Can You Afford Retirement?
A generalizable solution for near retirees
Jenny and Bobby Maguire are retired.
Took their decision over a toast at their 67th birthday party, a date they share in common.
They’ve turned toward tennis and fishing, and away from their careers as commercial lines underwriters, where they had first met in an underwriting training program. Insurance doesn’t have to be boring!
A life in Tampa, three kids raised, and four grandchildren, all boys, to carry the Maguire legacy forward.
Why retire now? They have their health, and they don’t want to risk missing a mobile, outdoor life for a couple more years of insurance work. The choice is easy emotionally. Financially, there is uncertainty.
Uncertainty about longevity and health.
Uncertainty about the bills being paid.
Uncertainty about unforeseen risk.
The Maguire’s Pot of Money
By some measures, the Maguires did not build a fortune.
Together, they have 401(k)s worth $1.3 million, a brokerage account with $200,000 in cash, and Social Security retirement benefits ready to be claimed. Fortunately, their home is paid for, and their credit card debt never accumulates because they automatically pay their credit card statement in full each month.
What factors did the Maguires consider when deciding whether they could afford retirement?
Today, they have 1.5 million financial assets, which are invested but can be spent down.
Longevity. It is in their DNA, and they think age 90 is a reasonable max age.
Home Equity. They plan to live in their home until the last one dies, at which point the home will be sold, and the equity will be shared equally among their three children.
Monthly Social Security retirement benefits are estimated to be $6,370, and annual Medicare Part B premiums are estimated to be $4,573 at age 68 and increasing thereafter.
Taxes. Financial accounts and financial transactions may have tax consequences.
Projected investment performance with their 401(k) plans.
The Personal Finance Economics Solution
Understanding the financial resources during retirement is the starting point for baseline planning. Households share the same set of factors to consider.
In the Maguire’s case, Social Security provides about $6,370 per month, indexed for inflation. $1.5 million of 401(k) account value is a chunk of money from which they can pay themselves a monthly income. What they don’t pay themselves remains invested and helps grow the remainder of the account. Income taxes will be due on 401(k) withdrawals. And the Maguires want to consider their resources net of taxes and Medicare Part B premiums for 23 years.
Their solution:
The Maguires can spend, in total, $160,476, annually assuming their max ages is 90.
That is their annual standard of living cap that informed their decision to retire.
Guess how their actual spending broke down last year? The total was $70,833. Why the difference? They are not strictly comparable numbers. Spending is spending; household accounting. Essentially, a record of their transactions detailing how they lived.
The “can spend” looks at spending from the perspective of the savings created, the value of SS retirement benefits, and the returns of low-risk investments. The “can spend” number is the expert result.1
In other words, the Maguires can have greater confidence that they have the resources to maintain a higher standard of living.
No wonder they are happy.
The “can spend” number will change if the Maguires want to assure funds until each is 95 or 100. It will change if the Maguires want to endow their children with $ 100,000 of cash, along with a proportionate share of home equity at the death of the second. The cap spend number will change if they want to set aside emergency funds or a budget for long-term care. But, under current assumptions that consider their preferences, they can double their living standard.
For the Maguires, the “Can we Afford to Retire?” question can be answered with a resounding “YES.”
What Are Your Retirement Questions?
When to claim Social Security benefits
Your ideal retirement date and the trade-offs
Choosing between a Roth and a regular IRA
are topics we address in Chapter 7 of our book, part of a paid subscription.
Reduce the uncertainty about your financial questions.
You can always schedule a free 15-minute call through my Teach:able site to learn whether coaching services are right for you.
If you have a financial advisor, it is likely that they do not yet use economics-based financial planning techniques. It is the future. Send them my way. I can teach them how to help you.