January 5, 2022
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Dear MarketWatch,
I have $540,000 saved, and my wife has $250,000 in retirement funds. We also have $60,000 in the bank. We decided to retire early (I’m 58, and she is 57). The only debt we have is my truck, which is $450 a month, and insurance, which is $1,300 a month. Our budget so far has been around $3,200 a month (since I retired at the end of June). This puts us around $38,400 for a year.
Next year when I reach 59 ½ (at the end of October), I plan on withdrawing $4,000 per month from my retirement funds. Did I jump the gun on retiring? Dear reader, To be completely honest, it’s hard to tell if you retired too early. Even though you’ve shared how much you have in retirement assets and what your annual budget is, you may not have included every possible expense or are considering future expenses either. And the fact that you’re questioning this indicates you may actually think you retired too early.
Also — and not to be a downer since this is actually a good thing — people are living longer, which means you need to make your money last longer, too. You may live into your 90s or beyond, and you need your assets to stretch that far.
That being said, I do have some pointers for you to help you determine if you’ve “jumped the gun.” And also, I just want to note, even if you decide you did retire too early, there’s no need to panic — the fact that you’re being so mindful of your annual expenses and are still weighing your situation after already retiring is important.
Budgets aren’t very sexy, but you’ve already identified how crucial they are to knowing if your retirement will be secure. I’m sure the $3,200 a month figure includes your truck and insurance, but does it include any discretionary spending when you and your wife want to hit the town, or all of the groceries and utilities? Is it comparable to your pre-retirement budget? And what about taxes and inflation for everything under the sun, including healthcare? Is there any wiggle room should an emergency arise so that you don’t need to tap into your bank account or withdraw even more from your retirement accounts? You will likely also see home repairs, or need to replace your cars during your lifetimes.
You didn’t specify if that $15,600 annual insurance covers car, home and health but make sure you have all three. Healthcare is extremely important, especially as you wait for Medicare eligibility at 65 for each of you. You might also want to start thinking about how you’ll fund long-term care, which includes nursing homes or in-home aides. Those bills can easily rack up and deplete retirees’ hard-earned savings.
Along with a budget, do a deep dive into your spending, looking at where your money is going month by month or year by year. What you spend your money on today may not be what you spend your money on in a year, or five, and probably not in 10 or 20. Look out for expenses you may have on auto-pilot but not actually use (such as subscriptions to streaming services) or are spending a bit too much on right now (like clothes). Try to identify what expenses you may have in a year, five years or 10 years down the line — do they fit into your current spending estimates and budget? This simple process would “more accurately help them determine whether or not they will be successful,” said Scott McLeod, a certified financial planner and president of Brown Financial Advisory.
There’s a lot of debate over the right withdrawal rate from savings and investments if you want them to last for the rest of your life. The rule of thumb used to be 4% but that’s been widely contested in recent years. The goal, ideally, is to take as little as you can from these accounts so that they can continue to grow as you age — that way, they aren’t wiped out while you’re still alive. Your current annual spending of $38,400 equals a 4.9% withdrawal rate from your retirement accounts alone — but taking $4,000 a month would be a little more than 6%. Can you pare back that annual spending, at least until Social Security kicks in? Or are there any other income streams you can consider between now and when you claim Social Security?
I’d like to go back to inflation for a minute. One of the myriad reasons why it is crucial to keep your retirement assets intact as long as possible is that investments, assuming a reasonable asset allocation, likely will beat inflation.
“Over long periods of time, inflation tends to erode purchasing power,” said Ashton Lawrence, a certified financial planner and partner at Goldfinch Wealth Management. “An effective investment strategy for retirement needs to include growth, alternative investments, as well as income-generating assets, to help protect against the corrosive effects of inflation.”
Review your portfolios and their investment mix. A lot of people became enamored with the returns they saw in the last decade thanks to a rising stock market, but there are no guarantees that will continue. You need to be prepared for declines, so that they don’t erode your savings. You can talk to a professional at the firms housing your retirement assets about your portfolios.
If you haven’t already, create and account with the Social Security Administration. There you’ll be able to check that all of your work and earnings history is correct, and you’ll be able to get an idea of what your retirement benefits will be depending on when you begin claiming (be it early at 62, at your Full Retirement Age or delayed to age 70). This number will give you an idea of how much less you’ll have to take from your retirement assets.
Keep in mind, the earlier you claim before your Full Retirement Age, the less you’ll get of your full benefit, and that’s a permanent reduction. For example, taking Social Security at age 62 would be an approximate 30% reduction in lifetime benefits, said David Haas, a certified financial planner and owner of Cereus Financial Advisors. “This is a lot and will be very meaningful for the couple.” How you claim your Social Security benefits also affects what your wife will get in hers — you reducing your benefit equates to reducing hers if she were to become a widow.
Again, I can’t say for sure if you’ve retired too early. If this wasn’t the answer you were hoping for, consider working with a qualified financial planner to go through your numbers in greater detail. And just because you retired already doesn’t mean you can’t keep earning money. If you left because you had to or just didn’t like what you did anymore, consider part-time or freelance work where you get to set your own hours and do what makes you happy. This extra cash will mean taking less from your retirement accounts, allowing your assets to continue to grow.
“The good news is that the decision to retire is not absolute,” Haas said. “This couple could still get jobs, even jobs with benefits. They can switch to different jobs they might like better, even ones with lower salaries. The benefits can solve the healthcare issue until age 65 and by avoiding taking Social Security early, they can lock in higher lifetime benefits.”
Thanks Alessandra Malito for this article!