When and How to Retire
Last week a loyal reader of the weekly newsletters responded to me and asked if I’d give some advice specific to his situation. He correctly assumed that others were in a similar position and it would help himself and other people who are trying to decide when and how to retire. So I’m going to talk about the when and how of Bill’s situation so everyone can see how to objectively approach these decisions.
Bill lives on the other side of the country. I’m in the mountains and he’s in the city. We are both benefitting from the enhanced communication that is provided by technology. For me I can share my message with more people and any of you, like Bill, have more information at your fingertips than ever before but need some help sorting out all the options and opinions.
Last fall Bill scheduled an appointment and made me part of his search for a financial advisor that can help with retirement. He is now a 58 year old federal employee and wants to see if his expectations are realistic. His pension would be available at age 60 but he plans to work until age 62 so early social security will set a nice baseline for retirement income.
So his first question: Do I have enough to retire as planned?
I use the below assets to do a basic calculation:
$525,000 in a Thrift Savings Plan
Continued maximum TSP contributions until retirement
$175,000 in a Roth IRA
Continued maximum Roth contributions until retirement
He wants $5K per month in retirement and social security will pay $1600 and his pension is $2000
That leaves a $1400 monthly income gap to cover
Yes he can retire as planned with plenty of funding and will have his choice of options for asset allocation. His annual income gap amounts to 2.4% of his current assets. With continued growth and savings the gap will be a much smaller percentage of assets. That means Bill can either retire earlier than expected or plan to spend more when he gets there.
Traditional planning gave us the 4% withdrawal rule and you are in really good shape if annual needs are less but 5% of assets as income is very possible for those of you who aren’t. Bill at 2.4% of assets is in an extremely strong position.
The second question: What do I do with my assets until then?
Like many people, Bill has been saving and investing during some excellent market periods. While the market is still very high he is concerned that any volatility could put the planned date in jeopardy. In a lot of situations there is an easy answer. Once you have enough there is no reason to take unnecessary risk. A few years away from retirement is the perfect time to add an annuity to the plan so risk is decreased and volatility won’t change your retirement date.
But like a lot of people with qualified retirement accounts Bill can’t move money from his TSP until age 59 ½. Fortunately with the TSP there is a G-fund option so he can get the 10 year US Treasury rate and keep his assets protected. It’s a floating rate that is paying about 2.7% now but was over 3% at the end of 2018. The best feature is that the money is totally liquid so he can continue contributions and get a safe yield. A whole new set of options will be available to him in a year and a half when he can move funds and that’s when I’ll recommend allocating assets to a more definitive retirement plan.
If you don’t have a TSP and G-fund then your options are going to depend on what’s available in your employer-sponsored plan. In many cases nothing more than a money market fund is an option for protecting assets when they can’t be accessed. Bond funds are a common option with liquidity but those are a bad idea when interest rates continually fluctuate.
No matter what your situation, a few years before retirement is when you need to start protecting assets, especially if you’ve saved enough already. If low yields are holding you back just remember that often times not losing money is better than taking risk because you want a better return. It’s up to each individual to decide for him/herself how much risk to take before and during retirement. When it’s possible to yield well and protect money I don’t see why so many people continue to take risk but it’s not always up to me.
Bill is in a great position and there’s no reason to take risk. About two years from now he’ll have access to funds and then can compare income strategies and products. His income gap is small so there will be plenty of options and like always I’ll show him how to get the most from his safe assets.
As for the how, there are several ways he can do it. If he chooses a guaranteed lifetime income product it could cost as much as $300K to lock in the steady cash flow required to fill his income gap. Since that is less than half of his current assets it is a reasonable option if he doesn’t mind locking the money away for life. But since he has plenty of assets, running out of money in retirement won’t be a problem. The Flex Strategy would provide more growth and spending potential with the same level of safety and assurance, just without the lifetime commitment.
The Roth IRA is the perfect qualification for assets that can be managed for long-term growth, discretionary spending and tax-free income later in life. Bill doesn’t need it for income so he can invest it for growth and will likely see substantial accumulation toward the later years of retirement. Like I said, he is in a great position so has plenty of options.
Everyone should hope to retire at the top of the market and then take chips off the table in order to protect what they have. Bill has done that a bit early but he still got out on top and will enjoy a profitable retirement because of it. His when is whenever he wants and his how will happen when he can move his assets from the TSP.
If any of you would like a mathematical and objective answer to these questions then give me a call or schedule an appointment below.
All my best,