In Your 50’s or 60’s and Approaching Retirement? Some Common Questions

As you might expect, it is quite common for people to visit us at Moneywatch as they are in their 50’s and 60’s and can, maybe for the first time, actually envision a time when they will be retired. Although they, correctly, have a myriad of financial questions that I will describe later, the question WE ask THEM is – What’s your grand plan? Meaning, you have plenty of life left, how do you plan on living it?

We ask that question for two reasons:

1) Transitioning to retirement can be psychologically and emotionally difficult and we want to make sure our clients have thought this through. That may sound hilarious to someone in their 30’s working 10 hours a day and longing for some time off but work is important: it helps provide purpose to our lives, it proves to us that we’re needed and it gives us someplace to go each morning and have meaningful interactions with our peers. For some people, losing all of that overnight is like hitting a brick wall. So, we help our clients think through their transition even before we create a financial plan that will allow them to enjoy their remaining working years knowing what their options are.

2) As you might expect, your financial plan must support whatever personal plans you’ve made. For instance, if you want to sell your house and buy a boat to sail around the world, you must be able to financially make that happen. (We’re still waiting for someone to bring us that grand plan, by the way) More conventionally, if you plan not to work at all, can you afford it?

Here are some common financial questions we hear from clients:

How much do I need to retire?

Simply put, a financial plan will help you determine what amount of savings – in your work retirement plan plus any other investments – you need to have to cover your expenses from retirement through the rest of your life. A plan will help answer this question. For a rough estimate, if you took 5% of your savings each year for income, would it cover your expenses?

Am I invested properly for this stage of my life?

The glide path into retirement is an important one as we try to balance the dual needs of continued growth with the preservation of your investment assets. So, we often manage the investments of clients within a few years of retirement much differently than younger clients. No one wants to have to delay their plans because they weren’t prepared for a downturn in the stock market right before their retirement party.

How do I turn my savings into income at the right time?

Transitioning properly from being a “saver” into being a “spender” can be an emotional one but, more important, requires a plan to convert those savings to income when you need it. We determine which accounts – work retirement account, IRA, Roth IRA, taxable investment account – as well as which investments within those accounts to draw from. And we work to minimize tax consequences at the same time.

When should I take Social Security?

Your overall financial plan will consider when you will need income, your current health and other factors to help determine the best age at which to start taking Social Security to maximize the amount you will receive through the rest of your life.

How can I best support my favorite charity?

It’s a lot more fulfilling to see the impact of your largesse on your favorite charity when you are still living, right? Your financial plan will help you determine how much to support your cause now and possibly how much to include for them in your estate when you’re gone. Proper estate planning, as we help you partner with an attorney who specializes in wills and trusts, can be an important – and fun – part of your retirement plan.

The approach to retirement can be terribly exciting and daunting all at the same time. We seek to provide peace of mind so our clients can enjoy their remaining working years knowing what their options are. If they want to quit their job to pursue other passions, they can do it with confidence. They will know how much income they can comfortably take, and how much money they can give away if they want to.

55 And Behind On Retirement Saving?

It isn’t at all unusual for someone in their 50’s or even early 60’s to ask us for advice as they approach retirement with too little savings. As you might guess, there are as many reasons for being behind as there are people: a late start saving, frequent job changes, personal student loan debt, college expenses for their children, or just plain bad luck. Our first advice? Forgive yourself, your predicament is not about the past, it’s about the future. Let’s consider Joey’s story:

Joey is 55 years old and makes $80,000 per year. Joey spends almost all his money on clothes and sandwiches but decides he should probably get ready for retirement in 10 years. He has saved $150,000 in a retirement account and decides to save 10% of his salary, $8,000 per year, over the next ten years. Projecting average annual returns of 7% from a diversified portfolio, when Joey turns 65 he will have accumulated wealth of about $405,000. Using a reasonable withdrawal rate of 5% per year, Joey will have $20,000 per year for his expenses. Let’s add in Social Security: Joey will be eligible at age 67 and will draw $2,360 per month, approximately, at that age – $28,320 per year.

Uh, oh, at age 65 can Joey live on that $20,000 rather than $57,600 per year in take-home income he is used to($80,000 – $8,000 in retirement contributions – 20% for taxes = $57,600)? He will have to do that for 2 years until he can take that $28,320 per year in Social Security.

At age 67, his income will be approximately $48,320 ($20,000 from his retirement plus Social Security) – still well below (16% below) that $57,600 per year he needs.

So, how much will Joey need in retirement savings at age 65? He will need a total of about $585,000 plus Social Security to maintain his current lifestyle of $57,600 per year. That’s $180,000 more than he is projected to have in 10 years.

Joey has four broad options:

1. Save the same amount but earn 11.55% annually on his investments – an unrealistic expectation.

2. Save $21,000 per year instead of $8,000.

3. Work and save for a little over 14 years, rather than 10. Joey will be 69 at that time, so not completely out of line.

4. Combine strategies of saving more each year and working a little longer too by reducing his current living expenses. For instance, can Joey downsize his home and invest the savings toward his retirement?

The power of compounding is real and is a great reason to start saving and investing at as young an age as possible to be able to achieve your financial independence as soon as possible. But, as Joey shows us, life doesn’t always go according to plan. So, if you find yourself in Joey’s situation, estimate how much you will need to have saved when you retire and develop a plan to get there…and start today!

Should Cal and Rick Pay Down Debt or Save for Retirement?

There is a natural, and understandable, instinct in most of us to want to pay off our mortgage as soon as possible. In fact, it’s considered a kind of rite of passage. Yep, the missus and I paid off the house and finally have the kids off the payroll, now we can save for our retirement! But, is paying down your house or other debt early really the right thing to do for your long-term best interest?

Let’s take a closer look at a couple of common situations people face:

1. Cal owns a home for him and his family that is reasonably-priced for his family’s income with a monthly payment that allows them to pay all their expenses with a little left over. What should they do with that “extra” money each month? Pay down their mortgage or save and invest for their future? From a math perspective, Cal’s decision should be based on his after-tax cost of borrowing versus his after-tax return on investing. So, let’s assume Cal has a 30-year mortgage at 4% interest and he and his wife are in the 30% tax bracket. The true cost of that debt is 2.8% because mortgage interest is tax-deductible. So, 4% rate minus 30% equals 2.8%.

Cal’s financial planner tells him that his investments – in his 401(k) and his wife’s 403(b) – should earn a 7% annual average return, if averaged over the long term. Since that rate of return is in tax-deferred accounts, we won’t deduct income taxes from the 7% return.

So, comparing where to put that “extra” money is quite simple, right? 7% is more than 2.8%, so that’s where the dollars should go. Carrying a low-interest mortgage and investing extra dollars into your retirement is a wise decision since your investments will have a better return than what the debt is costing you. In other words, Cal will be better off investing at 7% than avoiding a cost of 2.8%.

2. Rick has a good income because he went to a good university and graduate school but he has student loan debt. Should he put his “extra” money into paying down his student loans or into his retirement accounts? First, we would tell Rick to, at the very least, put enough into his retirement accounts to receive the match from his employer. Don’t give away the free money. After that, the calculation is the same as above. This time let’s assume the student loan interest rate is 6.5%. Let’s also assume that Rick’s financial planner tells him he can expect to earn an average of 7% over the long term from his investments. As a high-earner, Rick is in the 35% tax bracket. As most student loan debt is not tax-deductible, we won’t lower the interest rate for comparison. And, as above, Rick’s investments are in his work 403(b), we won’t lower the return number either.

So, should Rick pay down his loans or sock more into retirement? Although the student loan interest rate is lower than the rate of return from his investments, it is close enough that he should put that “extra” money into paying down his student loan debt. (We would recommend he explore refinancing his student loans to get a lower rate but that’s for another discussion)

Student loan debt is a deterrent to saving enough for retirement for many young people and all options should be explored in order to put your money to work for your future self as soon as possible.

Like many things, debt is okay in moderation and under the right conditions, if it helps us purchase things that will help us. Debt for a home with a competitive interest rate at a payment that allows you to pay your expenses and save for retirement – probably good. Six-month old credit card debt for Chinese food you can’t even remember eating – probably bad. As always, having a plan to retire debt and reach your goal of financial freedom will help get you to both faster.

If you want to examine your own personal situation, use the online calculator here: