. That could make you less anxious about needing to cover the remainder with your savings.
Savings Withdrawals
You will need to cover the rest of your expenses by taking money from your savings. For this, you’ll want to spend some time understanding different withdrawal methods. That’s because you’ll need to decide on a distribution plan that allows you to be comfortable taking the withdrawals necessary to pay for any remaining expenses not covered by your pensions and Social Security. The big fear for most people is that they will end up running out of money too soon.
A simple way to evaluate this risk would be to look at your planned withdrawal rate. As an example, let’s say you determine you’ll need to withdraw $40,000 per year from your savings.
If we round your savings to $2 million, that’s a 2% withdrawal rate. Most planners would tell you that is a very conservative withdrawal rate and should leave you feeling pretty confident. Higher withdrawal rates, 10% for example, introduce significant risk. But again, you need to be comfortable with whatever you decide. Base your choice on an understanding of your income needs and the risk you are willing to take. There isn’t an objective mark to hit.
Your Feelings About Risk
As you consider your choice, consider how you feel about the different risks you’ll face. The easiest way to see this is through your investments, but they aren’t the only source of risk in retirement.
Your investments necessitate a tradeoff. The more aggressive your investments are, the more chance they have to grow and support you throughout retirement. But that also means they will be more volatile and could cause you concern when the markets are rough. Very conservative investments might not be as scary to hold, but the risk is that they may not grow enough to sustain you throughout retirement.
I notice that you hold roughly half of your savings in cash. Of course, I don’t know why – you may have recently inherited money or sold property and are still deciding what to do with it – but this would initially indicate to me that you are a very conservative investor.
The cash can serve as a good buffer against market volatility and be especially helpful during those few years between retirement and when Social Security starts. This could also be a source of risk too since the real value of cash will fall over time as inflation withers away at its purchasing power.
What to Do Next
None of what I’ve said here directly answered your question. But that’s because any answer I could give you would be incomplete and assume too much about you. There is a lot of nuance to these decisions and they are very personal.
I can’t stress enough how important it is to make sure you understand your situation, your appetite for the various risks you might face and the options available to you. Make your decision based on that understanding and choose something you are comfortable with.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.
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