I turn 63 this year, but my family lives longer so I’m using age 100 as my life expectancy marker for retirement planning.
I have a combined portfolio of $200,000 in 5% money market, and $1.4 million in stocks in a 401(k) (mostly dividend stocks) and a Roth. I just bought a $200,000 annuity for protection. I still have a $125,000 mortgage and will need a new car soon. My salary is $135,000 a year. I hope to continue working but I’m not taking it for granted and want to be prepared for the layoffs that seem to be happening more often.
I expect my expenses to be around $100,000 a year in retirement.Should I convert some of my savings to a Roth and take the tax hit now? Also, at what age can I retire worry free?
– Gen
I think you are in good shape. There are some meaningful gaps in the information you provide, but I’ll explain the reasonable assumptions I used to fill them in before I explain where you stand. As for converting the money into a Roth, yes, I think a Roth conversion strategy could be valuable to you although I don’t think I would recommend doing it all at once. You may consider spreading the conversion over several years. (If you have similar retirement-planning questions, Consider engaging with a financial advisor.)
I don’t want to shy away from answering your question, so let me quickly state some assumptions I had to make. I’m not suggesting that these assumptions are “correct” or that you should use them as targets. Adjust these as needed when you make your final decision.”
investment: You said you have $1.4 million in “stocks,” which I expect includes some bonds of various types, or that you plan to at least reduce your equity exposure in the near future. . I assumed you would have a classic 60/40 portfolio In retirement
social Security: Just knowing what is a year of your salary, I used it Average Social Security benefit of $1,907. You can check your own Social Security statement or earnings record to find your specific benefit.
Annually: I assumed that you have a deferred income annuity and you will start making lifetime payments in five years. A popular online annuity estimator gave me a monthly payment of $1,618 and I didn’t factor in inflation.
(Keep in mind that everyone has a different approach to retirement. Here’s a Financial advisor can help you with the planning process.)
Given these assumptions, A Monte Carlo analysis suggests that your late 60s would be a reasonable retirement goal. However, with more caution and precise planning, you can potentially retire earlier.
For example, with a life expectancy of 100, you’d expect a longer retirement than most people would need to plan for. It makes sense to include this long timeline as you have. But have you specifically thought about how your expenses might change? In most basic retirement planning scenarios we assume that expenses generally increase for inflation. That’s what I did here, but that’s not always the reality.
Medical costs add up quickly, while other expenses such as travel, entertainment, food and housing can decrease – especially as you get older. Suppose you decide to plan to increase your expenses for some time, but then Reduce in real terms As you physically slow down. Then you can make your plan to account for it. This can significantly improve your projection – and give you the confidence to retire earlier.
One way to achieve this is to create a substantial “income floor” of guaranteed money. You can do this by delaying Social Security until age 70 to maximize your benefits. When paired together, your higher Social Security benefits and annuity payments will provide you with guaranteed income for life, reducing the risk of running out of money. If these resources can meet your needs, you may feel more comfortable retiring earlier, especially if your health and Long term care insurance.
Again, I’m not saying this is who you are should do I’m just giving you an example of something can do do Another powerful tool that can go a long way is a simple willingness to be flexible with your spending and spend a little less when the market takes a hit.
The bottom line is that you have several options depending on your plan preferences. (A Financial advisor (can help you create a retirement income plan tailored to your needs.)
Roth conversions are certainly worth considering and I suspect will improve your retirement results. However, I won’t do it all at once. You are probably now in the lower 24% marginal tax bracket. Depending on your retirement expenses you will likely be in the 25% or 28% bracket if Tax Cuts and Jobs Act The sun will set in 2025 as it is currently scheduled to do.
Doing a Roth conversion allows you to pay taxes on that money while you’re at a lower rate. Then, any growth on that converted money can be withdrawn tax-free later. Combining this with delaying Social Security as described above can be particularly tax-efficient. Taxable income such as withdrawals from tax-deferred accounts and your annuities can increase the portion of your Social Security benefits that is taxable, so making conversions before you receive them can reduce taxes on your benefits later. .
Since you didn’t say how much of your $1.4 million is in tax-deferred accounts, it’s hard to know how the lump sum conversion will affect your tax rate. If you convert your entire tax-deferred assets now, it can spread across 24%, 32%, 35%, and 37% marginal tax rates.
Instead of doing that, you might consider spreading it out so you don’t subject yourself to those high rates. You can start by looking at filling the 24% (and then 28% post TCJA) bracket each year. (This type of tax planning is an area that a Financial advisor may be able to help you.)
Roughly speaking and relying on some assumptions, I think you are in a good position even considering your expected longevity. I think you can put yourself in a better position by carefully considering how you want to plan your retirement income, and by spreading your Roth conversions over several tax years. You may find that an adaptive approach to retirement can provide a more favorable outcome.
If you have tax-deferred retirement accounts, you’ll want to plan for it Required minimum distribution (RMDs). This mandatory withdrawal begins at age 73 (75 for those turning 74 after December 31, 2032). of Smart Asset RMD Calculator This can help you estimate how much your first RMD will be. Remember, failure to satisfy your RMD can result in a tax penalty.
A financial advisor can help you plan for RMDs, implement Roth conversions, and create a well-rounded plan for retirement. Finding a financial advisor is not difficult. SmartAsset’s free tool You’ll be matched with up to three vetted financial advisors serving your area, and you can make a free initial call with your advisor matches to decide which one is right for you. If you are ready for it Find a mentor that can help you achieve your financial goals, Start now.
Keep an emergency fund in case you incur unexpected expenses. N Emergency fund Must be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be reduced by inflation. But a high-interest account allows you to earn compound interest. Compare the savings accounts of these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.
