CAUTION
ROAD TO EARLY RETIREMENT MAY BE BUMPY
Q
We both recently “retired” after 35 years in education (technically “separated” because we chose to suspend our pension until age 62 when we can receive full compensation). We are both 58 years old. Here’s what we have as we seek to “bridge” until we start pension and Social Security:
$ 20,000 in emergency fund.
$ 70,000 from the recent sale of our rental house.
$ 50,000 in a joint account for health care costs for the next three years or so.
$ 200,000 in annuities.
$ 800,000 in “defined contribution” 403( b) account, accessible at 591⁄ ($420,000 accessible June 2
2018 for wife; $380,000 in December 2018 for husband).
We are planning to use cash and investments first instead of starting our pension early and receiving less due to early withdrawal penalty. Is this doable? Wise? Lunacy?
A
Lunacy seems a bit strong. Risky? Possibly. While I certainly don’t feel like you’ve made a mistake, you will certainly need some luck to ensure success.
You have what few people have — a million bucks and two pensions. If you were 62 years old or older right now, your path would be relatively easy.
Alas, you are not, and it will not be.
Four years may not seem like a big deal, but it is. Now you’re facing seven years of health care expense exposure instead of three. For most people, that would be a deal breaker. Although according to my research, you’re currently eligible for health care coverage in the state of Washington under their teacher retirement provisions, once you begin taking the pension. This is good news, because your retirement strategy still has legs.
However, like most Americans younger than 65, you’re still in a race to age 65 and Medicare eligibility, in which you’ll enjoy significantly less exposure to big-ticket medical bills. The two biggest threats to any retirement plan are health and market risk. Both can deplete a well-funded account at the absolute wrong time. You can mitigate market risk emergencies, to a degree, with the proper asset allocation, but health emergencies can blow through your $50,000 health care fund very quickly.
The first giant piece of luck you’ll need is uneventful health over the next seven years.
Luck aside, you’ll also need to be especially disciplined over the next four years. Looking through the list of assets you provided, the only monies that are easily and cheaply accessible (no penalties) are the emergency fund and the rental house sale proceeds. You’ve got $90,000 to last you until June
2018, when some qualified (retirement) money frees up upon the first person achieving the age of 591⁄ 2.
Come June 2018, whatever portion of the annuities in which the wife is the annuitant become available, as well as
$420,000 from a 403( b). Those remain the only accessible assets until December 2018, when the rest of the assets become easily accessible. At this point, you should still have roughly
$1 million, which would then be responsible for creating an income stream until you reach age
62, when the pensions come available. In other words, you have 21⁄ years of relatively sub2 stantial withdrawals on your
$1 million nest egg. If you can set your income level at or below what your pension amount promises to be, you can easily transition off of your assets and
The two biggest threats to any retirement plan are health and market risk. Both can deplete a well-funded account at the absolute wrong time.
onto the pensions.
Which brings us to the second bit of luck you’ll need to make your plan a success — no matter what your asset allocation is, you’ll need the markets to stay calm from age 591⁄ to 62. 2
Depending on what your living expenses are and how big your pensions are, I’m feeling pretty good about the plan you’ve laid out.
Also: It’s tough to tell whether you’re eligible for Social Security, given I don’t know what retirement path you’re on through Washington. Some teachers are eligible for Social Security, while others are not. Therefore I left it out of my answer.
Obviously if you’re eligible, it makes your retirement plan even sweeter.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money? Email him at AskPete@petetheplanner.com