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Dear Fix My Wallet,
Intellectually, I feel well prepared for retirement, but in my heart I have an irrational fear that I am not financially prepared for retirement. I think my concerns revolve around uncertainty in the market and around not having a source of income (I’ve been working since I was 14). I am currently 57 years old and my wife is 60 years old. I look forward to retiring in three years at most. My wife thinks she might want to work part-time to keep herself busy, but I’m pretty convinced I don’t want to spend my retirement working.
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Will we actually be able to retire in a couple of years and live a reasonable lifestyle without running out of money? Do we need to change our wallet setup? How should we withdraw our retirement funds, especially while waiting for Social Security?
Our annual expenses, including projections of having to purchase health insurance, and our entertainment and travel expenses, are about $70,000 in 2024 dollars.
We have no debt, except for a $20,000 loan from our retirement account, listed below, which will be paid off during the year; – Two vehicles, each less than five years old; and a house and cabin worth together about $650,000. Our combined Social Security income is expected to be $5,700 per month at age 67 and $7,400 per month at age 70.
Here’s what we have:
Head versus heart
Dear head vs heart,
You are the kind of retiree for whom the bulldozer strategy was created. You have a lot of different accounts of different types, and it feels like a big mess when you list them. It’s definitely difficult to deal with things this way.
the Bucket strategy It is a type of mental accounting that allows you to visualize your holdings in a way that may make more sense to you. Start by organizing your buckets according to tax efficiency: tax-deferred savings, tax-free growth, and taxable savings. This will help you know if you are saving in the right places for the next three years until your retirement. The goal is to have a variety of income sources, so you can choose where you withdraw money from in order to minimize your tax burden.
As you start spending money, you can shift to thinking in time frame combinations – a short-term one that is mostly cash, a medium-term one that is more conservative and a long-term one that is more aggressive. That’s when you want to adjust your investments to make them work for you. For example, you wouldn’t want to have individual stocks in the short-term bucket and cash in the long-term bucket.
I suggest crossing this expected inheritance off your list. You never know what might happen, and it’s not something you can count on. If a large inheritance eventually comes your way, you can adjust your plans accordingly, without counting your chickens before they hatch.
Deferred tax bucket
Group all your tax-deferred retirement accounts into one pool: 457(b), 403(b), and employer-sponsored plan, all of which currently total about $943,000. You have another two and a half years before you can get this money without penalty, but your wife can already start drawing from her savings if she needs to. However, when you start putting that money to work, you’ll have to pay tax on it as ordinary income.
You’ll also have to start withdrawing money from these accounts when you turn 73, which is below the current rate Minimum required distribution rules. By the time you reach that age in 16, those savings could be worth more than $2.5 million, assuming an average growth rate of 7%. You can continue adding to this bucket over the next few years or start spending it early, but it depends on you.
Tax deductible bucket
Your Roth IRAs are intended for the tax-free growth bucket. These accounts are now worth $260,000, and no matter how much they grow, they will never affect your taxes, because you pay the tax on the Roth contributions up front. You can withdraw the money you’ve invested at any time, but you’ll have to wait until you turn 59½ to get the growth without a penalty.
This makes this a good bucket if you need a cash infusion in the next few years, but otherwise, you may want to spend from this bucket last, because the growth is tax-free. If you left that money alone, it could be worth $1.2 million by the time you’re 80.
You didn’t mention heirs, but Roth accounts are also the most beneficial to leave behind when you die, because your beneficiaries don’t have to pay tax on the balances for 10 years.
Taxable bucket
With your holdings in brokerage accounts and cash, it doesn’t seem likely that you’ll need to touch those Roth funds early. The goal is to have enough cash to cover your expenses from the time of retirement until Social Security kicks in, followed in short order by RMDs. For anything you need next, you can choose the account that works best.
If you retire at 60, you will have approximately 10 years left in which you will need to cover annual expenses of $70,000.
This is where good financial planning software comes in, because it allows you to run hard numbers and set all these variables and time frames. But just by looking at the buckets, you can do a little rough analysis and see that the $1.25 million you have now will almost certainly cover your projected expenses — in fact, you’ll mostly be scraping the top off, meaning your accounts could actually grow over that period, even with a return. Moderate 7%.
However, retirement spending forecasts are not an exact science. Maybe $70,000 a year is low for you, especially if you don’t factor in future health care costs or other emergencies. Or maybe once you retire, you’ll decide to spend more freely at first, while you’re healthy and can enjoy it.
And when it comes time to hang up your spurs, you may decide that’s not what you want to do. There could be some type of work in your future, but it will be driven by your passion, not your bank balance.
You can also join the retirement conversation on our website .