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Dear Fix My Portfolio,
Intellectually I feel well prepared for retirement, but in my heart I have an irrational fear that I am not financially ready to retire. I think my fears center around the uncertainty of the market and the lack of an income stream (I’ve been working since I was 14). I am currently 57 and my wife is 60. I want to retire within three years maximum. My wife thinks she might want to work part-time to keep herself busy, but I’m pretty sure I don’t want to spend my retirement working.
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In a few years, will we actually be able to retire and live a reasonable lifestyle without running out of money? Should we change our portfolio setup? How should we tap our retirement funds, especially while we wait for Social Security?
Our annual expenses, including the expectations of having to purchase health insurance, and our expenses for entertainment and travel, are approximately $70,000 in 2024 dollars.
We have no debt, except for a $20,000 loan from a retirement account, listed below, which will be paid off within 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.
This is what we have:
Head vs heart
Dear Head vs. Heart,
You’re the kind of retirees the bucket strategy was made for. You have a lot of different accounts of different types, and it just looks like a big mess when you list them. It’s definitely difficult to get a handle on things that way.
The bucket strategy is a type of mental accounting that helps you visualize your assets in a way that might make more sense to you. Start organizing your buckets based on tax efficiency: deferred savings, tax-free growth, and taxable savings. This way you can see whether you are saving in the right place for the next three years until your retirement. The goal is to have a diversity of income streams so you can choose where you get money from to minimize your tax burden.
As you start spending the money, you can move on to thinking about time frames: one for the short term that is mostly cash, one for the medium term that is more conservative, and one for the longer term that is more aggressive. That’s when you’ll want to adjust your investments so they work for you. For example, you don’t want individual stocks in the short term and cash in the long term.
I suggest crossing that expected inheritance off your list. You never know what can happen, and it’s not something you can count on. If a significant inheritance eventually comes your way, you can adjust your plans accordingly, without counting your chickens before they hatch.
Tax-deferred bucket
Group all your tax-deferred retirement accounts into one category: the 457(b), the 403(b) and the employer-sponsored plan, all of which currently total about $943,000. You still have two and a half years before you can get rid of that money without penalty, but your wife can already start drawing on her savings if necessary. That said, if you’re going to tap that money, you’ll have to pay taxes on it as ordinary income.
You will also have to start withdrawing money from these accounts at age 73, according to current mandatory minimum distribution rules. By the time you reach that age in 16 years, those savings could be worth more than $2.5 million, assuming an average growth rate of 7%. You can keep adding to that bucket for years to come or start spending early, but that’s up to you.
Duty free bucket
Your Roth IRAs are for tax-free growth. Those accounts are now worth $260,000, and no matter how much they grow, it will never affect your taxes because you pay the tax on Roth contributions in advance. You can withdraw the money you invest at any time, but you must wait until you are 59½ before you can withdraw the growth penalty-free.
That makes this bucket good if you need a cash injection in the coming years, but otherwise you might want to spend out of this bucket last because the growth is tax-free. If you leave that money alone, it could be worth $1.2 million by the time you’re 80.
You didn’t name any heirs, but Roth accounts are also the most beneficial to leave behind when you die because your beneficiaries don’t have to pay taxes on the balances for 10 years.
Loadable bucket
With your assets in investment accounts and cash on hand, it doesn’t seem likely that you’ll need to touch that Roth money early. The goal is to have enough cash on hand to cover your expenses from the time you retire until Social Security kicks in, followed in the short term by RMDs. For everything you need after that, you can choose which account works best.
If you retire at age 60, there are about ten years left in which you need to cover $70,000 in annual expenses.
This is where good financial planning software comes into play because it allows you to run exact numbers and input all these variables and time frames. But just by looking at the buckets, you can do a little back-of-the-envelope analysis and see that the $1.25 million you have now would certainly cover your expected expenses – in fact, it would mostly take you off the top skimming. This means your accounts can actually grow over that period, even at a modest 7% return.
However, pension expenditure projections are not an exact science. Maybe $70,000 a year is actually quite little for you, especially if you don’t take into account future healthcare costs or other emergencies. Or maybe once you retire, you decide to spend more freely while you’re healthy and enjoying it.
And when it comes time to hang up your spurs, you may decide you don’t want to. There may still be some type of work in your future, but it will be driven by your passion, not your bank balance.
You can also participate in the Pension Discussion in our .
