I am 60 years old, married, and have no mortgage. We also have $1.1 million in liquid cash and $880,000 in 401(k) funds. I will have two pensions that haven’t started yet, and my wife will have one that, if we took it today, would add up to about $3,500 a month. In addition, we paid social security contributions. At age 65, we were making about $5,000 a month combined. My wife and I will have medical and dental insurance through the state as long as we live. Not sure if I can retire now or wait a few more years to increase my pension?
-Fred
The answer to questions like this is always “it depends”.
Yes, coming up with the answer definitely requires a lot of math. But you still need to interpret the math and its conclusions in a way that feels comfortable to you, based on your own circumstances and attitudes toward money, security, and risk.
I’ll highlight some of the things you should consider when making your decision, but I can’t give you succinct answers here. If you’re planning on doing this on your own or consulting a financial advisor, I highly recommend doing a lot of research.
your retirement expenses
Ask an Advisor: I’m 60 years old and have $1.1 million in cash, an $880,000 401(k) account, multiple pensions, and Social Security. Should I retire now?
Everyone’s income and expenses in retirement are different, so without knowing your expenses, we can’t know whether your income is enough. It’s also important to estimate how much you’ll need to spend each month, regardless of your income source (pension or Social Security) and the savings you have to replenish (cash and 401(k)).
Doing this allows you to compare your income and expenses just like you would if you were still working.
One way to get a rough draft of your retirement budget is to start with your current monthly expenses. From there, you can make adjustments based on any changes in your plans or expectations after retirement. This could be buying a new car, taking a celebratory vacation, or considering changes in health insurance premiums.
The fact that you’ve already paid off the loan on the house is a big advantage.
Once you have estimated your expenses, consider your different sources of income in retirement. Some are guaranteed, while others are at risk due to market fluctuations. Here’s what’s worth a look.
Pensions and social security
I like to think of guaranteed income first. For you, that’s pensions and Social Security. Rather than getting into the nuances of when you claim benefits (although strategies for claiming benefits are certainly something to consider), let’s look at the numbers you mentioned. At age 65, you have approximately $8,500 per month from regular sources. As a side note, check whether your pension includes annual inflation adjustments.
Compare this to your expected costs. How much does it cover? one third? half? all? Of course, being able to cover most costs means greater security. If you can cover them completely, you’re in a really good position, although for most people this won’t be necessary.
During this step, you can also divide your spending into necessities and needs. Consider how many of your necessities can be met individually. It would be great if you could cover all of this with a fixed source. This takes the worry out of having to use your savings to cover the remaining costs. A financial advisor can help you break down your budget and create a plan.
Savings Withdrawal
You’ll need to take money out of your savings to pay for the rest. To do this, you need to spend some time understanding the different withdrawal methods. This is because you need to decide on a distribution plan that allows you to feel comfortable withdrawing the necessary amounts to cover any remaining costs not covered by pensions and social security. The biggest fear most people have is that they will eventually run out of money quickly.
An easy way to assess this risk is to look at your plan withdrawal rates. For example, let’s say you determine that you need to withdraw $40,000 from your savings each year.
If we round your savings to $2 million, the withdrawal rate is 2%. Most planners will tell you that this is a very conservative withdrawal rate that should make you feel very confident. Higher withdrawal rates (e.g. 10%) carry significant risks. But then again, Whatever you decide, you need to feel comfortable. Your choice is based on an understanding of your income needs and the risk you are willing to take. There is no objective target to hit.
How you feel about risk
Ask an Advisor: I’m 60 years old and have $1.1 million in cash, an $880,000 401(k) account, multiple pensions, and Social Security. Should I retire now?
As you consider your options, consider how you feel about the different risks you will face. The easiest way to see this is through your investments, but they aren’t the only source of retirement risk.
There are trade-offs to your investment. The more aggressive your investments are, the greater the chance they will grow and support you throughout retirement. But this also means they will be more volatile and may cause you concern during market downturns. Holding very conservative investments may not be so scary, but the risk is that they may not grow enough to last you throughout retirement.
I noticed that about half of your savings are 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 them – but this first tells me that you are a very conservative investor.
Cash can serve as a good buffer against market fluctuations and is especially helpful during the years leading up to retirement and Social Security. This can also be a source of risk, since the real value of cash will decline over time as inflation erodes its purchasing power.
Consider consulting with a fiduciary financial advisor about your retirement plans.
what to do next
Nothing I’ve said here directly answers your question. But that’s because any answer I can give you is incomplete and assumes too much of you. These decisions have a lot of nuance and are very personal.
I cannot stress enough the importance of making sure you understand your situation, your appetite for the various risks you may face, and the options available to you. Make decisions based on this understanding and choose what you feel comfortable with.
Find a financial advisor
If you have questions about your investments and retirement situation, a financial advisor can help. Finding a financial advisor isn’t difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started today. You can also check out SmartAsset reviews.
Planning to retire? Use SmartAsset’s Social Security Calculator to find out what your benefits will look like in retirement.
Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid—held in an account that is not at risk of large swings like the stock market. The trade-off is that the value of liquid cash may be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance and tax topics. Have a question you’d 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 he has been compensated for this article.
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