I am 60 years old, married and have no mortgage. We also have $1.1 million in cash and $880,000 in a 401(k). I will have two pensions, which have not yet kicked in, and my wife will have one pension, all three together about $3,500 a month if we were to receive them today. We also paid into social security. At age 65, we make about $5,000 a month together. As long as we live, I will have medical and dental insurance for me and my wife through my state government. Not sure if I can retire now or wait a few more years to build on my pension?
-Fred
The answer to these types of questions is always: “It depends.”
Yes, there is definitely a good dose of math involved to arrive at your answer. But you still have to interpret that math and its conclusions in a way you’re comfortable with, based on your own situation and attitude toward money, security, and risk.
I will highlight some things to consider as you make your decision, but there is no way to give you a concise answer to this. I highly encourage you to do a significant amount of research if you plan to do this yourself or consult a financial advisor.
Your expenses during your retirement
Income and expenses are different for everyone who has retired. So we cannot know whether your income is sufficient without knowing your expenses. Regardless of the income streams (pensions or Social Security) and savings you have to supplement (cash and 401(k)), it’s important to also estimate the amount you’ll need to spend each month.
This allows you to compare your income and expenses, just as you do while you are still working.
One way to get a rough outline of your retirement budget is to start with what you currently spend each month. From there you can adjust your pension based on planned or expected changes once you retire. This could include buying a new car, taking a festive holiday or passing on changes to your health insurance premiums.
The fact that you have paid off your house is a big plus.
Sources of income
Once you’ve estimated your expenses, you’ll need to consider the different sources of income you’ll have in retirement. Some are guaranteed, while others are subject to risks due to market volatility. Here’s what to watch.
Pensions and social security
I like to look at the guaranteed income first. For you these are pensions and social security. Rather than get into the nuance of when to claim your benefits (although claiming strategies are certainly something to think about), we’ll go with the numbers you mentioned. At age 65, you would receive approximately $8,500 per month from regular sources. As a side note, check to see if your pension includes an annual inflation adjustment.
Compare that to your expected expenses. How much does it cover? A third? Half? All? The ability to cover a greater share of your expenses obviously means more security. If you can cover them completely you are in a very good position, although for most people that is not necessary.
At this step you can also divide your expenses into needs and wants. Separately, think about how many of your living needs can be covered. If you can reach all these sources with fixed sources, great. This can reduce the fear that you will have to cover the rest with your savings. A financial advisor can help you break down your budget and create a plan.
Withdrawals from savings
You will need to cover the rest of your expenses by taking money from your savings. For this, you need to spend some time understanding the different withdrawal methods. That’s because you need to choose a distribution plan that allows you to confidently make the withdrawals needed to pay the remaining expenses not covered by your pensions and Social Security. The big fear for most people is that they will run out of money too quickly.
A simple way to evaluate this risk is to look at your planned withdrawal rate. For example, let’s say you determine that you need to take $40,000 per year out of your savings.
If we round your savings to $2 million, that’s a 2% withdrawal rate. Most planners would tell you that this is a very conservative withdrawal rate and should make you feel quite confident. Higher withdrawal rates, for example 10%, carry significant risk. But again, you should feel comfortable with whatever you decide. Base your choice on understanding your income needs and the risk you are willing to take. There is no objective target to hit.
Your feelings about risk
As you consider your choice, think about how you feel about the different risks you face. The easiest way to see this is through your investments, but they are not the only source of risk in retirement.
Your investments require a trade-off. The more aggressive your investments are, the more likely they are to grow and support you during retirement. But that also means they will be more volatile and could worry you when markets are rough. Very conservative investments may not be too scary to hold, but the risk is that they won’t grow enough to support you in retirement.
I see that you keep about half of your savings in cash. Of course, I don’t know why – you may have recently inherited money or sold property and are still deciding what to do with it – but this would initially indicate that you are a very conservative investor.
The cash can serve as a good cushion against market volatility and can be especially useful during the few years between retirement and when Social Security kicks in. This could also be a source of risk, as the real value of cash will decline over time as inflation erodes its purchasing power.
Consider consulting a fiduciary financial advisor for your retirement planning.
What to do now
None of what I have said here has directly answered your question. But that’s because any answer I could give you would be incomplete and assume too much about you. There is a lot of nuance to these decisions and they are very personal.
I cannot stress enough how important it is to make sure you understand your situation, that you are aware of the different risks you may face and that you know what options are available to you. Make your decision based on that insight and choose something you feel comfortable with.
Find a financial advisor
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If you have questions specifically related to your investment and pension situation, a financial advisor can help you. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. You can also check out SmartAsset reviews.
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Planning for retirement? Use SmartAsset’s Social Security Calculator to get an idea of what your benefits might look like in retirement.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article.
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The post Ask an Advisor: I’m 60 years old, have $1.1 million in cash, $880K in a 401(k), several pensions and Social Security. Should I retire now? appeared first on SmartAsset Blog.
