Marketwatch posted an advice type of column where a reader asked about his retirement readiness as he just got laid off and now would like to be done with working. He is 61, no mention of his wife's age or whether she is still working. They have a combined $350,000 in qualified retirement accounts and $200,000 in taxable accounts. He said his Social Security will be $2035 at 62 and his wife's will be "way less." At a minimum, her SS will be half the $2035 or $1017.50 but it seems to me that knowing whether she can take that next year when he takes is $2035 is crucial information. He said their monthly expenses are $2700/mo.
Brett Arends from the Marketwatch staff took this on. He was very optimistic for these people saying
...if you want to hang it up, you’ve got so many options it’s hard to know where to start.
I wouldn't go that far but to be clear, these people are not up a creek. They don't quite have as many options as I think Brett is implying in his first reaction though.
The first thing I'll say is if these peoples' situation is anywhere close to you or where you might be between now and when you plan to retire, look at your expenses closely. I don't mean in the context of cutting them although maybe that's a good idea, but making sure you have an accurate picture. I seriously doubt the $2700 aka $32,400 is accurate.
These folks live in Massachusetts and own their home outright. Brett, in sizing up their situation notes the average home value in Mass is $600,000. According to SmartAsset.com, a $600,000 house would have a property tax bill of $6720. So are they really spending $25,680 ex-property tax? That seems unlikely.
I maintain our budget on a spreadsheet. There a column off to the right of the various monthlies where I track things that are not monthly but maybe annual or twice per year. Examples of this type of expense include $450 for tax prep, $500 for firewood, $2000 for homeowners insurance and so on. This list starts the year at about $9000 including $2000 for property tax. If I were in the position of the advice seeker I would add this $9000 into the total of our monthlies to get a better picture of our true expenses. But there's more as we talk about all the time. What number should you budget, maybe based on previous experience, for unexpected one-off expenses? Look back and make an educated guess, $1000/mo? More? Less? For example then, our monthlies add up to $46,000/yr but figuring one-offs we can budget for and $1000 more per month for ones we can't gets us up to $68,000. That's not every penny but is a much better picture than just thinking in terms of fixed monthly expenses.
Do they ever want to take any sort of trip? Even just a long weekend down the Cape or in Vermont would cost some money. One small hack for this could be to spend any money from last year's budget for unexpected one-off expenses. Budget $10,000 for last year, only use $7000? Great, $3000 for traveling this year.
This is a worthwhile exercise to do to create context for yourself in case, like the advice seeker, your hand is forced at work.
Brett then goes on to discuss applying the 4% rule to their $550,000. A straight 4% works out to $22,000 in year one, when he is 62. Not mentioned is the potential income tax to be paid depending on where the money is taken from, taxable accounts or IRAs. At low incomes like we're talking about, taxation can be quite reasonable but not mentioned by Brett is advice to ask an accountant how much tax would be owed. If they don't take Social Security right away, taking their $22,000 from IRAs could be tax free for falling under the standard deduction. If instead of being 61, this person was 58, then there is a potential penalty for taking from IRAs. I say potential because there is a way to avoid the penalty which would be worth learning about if you are in the advice seeker's situation and younger than 59 1/2.
But any tax owed is yet another expense to contend with.
In terms of my opinion on what they should do, knowing the wife's age is important and we don't know whether she is still working. If she is close in age, two years younger or less and not working, I would encourage him to wait until she is 62 before he takes Social Security. Again this presumes they are close in age. With relatively low expenses, I think he needs to try to find some sort of income stream to tide them over for, in our current example, the next couple of years or maybe just one year for a one year difference in age between them.
A 62 year old waiting a year or two is a whole different thing than waiting until 70. He clearly does not want to wait that long. If he can hold out for a year or two in this way, his SS will go up 8% (plus any COLA) each year. $2035 becomes $2197 a year later and becomes $2373 two years later and now his wife is getting $1017.50. While I simply don't believe $2700 in expenses is comprehensive, the scenario of waiting just a little bit gets them to $3400/mo which clearly goes much further. The increase in SS by the brief wait also takes a little burden off the portfolio.
As far as what to do with the money, Brett gives reasonably vague advice about a 50/50 mix of a very broad equity index fund and a TIPS fund. It's reasonably vague based on how much more an actual information an advisor working with these people would need to know.
The chart shows how the two funds suggested did in 2022. The equity fund assumes sequence of return risk and the TIPS fund assumes interest rate risk. These people, implementing this portfolio in December of 2021 might have freaked out and sold. Certainly it would have been a stressful period for them and while equities have made good progress clawing back, the TIPS fund has not.
Going forward, from here if implemented today, what are the risks to this 50/50 portfolio suggested by Brett? The risks are the same, risk the equities go down a lot and risk that interest rates take another big leg higher. Neither is a guess or attempt to predict anything. Those are the risks. Does it make sense to try to mitigate those risks? That is up to the end user but I would want to. Either way, this is a great example for all those posts here exploring sequence of return risk. Implemented at an unlucky time and these people are down 19% or so, more if they still took out $22000 for expenses.
At the start of this post I said the advice seeker and his wife are not up a creek but they are vulnerable, based on their incomplete particulars, they have no margin for error, or at least very little margin for error.
A heuristic for this that we have been throwing around for years here is that something's gotta give in this example. Each of them having some sort of income stream, worked on their desired terms that they hopefully started to cultivate years before seems like a good fit here. And again, for all we know she is still gainfully employed, making enough to cover a meaningful chunk of their expenses. In a different scenario where he hadn't been laid off, instead he was working and wanted to retire from that work, a good fit for that scenario if something's gotta give is to work another year or two.
This was a fun post to explore some thoroughness issues, it provided a good example of sequence of return risk and reiterated the need for flexibility in how we commence our retirement.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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