Retirement: "Just Knowing"
Alternatives including a Roth conversion
Somehow, Grace Liu reached her 67th birthday, despite a battle with breast cancer, the tragedy of the premature death of her first husband Henry when they were both 40, and the more timely death of her live-together friend Benjamin at age 90.
In every way, Grace’s job saved her. She lives in an academic world, my world, managing a leadership academy within a business school. A wealthy donor was relieved of some of his money by a convincing dean who thought every graduate student needed “off-curricular” leadership skills, a set of short courses taught by adjuncts who were tugged away from their day jobs a few hours each week to host sessions.
A new dean has new fundraising targets and objectives, and Grace may be ready to retire. The toll taken by health, widowhood, and work has been expensive. Grace has persisted through emotional hardship and won.
Her question: “Can I afford retirement?” My response: “Maybe.”
I have been reading this question lately. Anxious, single women in their 60s who are ready for some peace of mind. Relief from the uncertain path of their future financial lives. Their paths may not be abundant, but they could be.
Just knowing is the goal.
Sharing Grace’s Finances
The question, “Can I retire now?” is answered by knowing whether Grace’s financial resources can sustain her for the rest of her life.
A family with a long health history and a normalized health prognosis sets Grace’s maximum age at 95 for our planning purposes. Grace has been receiving a widow benefit under the Social Security system since 2017, and she intends to begin withdrawing her Social Security retirement benefits in a year when she formally retires from her leadership academy post.
Grace’s retired life needs funding from age 68 through age 95. Here is what she has going for her:
Grace owns her home outright, valued at $380,000, in Magnolia, Texas, just north of Houston
Grace’s employer-sponsored 403(b) plan has a market value of $980,000, with 5% contributions and a 100% employer match for one more year
Grace holds $35,000 in a bank checking account with B of A
Grace established a brokerage account with Schwab, and the market value of her holdings is $95,000
Grace uses credit cards to fund spending but pays off the debt in full every month
“Just Knowing”
Grace’s baseline financial plan, in which she works another year and then begins supporting her lifestyle with Social Security retirement benefits and retirement plan withdrawals, permits her to spend $76,900 every year above what she pays for taxes and homeownership costs (property taxes, insurance, etc.). $76,900 is Grace’s discretionary spending cap. I used MaxiFi Planner as my tool.1
Grace can afford to retire if she stays within the summation of her prospective taxes, homeownership costs, and $76,900.
Now she knows her annual number.
To age 95, Grace’s living standards total to a lifetime living standard of $1,629,910.
Can this be improved by tweaking how she funds her retirement?
First Alternative to the Baseline
While Grace is retiring at age 68 and intends to withdraw funds from her 403(b) at age 69, is there a better age to begin withdrawing Social Security retirement benefits?
There sure is.
While Grace has received a widow benefit related to Henry’s earnings since October 2017, if she begins withdrawing SS retirement benefits at age 68, the widow benefit effectively goes away. Grace’s income has been high and her retirement benefit based on her own past earnings is much preferred.
If Grace waits until age 70 to withdraw her Social Security retirement benefits, she will continue to receive the widow benefit and a much higher retirement benefit because she is waiting until age 70.
The dollar impact is substantial.
This “first alternative” choice raises Grace’s lifetime living standard to $1,711,494, an increase of about $81,000 in today’s dollars. She also increased her lifetime Social Security benefits by $100,074 and her federal income taxes by $18,490, but she is much better off net of additional tax.
Can she afford to retire? If she likes her annual spending cap under her baseline plan, she will like the higher spending cap under the alternative. It rises to $80,750 annually, a 5% rise by better planning.
Second Alternative - Add in a Roth Conversion Strategy
Taking a 401(k) or 403(b) plan and converting to a “Roth IRA” is receiving a lot of press today. There are long-term tax advantages to a Roth conversion, while higher income taxes in the near term when retirement money is withdrawn from the employer-sponsored retirement plan.
The “second alternative” begins with Grace’s first alternative of relying on the widow benefit until she reaches age 70, at which point she begins her Social Security retirement benefit. Added is a Roth conversion strategy.
The details are in the attached financial plan, but the outcome is that Grace can increase marginally her lifetime living standard another $40,229 if she adopts a Roth conversion strategy. Her lifetime living standard increases to $1,751,723.
Best money outcomes are obtainable with economics-based planning. Grace knows.
Grace’s question is about retirement. You may have a different, consequential financial decision. How can you apply the same economic insights to your financial situation? DM with me is a start; it is included with a paid subscription. Next week, I begin a rollout of short courses on Teach:able including coaching sessions.
If you are a desktop Substack reader or a free subscriber, hit the subscribe button to see the Teach:able discount and other benefits.
Comments are open.
Solid advice for someone who needs to know now.