Did they save enough for life after retirement?
This week we look at a hypothetical couple who feel they began saving late in life and now that they’ve just entered into retirement they question, “Were we ready?”
The situation
Walt, 66, and Gail, 64, moved to Colorado to attend college, fell in love and never left. The couple have three children and four grandchildren, all in the Denver metro area. Gail retired nine years ago and has helped take care of their grandchildren part time while Walt was still working. Walt retired in February from his position in health care administration after 32 years.
Walt was earning $100,000 at the time of his retirement and has a monthly pension of $1,011 per month. Gail receives an PERA pension of $1,349 per month from teaching middle school math for many years. The couple have qualified retirement accounts valued at $920,905 and $78,320 in their checking account. They’ve just begun withdrawing $2,015 per month from their retirement investments.
With the help of their adviser, they have all of their estate documents up to date including a living trust that is properly funded (living trusts are often not properly funded rendering them useless). They have long-term care insurance, a very healthy nest egg, their pensions continue so long as either spouse is alive, and soon they’ll both have Medicare and all the parts of the formula for a comfortable retirement.
Walt’s projected Social Security will be $2,415 at age 66 or $3,208 at age 70. Their home is valued at $425,000 and they owe $107,000 on their mortgage with 10 years left to pay. In 2014 they took out a home equity loan to refinish their basement and owe $14,240.
The couple’s biggest question for What’s the Plan is “Do we really have enough to live the way we want and to travel?” Walt also wants to know if waiting to claim Social Security is the best advice. He has read conflicting answers and hopes that Pam will provide some clarity for their family. Gail and Walt would like to be able to have a budget of $4,500 per month and be able to spend $12,000 per year on trips for the next five years. Recommendations
Investor behavior is one of the most important predictors of financial success.
According to a 2014 Bloomberg study, the average investor received only 2.5 percent between 1985 and 2014 on their investments when almost any index, even inflation, would have been higher.
The couple actually didn’t start late at all. They received and followed excellent advice from their adviser over the last 20 years. Because of that, they are on track to achieve their desired lifestyle. As with anything, a second opinion can never hurt and confirmation of their finances was “just what we wanted to hear!”
I advise Walt to waituntil age 70 to claim his Social Security. The difference between age 66 and age 70 is equivalent to an 8 percent rate of return and meaningful but not understood by most people. Social Security will also factor in cost of-living increases based upon the higher amount. Based on Gail’s PERA numbers, she will be entitled to a spouse’s benefit on Walt’s record, too. This is because twothirds of her PERA is less than 50 percent of Walt’s age 66 benefit. The widow’s benefit down the line is potentially 100 percent of whatever Walt is entitled to at the time of death, offset by twothirds of her PERA.
Walt should supplement his income with his IRA and cash but should not completely deplete their emergency fund.
The couple has just enough assets with a moderate investment portfolio to maintain their current budget and afford to travel indefinitely. If they can average 3 to 4 percent over inflation returns on their investments, they will be on track. Once Walt turns 70, they will turn down the draw from their retirement accounts by the amount of his Socia Security benefit.
When the student is ready, the teacher appears. Walt and Gail were smart to follow good instruction. The math works.
Pam Dumonceau has 24 years of experience and is the principal of Consistent Values, a registered investment advisory firm in Greenwood Village.