Pre-Retirement Financial Review is a Must
My husband has taught high school biology for 30 years in Boston and works hard for his students. But he’s nearly 64 and it’s time to think about retiring.
Can we afford it? When we retire, will we eventually run through our savings? Is retirement scary – or what?
Questions like these are also probably haunting millions of baby boomers in the middle of the night. One out of three boomers in a recent Transamerica survey said they are not confident they will have enough income to retire “comfortably” and another third concede that they are only “somewhat confident.”
To find the answer for ourselves, my husband and I hired a financial adviser. It was the best thing we could’ve done. The point of this blog is to encourage other boomers to take stock of their imminent retirement, whether it’s around the corner or still a decade away.
We’d been kicking around retirement scenarios inside our marriage bubble. My husband has not fixed a retirement date in his head but is talking about the next one to three years. To be conservative, we posed this simple question to our adviser: can Garret retire in 2018?
Her answer was in the half-inch packet, which she delivered to our front door. We sat around our dining room table as she walked us through her quantitative analysis of our financial profile.
Many financial advisers like to talk about how they’ll manage a baby boomer client’s investments. In truth, simple index funds do the trick for us. Our adviser, Wendy Weiss of Weiss Financial Advisors in Cambridge, Mass., used to be an investment adviser for large financial firms, but spent very little time on our investments. The most important thing for baby boomers who, like us, are not wealthy is knowing how much income will come in the door every single month to pay the bills in retirement.
“It’s more important for my clients to find out how to use that 401(k) in retirement than it is for me to try to manage the investments for you,” she said.
Wendy’s retirement software made projections of how much income we’re likely to receive, year by year through 2050, when I’ll be 93. Our income will come from retirement savings, Social Security, and pensions – his from teaching and my small pension from a former newspaper job. Income projections are imperfect estimates, but ours included inflation adjustments for Social Security and, also accurately, no inflation adjustments on the pensions.
We already knew that our income will be in for a wild ride after Garret retires. In the calendar year in which he retires, he will receive about two-thirds of his salary but will be made whole for the year when he starts collecting his pension after his July birthday. The real hit will occur in the calendar year following his retirement – at least a 25 percent drop. This will take some getting used to, but our taxes will also be lower. Our income should then hold fairly steady while I continue working (I’m nearly 60). When we’re both retired, our income will drop another 20 percent.
Assuming I retire at age 66, Wendy’s analysis shows that if we keep our spending at current levels, adjusted for inflation, and can leave our investments alone until my retirement, our investment income will just about fill the gaps. It seems like it’ll be a good idea to try to live more modestly – just to be on the safe side – so we can hold on to our savings in the early retirement years. But it’s very helpful to see the numbers, rather than rely on rough guesses about how the income will flow.
Women typically live longer than men, so Wendy also assessed my well-being if Garret dies first. Garret has a good survivor benefit on his pension, which would leave me in good shape. On the other hand, if I go first, he wouldn’t get much from my tiny pension and none from my Social Security (under federal law, his state pension effectively eliminates what might have been a nice survivor benefit for him based on my work history). But I brought 401(k) savings to the marriage, and we’ve been saving like crazy since marrying three years ago. We have about $400,000 now. I still worry about him and a more detailed analysis will be a good idea in a few years.
A critical question for pre-retirement couples is how much they’re spending now. To determine whether we’ll be able to sustain our current standard of living in retirement, Wendy scoured our 2016 bank and credit card statements. In general, retirement experts like to think in terms of replacement rates: an individual or couple should have enough retirement income to replace 70 percent to 80 percent of what they earned while they were working. Wendy’s approach is a pragmatic version of that. She totaled up everything we’d purchased in 2016, including the sectional couch, excessive restaurant tabs, bloated Whole Foods receipts, and a trip to visit my husband’s brother living in Morocco.
She also asked if we anticipate major expenses in retirement. Offsprings’ weddings? None. Renovations? Modest – a new kitchen sink, countertops, and cabinet doors. A car? Yes, but we’ll drive our 2004 models as long as possible. She also encouraged us to consider our future options and tradeoffs. How can we control our expenses so we don’t burn through our savings too fast? Can we afford to delay my Social Security benefits to age 70? What about long-term care?
Medical costs (apart from long-term care) are a major expense even with Medicare. We’re extremely lucky on that score: Garret has a Medicare supplemental plan through his teachers union. Wendy estimated that our health care expenses will rise in the future but are manageable – at least that’s how things look now.
When this process was all over, Wendy answered the question: Can Garret retire next year? “You will be fine,” she said. She calculated that we have a 72 percent probability of not running out of money. We’d like to push that closer to 80 percent by continuing to save. Part-time work after we “retire” is appealing, but finding work can be tricky for older workers. Our rising condominium value in a hipster neighborhood three miles from Boston could help if we downsize, move somewhere less expensive, or take out a reverse mortgage – we’ll do more research on that.
Many boomers will read this and say we’re luckier than many people, because we have pensions and retiree health benefits – I can’t argue with that. But neither of us saved as much as we should have, and we could’ve been in better shape if we’d made fewer mistakes.
Retirement is scary even if a financial planner tells you you’ll be okay. Shed some light on your unique situation before you retire.
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I retired early at 52, about 5 years ago.
Before I retired, I used various retirement calculators to see if we had enough. My favorite was and still is CFireSim.com which is free.
To calculate retirement spending, I created a spreadsheet that broke things down by Home, Transportation, Travel, Food, etc. This really helped me anticipate how our spending would change once we retired.
I retired early at 52, about 5 years ago.
Before I retired, I used various retirement calculators to see if we had enough. My favorite was and still is CFireSim.com which is free.
To calculate retirement spending, I created a spreadsheet that broke things down by Home, Transportation, Travel, Food, etc. This really helped me anticipate how our spending would change once we retired.
It continues to amaze me that someone would wait until they are 64 to learn if they are ready to retire. Why didn’t they do a financial analysis 20 years ago and make a savings and investing plan that would ensure a timely retirement?
Can you honestly say that you would have projected the sequence of returns we’ve seen over the past twenty years? The only realistic “savings and investment plan” is to save as much as you can and invest according to risk tolerance, then see where you stand when you’re ready to retire. It continues to amaze ME that someone imagines they could do better.
Mike –
Our particular situation is unusual, because we just got married 3 years ago. You’re right that it’s a good idea to do these reviews earlier, and also to redo them as situations change.
But I imagine we are like a lot of last-minute baby boomers.
And Wendy thanks for sticking up for us! That was our intention to share our story and give other boomers something to think about. Hope it helps.
Kim (blogger)
72% probability of not running out of money does not sound reassuring to me. I am 61, mostly retired with a working spouse. We have $1.6 million in retirement accounts and if she retires, we would have to purchase medical insurance. I have 2 small pensions I could collect any time and likely live in a lower cost area (Midwest) than you do.
I really appreciate your forthrightness in using your lives as an example. Retirement is a scary unknown for many of us. And it’s not helpful to make snotty comments about waiting too long to calculate one’s financial future when people have no idea about a given couple’s circumstances.
Thanks for a very helpful post.
WNE
I hope you used an hourly fee planner for the retirement assessment. That way you can keep your index funds and not pay a fee to the planner for the rest of your lives.
Kim and Garret,
Way to go! You are doing many, many things well…use of an adviser, index funds, living modestly and a very nice 401k. Very few people have done what you have done. Yes, retirement can be scary because a plan is a plan and the assumptions change because everything changes in the systems you count on. Ironically, once you retire and get your benefits you must fight to keep them through advocacy organizations that watch over your pensions and benefits.
Keep in mind you will need to stay engaged and here are gems I have found very, very useful to do so.
This is a one year subscription of $40 and includes GPO/WEP and is supported by the expert on Social Security and updated. They have accurate info that gives you scenario reports. Way too much about Social Security info is wrong in articles I read. I get S.S. for time I did not work for the state and my spouse gets spousal benefits. Probability is she will live longer so we filed the restricted application (not file and suspend) and deferred her own benefit to 70. This software was spot on…no hassles or incorrect info when we applied online: https://maximizemysocialsecurity.com/
This is an excellent group with lots of threads you can read up on and get up to speed quickly. You can also post an issue and get lots of solid inputs to consider. The group founder is a strong supporter of index funds. Their philosophy is spot on: https://www.bogleheads.org/forum/index.php
This captures the essence of what to avoid and his blog is good: http://money.usnews.com/money/blogs/on-retirement/articles/2017-06-09/12-regrets-you-can-avoid-in-retirement
This lady financial advisor is the best. Her book is the best I have ever read on retirement. She conducts superb free webinars and the one on unique women’s issues is superb: https://www.sensiblemoney.com/blog/
This guy does a great job of going about the money and all the other facets of retirement and has a great planning guide kit: http://intentionalretirement.com/joe-hearn/
Each of these are the very best. I have used them first hand (and I have gleaned from others) but these are the gems that will save you a lot of time and bring you up to speed quickly.
I planned to replace 100% to add cushion and not count on working part-time. It is about replacing your budget from paychecks to portfolio checks.
Bottomline, ready or not everyone will retire some day and live within the resources they have. No one should feel badly because there are a lot of systems and moving parts in this third stage of life but there are more tools and supports out there that only the rich had real access to before. Thank God for the Internet.
All the best to you two as you prep for your bonus years…may they be filled with many blessings of mind, body and spirit!
Tha Rev
Thanks for sharing your personal story, Kim! I invested in a retirement readiness analysis by a fee-for-service CFP just over 2 years ago. My question for him then was: will I be able to retire in 2 years? The answer was yes, but guess what? Things changed! My mother died and I got additional money from her estate last year, and am looking to get more money and part of her IRA this year. This all sounds great, but the fact that there seems to be so many more “money things” to deal with all of a sudden, coupled with the uncertainty surrounding healthcare coverage (I am not old enough to enroll in Medicare yet), as well as the change in the Social Security regs concerning collecting of my ex-husband’s benefits (I no longer will be able to) has made my recent plan out of date. I think this illustrates how complicated retirement planning can be, especially in the current ever-changing world! Best of luck to all of us!
I agree, the concept of pre-retirement has become so vital for people, so the financial review is getting more important day-by-day. Thanks for your article.
My wife and I have both recently retired. We have listened to and read advice about spending and withdrawal rates from at least a dozen financial planners.
IMO, financial advisors are advocating much too conservative spending levels for the first decade of retirement. The research on safe withdrawal rates recommends 4% or lower using the assumption that retirees must have level real spending for up to 35 years of possible survival. But level spending is neither practiced nor desirable for elderly retirees. Quite simply, energetic 65 year old retirees in good health gain much greater utility from an extra $10,000 a year than do worn out 85 year olds.
It is likely that retirees with adequate nest eggs (in excess of $500,000) can flex spending significantly in response to market downturns. By flexing spending – and allocating 70% or more of assets to equities – such retirees can easily enjoy early withdrawal rates of 5 or even 6 percent. That’s especially true for retirees with Social Security and private pensions.
In my case, 100% of our non-discretionary spending is funded by Social Security and a modest pension. Our nest egg will be used for significant non-discretionary spending including vacations, hobbies, and recreation. A 6 percent initial withdrawal rate will be modified as equity markets rise and fall.
I used to think that I would be in a lower tax bracket, too. Since I retired 6 years ago, at 67, my federal taxes have gone up. Why? No more deductions with all taxable income including a chunk of Social Security and RMD’s that started at 70 1/2. Not complaining, just giving some facts. I am happy to have pension, SS, a healthy IRA and no debt.
Thanks for sharing your experience.
P.S. My first career was teaching zoology courses at Iowa State University.
Kim,
Thanks for sharing.
Readers should remember that because of fees, you may have use less than 4 or 5 percent. Think 3 percent.