Here’s an interesting, real-life situation that I’d like to get feedback on.
I know there are some really smart ESI readers out there, and I need your thoughts.
The other day I received the following email from a reader (FYI, I’ve edited a bit for brevity but haven’t changed the substance of our conversation):
I would greatly appreciate your opinion on my current financial state and if I can retire:
- I turned 50 in July and my wife 49 in July
- My wife is a high school math teacher currently earning $87,650. She has 24 years in the district and was considering working 6 more years to get 30 years of service. If she does this, she will receive a reduced pension since she didn’t work 35 years. Her pension would be approximately $56K per year or $4,710 per month.
- I am a 50% partner in a business and my salary is $123K per year. My partner and I also own the office building and we pay ourselves rent of $2K each per month. The problem is, we bought the business from our former boss and have a 15 year note. We just completed year 4. The payoff, including interest, is approximately $2.3M. I would love to sell the business, but I wouldn’t get anything out of it once the note was retired. I am assuming if I retired at age 56, I would just walk away with nothing from the business.
- We currently have $3.9M in cash/investments not including our home, cars, life insurance, etc.
The monies are allocated as follows:
- IRA’s — $477,873
- 401K — $267,159
- 403B — $229,021
- Mutual funds/investments — $2,519,438
- Cash/CD’s — $292,326
- Stocks — $13,696
- 529 College Plan — $100,880
As I stated earlier, if my wife retires early (age 56), she would get a yearly pension of approximately $56K. If we take social security at age 62, I would get approximately $1838 per month and my wife would get $1,646 per month.
Some ancillary information – our home is paid off and valued at $225-250K, we have a 2016 Acura ILX and 2013 Honda CRV (both paid for), we have one child – a 16 year old daughter in a private high school. Her tuition is approximately $6K per year. I belong to a country club that costs me approximately $5-6K per year. We do not live extravagantly. We bank my wife’s entire pay and put at least $1K of every one of my pays away.
Can I retire at age 56 if not sooner in your opinion? Thoughts?
I responded with the following:
A couple questions:
1. How much do you need to spend annually during retirement? Put together a rough budget (even if it’s a back-of-the-hand estimate) so we can get close. Be sure to include any savings you may need to do (like for your daughter’s college, though it appears you have enough to cover it) for things you’ll be responsible for in future years.
2. What is the $2.5 million in mutual funds invested in? I’m guessing these are just in a normal account (not taxable) and you have access to move/change them in any way, right? If so, you could earn $75k a year on them alone if invested in a dividend fund/stocks at 3% (which is pretty conservative).
He responded:
1. I went through my expenses and guessed it would annualize out to approximately $80-85K per year. I think I have enough in our 529 plan for most, if not all, of our daughter’s college. I didn’t factor in a wedding, etc. so that could be more.
2. $2.06M is in Vanguard funds – most are in taxable accounts, some in tax exempt. The other $500K is with Janney Montgomery Scott invested in American Funds. Last year I made $60,935 in dividends and cap gains from Vanguard. On average, I receive $1,200-1,300 per month in dividends from JMS.
To which I responded:
Ok, so…
$85k in expenses
VERSUS
Approximately $75k in dividends/capital gains income each year plus $56k per year from your wife’s pension ($131k/year without even looking at other assets)
Seems like you have way more than enough. What am I missing?
So, dear ESI readers, this is where you come in. What am I missing?
If you go through the same sort of analysis I went through as I was deciding to retire it appears:
1. If he structures his assets correctly (for income) he’ll have more than enough to cover living expenses.
2. If he ever needs to spend some of his savings at the rate of let’s say $20k per year, he has DECADES of surplus left over.
This seems to be even more of a no-brainer retirement than mine was, especially since his wife’s retirement alone will cover a huge part of their expenses.
I asked him if I could post this and solicit your comments and he agreed. So let us have it!
A few questions:
1. Can he retire (either now or at 56)? Why or why not?
2. What steps would you recommend he consider to make his retirement even more secure? (specific money moves)
3. What am I missing? 😉
I’ll see you all in the comments below! Thanks for your help!
I agree that he will be more than able to retire at age 56. I would recommend that he use some of the current excess income and invest in a health savings account for himself and his wife. Additionally, I would recommend long-term care insurance, if they have not already purchased it. I am assuming that the annualized estimated expenses he stated included health care; however, having another 40k in an HSA for himself and his wife to use should they become ill or need more expensive medical coverage would be a good benefit.
Looks like he can afford to retire. Needs to make sure he knows what his safe withdrawal rate is. They’ve down a great job saving. Check out firecalc.com
College tuition is wildcard depending on where daughter wants to go to school. NYU is about $88k a year.
Based on his age, social security isn’t available til 68yo as far as I know.
Will partner buy him out?
Thank you for your comment. To answer some of your questions:
I plan to take social security “early” at age 62. Hence, the reduced amounts.
My partner nor the business really has the cash flow to buy me out, nor was the agreement structured as such.
As I mentioned below, why would you take Social Security early?
You have more than enough to retire at 56 (between your savings and wife’s pension), even WITHOUT any Social Security, particularly after 6 more years of saving/investing. Social Security is about as safe as it gets (yes there are projections about it’s “failure”….but that “failure” means it pays out 75% of current benefit levels, and given the HUGE approval ratings for Social Security there is ZERO percent chance politicians will let even that cut happen). Waiting each year beyond your full retirement age is a GUARANTEED 8% return which is phenomenal (everyone would take an 8% guaranteed return in today’s environment), and that growth then gets COLA’d permanently; that higher payout amount also survives you (passing to your wife). And by delaying SS those 8 years, you’d end up with 8 more years in which you wouldn’t have taxable income from SS that you could be doing Roth conversions up to relevant income limits.
Delaying is even more important if the worse happens and your wife dies early and your wife’s pension does not fully survive her (i.e. you only get 50% or even 0% of her pension as surviving spouse)….it’ll mean more guaranteed income for you if you live much longer than she does.
I guess I’m just really curious why you’d take SS at 62 given all the reasons against doing so — I think if you ran the numbers/considered all contingencies, you’d be smart to delay your Social Security at least (while maybe taking your wife’s early at 62 or 67).
Thank you. I will take that under advisement and consider. I was always under the mindset that you never know when your day will come and you can actually get more money by taking SS early if you live long enough.
raider,
Your assumptions are 1 for 2. Yes you never know when your day will come and if it comes early you will have gotten more by drawing early. However if you live long you will draw exceedingly more in total by waiting. For someone whose retirement future in the later years is questionable the correct answer is always to wait as long as possible. For someone like yourself who is exceedingly financially strong the choice is not that important in my view. If you want to try to maximize your potential long term draw then you wait. If you want to have the money now and let more of your savings grow in stead then you draw early. I don’t think it is that critically important for someone in your position.
Unfortunately the people for whom this decision is most important are the ones who usually draw early because they want to start getting that money as soon as possible and they are the ones who will likely face a bleak future in their 80s because of small SS payments and very little else to draw upon. This is why you already hear rumblings from some about raising the SS payouts for those at the bottom of the income scale. Those rumblings will get louder in future years as more people will end up facing this future.
I agree he can afford to retire. The real question to me is should he retire. I would work until my child finished college. She might consider professional school (ie medical school) which could easily be $100k per year depending on the school. The major variable of the future is health care. I would be concerned about health care for my wife and child. I would investigate buying long term care insurance and max out an HSA for my wife and myself. I would also plan for health care costs for my child until at least 26.
Retirement at age 56 gets my daughter through college – undergrad. If she opts to go on further – med school or grad school, that throws a different dynamic into the equation.
As for health care, we would have to see if my wife gets a 30 and out option. Most times the district will cover health care until medicare kicks in.
Looks like retirement at 56 should be no problem. In fact, his number are about where I plan to be at age 50, other than my expenses are expected to be slightly lower and my plan is to retire at 50.
I’m reading between the lines that he has some regret that he doesn’t expect to get anything from the business after having sunk so much into it, but it’s a sunk cost and shouldn’t be considered. Of course it would be nice to retire with a few million extra, but it doesn’t sound like that is possible to get from the sale of the business considered the outstanding balance on the note.
One other question – how much financial support is planned for his daughter as an adult? $100k is a lot for a 529, unless she is thinking about going into medicine and he is wanting to pay for medical school. Some parents feel the need to work until their children are on solid financial ground, but $100k towards education should be a sufficient foundation.
I’d suggest a couple ideas:
1. Take the next 6 years and focus on building up enough in “safe” investments (CDs, bond funds, iBonds, TIPS) to secure a large portion of your retirement “risk free” (or relatively risk free). Then you can let the rest go to stock funds to grow as a large legacy/fun fund.
2. Build up the HSA/accounts for health care.
3. When you retire at 56, live off taxable while doing Roth conversions on tax-deferred IRAs/401ks — you may want to consult an accountant to see if this is a good approach/smart and how much to do.
4. I’d consider delaying to 70 the Social Security of whichever spouse (you or your wife — looks like you) was the higher earner. That’s a bit extra in longevity insurance for whichever spouse lives longest, increases your SS payments, and also keeps your taxable income in regards to SS lower in years where you might want to be doing Roth conversions to avoid later RMDs. Plus, if you’re both in good health (and it appears you are?) one or both of you will likely live long enough to make that a financially beneficial decision
I also would like to know what health care coverage he and his wife get under her pension- as he will need that until Medicare kicks in? Or has this already been factored in his expenses?
I’m also confused about his business partnership. He is earning a salary from the business but he is in year 4 of a 15 year loan. Is he saying that if he sells his business interest it will only be enough to retire his share of the loan and he’d get nothing more out of this?
But other than that I agree with your analysis- he has enough income from investments and his wife’s pension to cover his costs.
-Mike
ESI, this reader can retire in six years at 56. Or, he can retire now. So can his wife. His question is not really a ‘question’, but a form of ‘humblebrag.’ Good for him! Now. On to the next episode!:-)
yup.
of course he can retire with $2.5 million and $1m in retirement assets. he could do it today without batting an eye.
he just wants recognition that he’s done well and a little affirmation. so, good job. if he needs further affirmation, suggest a golden retriever.
I can assure you I’m not looking for affirmation or a pat on the back. I’m looking for educated, unbiased opinions and analysis. I am very conservative by nature and want to make sure I do my due diligence and get as much advice as possible before I make this move. Thanks for all your comments, they have opened my eyes about things like HSA and social security .
I can say that even when I “knew” (thought) I had enough, then I KNEW (for sure) I had enough, it was still hard to pull the trigger.
Of course I had a boss that helped me along but for someone who is conservative with his finances (like I am), it was still hard to finally do it.
But I must say that once I did, I haven’t regretted it for a minute!
My suggestion would be around the 85K expenses and the 75K in dividends. If 85k is the expected expenses, then write your budget, cash out 100k or take your dividend money, and live off of it. For six months to a year. If you think you can do it, prove it. Prove it now while you are taking all your good income and banking it for later.
The ability to retire isn’t really the question you need to be asking. I think we all agree that you can. The question should be what strategy do I need to approach this? What positioning needs to happen before I take the leap? And, as ESI asks, what am I missing? Because your estimated expenses are sure to be missing something.
As far as the kids college fund being insufficient, if she can’t get educated in her chosen field for $100k, then she will either be making enough money out the back to cover those costs, you can pick them up, or she is way too interested in the college experience and not enough about the education. I’d pick up a copy of the Millionaire Next Door, which has aged some, and specifically read about parents supporting their children into adulthood seems like a good idea, but isn’t. It does a decent job informing about how much help is too much – not so good at answer the gray area question.
Finally, Reddit has a financial independence and early retirement community that is generally quite intelligent and well behaved. Six weeks ago, one of the members retired and has been detailing the life change between announcement, final day, first day off, and a few weeks out. You can read his latest installment here: https://www.reddit.com/r/financialindependence/comments/4zhgfp/update_6_weeks_into_fire/
Of course this reader can retire. Today, tomorrow, in 6 years, or whenever he wants. He has long since passed financial independence.
Looking at the numbers and people will say yes you can retire living the lifestyle you are now.
But the bigger question is what do you want to DO in retirement. How do you want to SPEND it? You are obviously actively running a buisness which requires a lot and maybe quite a bit of sacrafice. Do you have hobbies you want to enjoy or activities you want to continue or things to explore? If you are a golfer and you golf once a week , can your retirement money afford 7 days a week? Travel and trips? Is there something you have always wanted to do in a bucket list but were never able to do? Can these costs be covered by your retirement funds? These are the hard questions you need to ask yourself.
If I were in your shoes and the money saved I would retire right now. Yet I am not you and my idea of retirement is different from yours. Only you can feel comfortable with your choice of what retiremnet is and so does your wife.
It looks like your financials can but what do you want to acheive? Sounds like you have 6 years to figure that out along with your wife.
Is there any possibility that the wife could be laid off from her job earlier than the 30 years, or is the position completely secure due to academic tenure?
What if she is unable to complete the 30 years (due to death or disability, or the aforementioned involuntary termination)? Is there any partial benefit for less than 30 years?
Is there any spousal benefit to the pension?
Although the husband still has plenty to retire on his own merit, I would simply suggest a contingency plan in case the wife’s pension doesn’t pan out for whatever reason.
My wife is tenured and has senority in her department. Virtually no chance of a layoff. Health, on the other hand, is a different issue. Anyone can get sick at anytime, God forbid. That said, threre is a partial benefit for death or sickness to the spouse.
First, you both could retire now, especially if you cut expenses if you’re worried, but it is doable right now. Since I am a conservative money person too, I understand wanting to make sure.
I guess the sticky factors would be – is your wife’s pension transferable to you if she dies first? If so, is it the same amount? Here in Texas, her pension would be smaller if we wanted that option. Secondly, make sure you’d have a health care plan that would minimize your max out of pocket to $15,000 a year or less. The rest of your expenses can be changed by moving, eating differently, not funding all of your daughter’s education if she decides to go beyond a 4 year degree, etc. But pension amounts and health care plans are the things to get squared away.
Congrats on being where we hope to be in 10-20 years too!!! We’re 33 and have a couple hundred thousand in retirement accounts, but most of our net worth is in two houses (one paid off rental, and our home that still has a $193k mortgage but is worth $310,000 currently). Trying to get more in income-generating accounts by the time we’re 50…
Good luck! Sounds like you are well on your way!
Just out of curiosity, does the 15-year note include the office building or is the 15-year note strictly for the business itself? Do you own the building outright (with no mortgage)?
That should have read “Do you and your partner own the building outright (with no mortgage)?”
The 15 yr note if for business. The building is paid in full and owned by myself and my partner 50/50.
Is the value of your half of the building included anywhere in the numbers above? What is it worth? If you dissolved the business, what would happen to the building — I assume you would sell it? But what if you just sold your interest in the business to someone else, and your partner stayed on … what would happen to the building then? Could you sell/transfer your “interest” in the building, or would you just charge rent somehow? Could you somehow force a sale and require them to move elsewhere? Do you have any kind of (ideally written) agreement with your business partner that addresses this?
The building was assessed at $335K. My half is not included in my numbers. The purchase agreement was written that if one of the partners leave, it forces a sale. There are also key man policies in place in the event one of us dies. The beneficiary is the note holder and the note is then retired with the insurance payout. Whatever amount is left over goes to the partners widow. The business then is owned 100% by the surviving partner. The building would have to be worked out between my partner and I.
I think you two can feel pretty confident about retiring at 56 and you have gotten a lot of good feedback about a few things you still need to consider. I will second Coopersmith’s comments about thinking about what you want to do in retirement. This is an important line item to budget for. My husband and I retired early (63 and 61 respectively). We had ideas of what we wanted to do with all our extra time but we took some time to just wind down from our hectic careers first, which was an adjustment in itself. Retirement is like starting a new careeer. We are into our third year of retirement which has evolved nicely, filling our time with our new activities. Good luck with your choices!
One of my fears is another financial collapse like we had in 2008. If you recall, the Dow dropped to 7400. If that occurs again, I’d lose a good percentage of my investments (on paper) and wouldn’t get the dividends and cap gains I would need to live. Thoughts?
The gap between what you need ($85k) and what’s guaranteed ($56k) is $29k.
My guess is that even if the economy tanked completely, you’d still be able to make $29k in dividends and capital gains.
Plus there are other sources of income:
1. You other (retirement) investments.
2. You could go back to work.
3. Your wife could go back to work.
4. You could spend some principal until the economy pulled out of it.
I know these because I’ve already thought of them for myself.
BTW, if you live in a high cost of living area or in a house that’s too big you can sell/move to free up some cash.
I think he can retire now with careful planning on budgeting and expenses. He may run through a trial run with data from last one year of expenses to make a call.
i think you have discovered a goldmine… just create a sub-portal called ‘caniretire.esimoney.com’ & let people post their situation ask for community inputs on whether they can retire or not & let others give their feedback with some thumbs up/down or some 1-10 scale rating along with advice. you can sit back & enjoy the traffic 🙂