Short-term frugality is risky, but doable
My husband, age 62, decided last month that he would not be able to continue at his present job until our target retirement at age 65. His last day of work was last Friday! We both totally panicked initially and really looked around for another job. But during that process it occurred to us: There might be a chance that we might, financially, be able to retire now even though our income will drop from $114,000 to $5,000 a year. Are we crazy to think we can do this? We hope to live on our cash ($100,000), along with generating some extra income, until age 70 to max out our Social Security. We also hope to let our nest egg ($600,000) grow for as many years as possible without withdrawing. The only way we are able to do this is to lower our monthly bills to $1,250 a month! That includes our housing, utilities, life insurance, transportation costs and cellphone. So, my question is, “Are we nuts?”
What is slightly peculiar about your plan is that you went from planning on fully retiring at 65, with a fully activated retirement income, to quasi-retiring at 62 and now activating your full retirement income at 70.
I’m not suggesting that’s a bad idea because you clearly can see the difference between Social Security benefits at age 62 and age 70. But it certainly is a pretty big change of plan. You went from having a solid work income then transitioning to a solid retirement income, to a solid work income transitioning into eight years living like you never lived before, then transitioning into a relatively abundant retirement. That’s not bad, but it is weird. Think about your current state as retirement purgatory. You are neither fully working nor fully retired, and the final verdict has yet to be read. If you play your cards right, age 70 will bring great relief. If your plan begins to unravel like a poorly-made sweater, you may find yourself angry with the person in the mirror.
Let’s explore what happens at age 70. Even if your $600,000 doesn’t grow a penny between now and 70, it should be able to generate about $1,500 per month in income indefinitely ( based on a 3% distribution rate). I’m going to guess your Social Security retirement at about $2,800 per month at age 70 which, combined with the income generated from your nest egg and pension you have will take your retirement income to about $4,800 per month. That’s quite a departure from the eight years of $1,250 per month living you’re about to embark on.
You must have asked yourself, “What could possibly go wrong during the next eight years?” Your list of potential money emergencies likely includes major medical expenses, stock market meltdowns and a bevy of unforeseen and involuntary financial emergencies. Your plan to mitigate these expenses is proba- bly to dip into your nest egg or take social security early, thus activating your retirement. It’s a delicate balance between holding out as long as you can and not depleting your nest egg before activating your full retirement income strategy, thus lowering your ultimate retirement income.
Like most Americans, your biggest concern should be funding health care. Monthly premiums until you reach Medicare at age 65 may be higher than you think. And Medicare supplements aren’t exactly cheap, either.
You are wise to take the pressure off both your $100,000 in savings as well as your nest egg by working part time over the next eight years. The sooner your $100,000 in cash is depleted, the riskier your venture gets. You can preserve that savings by creating income on a monthly basis via work, just as you have for the last several decades.
As I often remind hopeful retirees, a successful retirement is only really measured post-retirement (death). The actions you take early on in retirement might look good and generate feelings of planning success, but you won’t really know the impact of those decisions until the math plays out over the course of your entire retirement. Typically, I see people spend liberally for the first five to seven years of retirement, which then backs them into a corner for their remaining years. Before they know it, they’re eating the goose which had been laying the golden eggs.
Cathy, it appears you and your husband are actually trying to do the opposite. You’re tip-toeing into retirement spending and then cranking up the income later in retirement. Your plan will work if you’re able to stay healthy and protect your nest egg from intrusion.
Good luck, and try to keep your hands off the goose.
You must have asked yourself, “What could possibly go wrong during the next eight years?”