A man in Massachusetts writes to ask if he can quit the rat race yet.
“[I] just turned 61 and of course got laid off…so I’m thinking it’s time to hang up my hat in the job ring,” he says. He and his wife have $350,000 in individual retirement accounts, and another $200,000 in Certificates of Deposit and an emergency fund. They have paid off the mortgage, have no car payments, and no other fixed costs beyond utilities, tax and insurance costs.
On Social Security, “I’ll get $2,035 before taxes if I go at 62 and our monthly expenses are roughly $2,700 or so. We’re pretty frugal…that’s including health insurance.” His wife’s Social Security, he says, is “way less.”
“Think I can hang it up comfortably?” he asks the Reddit community.
My take: Here’s to you, Massachusetts Guy!
You’ve held off the forces of ageism until you were 61. You’ve saved your money, lived frugally, paid off your house, and saved up $550,000. You aren’t even stuck with car payments, like so many people. You have a budget and you and your wife estimated your monthly expenses at $2,700, meaning $32,400 a year.
Read: Worried about your job? How to plan for a layoff
The smart move now is to talk to a financial planner to make sure you can cover all the bases. Preferably one that gets paid a straight fee for giving you advice, not commissions for selling you financial “products.”
But at this point, if you want to hang it up, you’ve got so many options it’s hard to know where to start. That’s because you are sitting on three big retirement assets: Your savings, your Social Security account, and your home.
Your savings: $550,000.
Value of your home? You don’t say, but the median value of a home in Massachusetts is about $600,000.
And the value of Social Security? You say you’re in line to get $2,035 a month if you start claiming at 62. To buy that sort of guaranteed income for a couple in the private annuities market would cost you about $560,000.
Total worth: About $1.7 million, not counting Medicare, or the value of the social safety net in Massachusetts (which is pretty good).
(Your home’s main value is rent-free living, but of course in an absolute emergency you can always tap the equity, either through a loan, or a sale, or conceivably a reverse mortgage.)
What are your options?
If you start taking Social Security next year, when you turn 62, you’ll collect $24,400 in your first year. It will rise each year in line with inflation. If you spend down your savings using the so-called 4% rule that would generate another $22,000 in income in the first year.
Total income: $46,000 a year in your first year, and rising with inflation after that. Well above your budget.
(The 4% rule, coined by financial planner Bill Bengen, argues that you can safely make your investments last your lifetime by withdrawing no more than 4% in your first year, and then raising the amount in inflation thereafter. This depends on some assumptions about how you invest.)
On the other hand, if you delay claiming Social Security till you turn 70 your benefits will jump by nearly 80%, to an estimated $43,000 a year. (In today’s dollars—adjusted for inflation.)
That alone will more than cover your estimated budget. Without even starting in on your savings.
But that would leave you living on your savings, your wife’s Social Security, plus any wages or other income, for the next nine years.
Would that be a challenge? Not if financial history, theory and current market rates have any say.
Inflation-protected U.S. Treasury bonds, with very low risk, currently yield nearly 2% a year above inflation.
Global stocks, based on history going back over a century, should be expected to generate returns of about 5% a year above inflation over time—although, as we all know, those returns vary a lot from year to year.
So for example a portfolio of 50% global stocks and 50% TIPS—Vanguard Total World Stock
VTWAX,
and Vanguard Inflation-Protected Securities
VAIPX,
say—should be expected to generate average annual returns of 3.4% plus inflation.
If we figure inflation averages about 3% over the next decade that means a $550,000 portfolio should be able to generate average returns of nearly $20,000 a year and rising. And that’s without even touching the principal.
Oh, and it’s not either-or. Each of us can choose to start Social Security at any point between 62 and 70, and each month we delay the amount we get goes up.
As usual, it’s not simply a matter of whether we have saved enough to retire yet—but also what sort of retirement we can afford with the amount we’ve saved. Massachusetts Guy seems in good shape.