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Dear Fix My Portfolio,
Intellectually, I think I’m ready to retire, but in my heart I have an irrational fear that I’m not ready to retire. My fears center around the uncertainty in the market and around not having an income stream (I have worked since I was 14). I am now 57 and my husband is 60. I am looking to retire in at least three years. My husband thinks he wants to work part-time to support himself, but I’m pretty sure I don’t want to spend my retirement working.
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Are we really going to be able to retire in a few years and live a reasonable lifestyle with no money? Should we change our portfolio settings? How can I withdraw my retirement funds, especially while waiting for Social Security?
Our annual expenses, including the expected need to purchase health insurance, and 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 repaid during the year; two vehicles, each less than five years old; and the house and cabin together cost about $650,000. Our combined Social Security income is projected to be $5,700 per month at age 67 and $7,400 per month at age 70.
Here’s what we have:
Head vs. Heart
Dear Chief vs. Heart,
You are a retiree who creates a bucket strategy. You have many different accounts of different types, and it just looks like a big mess when you list them. It must be very difficult to deal with these things.
The bucket strategy is a type of mental accounting that allows you to visualize your holdings in a way that is easier for you. Start by organizing your buckets according to tax efficiency: tax-deferred savings, tax-free growth and taxable savings. This will help you see if you are saving in the right place for the next three years until you retire. The goal is to have multiple streams of income, so you can choose where to draw your money from to minimize your tax burden.
When you start spending money, you can switch to think about time-frame buckets – one for the short term which is usually cash, one for the medium term which is more conservative and one for the long term which is more aggressive. That’s when you want to adjust your investments to work for you. You don’t want individual stocks in a short-term bucket and cash in a long-term bucket, for example.
I recommend removing the legacy you want from your list. You never know what can happen, and it’s not something you can count on. If a large enough inheritance is coming, you can adjust your plan, without counting the chickens before they hatch.
The tax-deferred bucket
Group all tax-deferred retirement accounts into one bucket: 457(b), 403(b) and employer-sponsored plans, all currently worth about $943,000. You have another two and a half years before you can touch that money without penalty, but your wife can already draw from savings if needed. That being said, when you start withdrawing that money, you will have to pay taxes on it as ordinary income.
You must also begin taking money out of the account when you turn 73, subject to the required minimum distribution rules. When you reach that age in 16 years, the savings can be more than $2.5 million, with an average growth rate of 7%. You can continue to add to that bucket over the next few years or start spending earlier, but it’s up to you.
Buckets are tax free
Your Roth IRAs are for tax-free growth buckets. The account is currently worth $260,000, and even if it grows, it won’t affect your taxes, because you pay taxes on your Roth contributions up front. You can take out the money you put in at any time, but you have to wait until you’re 59½ to take out the growth without penalty.
That makes this bucket good if you need a cash infusion in the next few years, but otherwise, you might want to spend from this bucket later, because of the tax-free growth. If you leave that money, it could be $1.2 million by the time you’re 80.
You didn’t mention your beneficiaries, but a Roth account is also the most beneficial to leave when you die, because your beneficiaries don’t have to pay taxes on the balance for 10 years.
Buckets are taxed
With your holdings in both brokerage and cash accounts, you probably won’t need to touch your Roth money early. The goal is to have enough money to cover your expenses from retirement until Social Security kicks in, followed briefly by RMDs. For whatever you need after that, you can choose the best account.
If you retire at 60, that leaves about 10 years that you have to cover $70,000 in annual expenses.
This is when financial planning software is great, because it allows you to run the exact numbers and put in all the variables and time frames. But just by looking at the bucket, you can do a back-of-the-envelope analysis and see that the $1.25 million you have now will almost certainly cover your projected expenses – in fact, you’ll usually break even on top, meaning your account will probably grow over that period, even if it’s yielding 7%. moderate.
However, projecting retirement spending is not an exact science. Maybe $70,000 a year is too little for you, especially if you don’t take into account future health care costs or other emergencies. Or perhaps when you retire, you will decide to spend a little more freely in the beginning, when you are healthy and able to enjoy it.
And when it’s time to close the spurs, you may decide that’s not what you want to do. Some types of jobs are still possible in the future, but they will be driven by your passion, not your bank balance.
You can also join our retirement chat .
