Retirement Day Has Arrived!
“It is time to retire.
We are excited! We will have all the time in the world to do whatever we want to do without any constraints. This is what we’ve worked for all our lives. We can’t believe the time is here!
The first thing we want to do is travel a bit, maybe a cruise to Alaska, or maybe the fall foliage one. We will have think about that.
Then, we want to fix up the house and the back yard so we have a place to relax. And we’ll need to get a more reliable car so we can take road trips to see the grandkids. Oh, and…. Well, you get the idea.
We have worked all our lives for this time to arrive. This is the time we get to do all the things we said we would do ‘when we have time.’
We agreed when we turned 62 that we would work until our full retirement age. We did not want to wait until 70 ½ because we want to be able to do things while we still feel good, while we are healthy and strong.
We are retiring when the stock market is not doing great, so we won’t want to pull from our 401(k) just yet. Our friend, a financial planner, was talking to us about sequence of return risk. This stock market volatility can really hurt the long-term life of our assets.
My wife and I both come from families that enjoy wonderful longevity, so we are looking forward to many years of fun with each other, with our kids and, of course, with our grandkids.
We want to make sure we make all the right decisions with our money!
Woot woot!!! We saved close to a million dollars while paying the mortgage, raising three kids, putting them all through college, and helping my mom and dad when they are older. Yay us!
On the income side, we have our Social Security income as well as our pension and a small annuity. We will be sitting pretty! Between us, we will be getting $2,800 Social Security + $550 + $400 for the pension and annuity. That is $3,750 a month, plus all our savings.”
One important side note is that this story from our friends is not typical; these numbers are extremely aggressive. Most Americans are not so well prepared.
Nearly 48% of Americans, ages 55 and older, don’t have any nest egg saved for retirement, according to a 2019 GAO study.
A Bankrate study shows only 37% of people could easily handle a $500 car repair. Of those unable to handle it from their monthly budget, 23% would reduce spending elsewhere, while 15% would use a credit card or borrow from family or friends.
That same study says, while savings predictably increase with income and education, even 46% of the highest income households ($75,000+) and 52% of college graduates lack enough savings to cover that same $500 car repair.
According to Fidelity, by 50, you should have six times your annual salary saved for retirement, and by age 60, eight times your salary. This same study states you should have ten times your annual salary by the time you reach 67 years old.
Let’s go back to our friends who are celebrating retirement day. We are super excited for them! They clearly have done a great job saving for retirement. Not only do they have good assets, but they have a nice bit of extra income each month from their pension and their annuity. Great job!!
“And then enjoy your happy retirement day! Go forth!”
“Enjoy the fruits of your lifetimes of labor.”
Since their combined annual salary was $110,000, they are not quite at ten times, per Fidelity Investments study, but when we include equity, they look pretty darn good.
What did you just say? Include equity? Why would we do that? We cannot spend our equity!
“It is stealing from your kids!” – a financial “guru” on a local TV station used this phrase when he was describing a reverse mortgage. I am guessing he also thinks it is stealing from your kids when you go on vacation, or pay too much for a game of golf because you always wanted to play that course. How dare you enjoy your retirement!
Would you ever consider not spending your 401(k) so you could preserve it for your heirs? Would you set your IRA up on the mantle so you can admire it and dream of the day they can spend it—when you’re dead.
You spent your whole lives saving for this day, plugging money away into your 401(k)s and your IRAs. You also spent your lives working so you could make the mortgage payment, thereby building equity through your hard work.
It is all the same, it is your pool of money, hard earned through a lifetime of effort. But by some long-outdated folklore, more than half of that hard-earned money should be set aside to give to your kids. Especially when a significant portion of those hard-earned funds are taxable and therefore need to be managed alongside non-taxable monies so as to minimize tax liability.
Seventy-four percent of seniors do access their equity but under the guise of a cash-out refinance of their current forward mortgage or a HELOC, why?
Prospective clients say, “If I choose a HELOC or a traditional refinance, everyone will agree that it is a great decision.”
When their friends or kids hear the words “reverse mortgage,” they say:
“They are going to take your house.” Not true! As long as you pay your property taxes, insurance, and HOA, if applicable and live in and maintain the home, no one can take your home.
“You know you don’t own your home any longer.” Not true! We are a loan on your home just like the one you have now. You still hold title to your home just like you do today.
“They can kick you out anytime they want.” Not true! See above – pay your taxes, insurance, HOA, live in and maintain the home, no one can “kick you out” ever!
“Your kids will get nothing.” Not true! Assuming we don’t have another 2008, there will likely be very good equity remaining for your heirs.
Our happy couple is about $700 a month short of being able to comfortably pay their monthly expenses. There is a little bit of disappointment as they review their bills versus their income, but they have saved up a good amount of extra assets so they should be fine. Right?
Back to all the things they are excited to do now that the big day is here. The kitchen remodel, new floors, and two new baths is going to run about $65,000, and the new back yard will be about $20,000. They set their budget for an SUV at $30,000. They also planned one cruise and a trip to see their aunt. Those two together will be about $10,000.
Altogether, that is about $125,000, and that will get them all set up for the future.
Oh wait, they need to withdraw at least $700 a month to cover the monthly shortfall. They don’t want to just barely have enough to get by, so they decide on $1,000 a month. Their first year withdrawals will be $137,000.
That will leave them $246,000 for their safety net, travel fund, medical fund if they ever need it. Pretty good!
But, after three years, that will be down to $210,000 because of their monthly withdrawals, and that doesn’t include any more travel. It will be down to $174,000 after three more years. That is only six years into their retirement, they will be 72 years young and feeling like they’re running out of money. What about inflation, interest rate risk, sequence of return risk.
They know they are among the lucky ones. They were able to save a good amount of money and are glad they did this exercise today rather than five to ten years down the road when some of those options might not exist.
Check out Wade Pfau, and Barry and Stephen Sacks, and many other retirement researchers. Take some time to read about the stand-by line of credit, and Home Equity as a Last Resort. Another great article about using equity addresses passive strategy versus active strategy. Take some time to do your own research to see how utilizing home equity can extend the life of your retirement assets.
And then enjoy your happy retirement day! Go forth! Enjoy the fruits of your lifetimes of labor.