Do you have questions about investing, how it fits into your overall financial plan, and what strategies can help you get the most out of your money? You can write to me . Please enter “Revise Portfolio” in the subject line.
Please fix my portfolio,
In your head you feel ready to retire, but in your heart you have an irrational fear that you’re not financially ready to retire. I think my anxiety centers around market uncertainty and not having a source of income (I’ve been working since I was 14). I am currently 57 years old and my wife is 60 years old. I would like to retire within three years at the most. My wife seems to want to work part-time to keep herself busy, but I’m adamant that I don’t want to spend my retirement working.
Most Read on MarketWatch
Can we really retire in a few years and live a reasonable life without running out of money? Should we change our portfolio settings? How should it be demolished?
Our annual expenses will be approximately $70,000 in 2024 dollars, including the need to purchase health insurance and expenses for entertainment and travel.
I have no debt other than the $20,000 loan from my retirement account shown below. This is expected to be repaid within the year. 2 vehicles each less than 5 years old. Together, the house and cabin are worth about $650,000. Our combined Social Security income is expected to be $5,700 per month at age 67 and $7,400 per month at age 70.
Here’s what we have:
head and heart
Dear head to heart,
You are the kind of retirees for whom the bucket strategy was created. There are a lot of different accounts of different types and listing them would be very confusing. It’s certainly difficult to understand things that way.
of bucket strategy This is a type of mental accounting that allows you to visualize your holdings in a more understandable way. Start by organizing your buckets according to tax efficiency. That is, tax-deferred savings, tax-free growth, and taxable savings. This will help you make sure you’re saving in the right place for the next three years until retirement. The goal is to diversify your income sources and be able to choose where you withdraw your funds from to minimize your tax burden.
When you start spending money, you start thinking about buckets of time frames. One is short-term, which is primarily cash, one is medium-term, which is more conservative, and one is long-term, which is more aggressive. In such cases, you will need to adjust your investments to make them work for you. For example, you don’t want to put individual stocks in a short-term bucket and cash in a long-term bucket.
It is recommended that you clear expected inheritance from the list. We don’t know what will happen and we can’t rely on it. If you end up inheriting a large amount of money, you can adjust your plan accordingly without having to count your chickens before they hatch.
tax deferral bucket
Group all tax-deferred retirement accounts into one bucket: 457(b), 403(b), and employer-sponsored plans. These now total approximately $943,000. There are two and a half years left before that money is available without penalty, but the wife can already start drawing from the savings if she wants. That being said, once you start using that money, you’ll have to pay taxes on it as regular income.
Also, currently you must start withdrawing money from these accounts when you turn 73. Minimum necessary distribution rule. By the time you reach that age in 16 years, these savings could be worth more than $2.5 million, assuming an average growth rate of 7%. You can continue to grow that bucket over the next few years, or you can start using it up early, it’s up to you.
duty free bucket
Your Roth IRA targets a bucket of tax-free growth. The value of these accounts is currently $260,000, but because you prepay taxes on your Roth contributions, no amount of growth will affect your taxes. You can take out the money you put in at any time, but you have to wait until age 59 1/2 to take out the growth without penalty.
So if you need a cash injection over the next few years, this bucket is a good choice, but if you don’t, it’s a good choice to use last as the growth is tax-free. If you leave this money alone, you could be worth $1.2 million by the time you’re 80.
Although you didn’t mention heirs, Roth accounts are also the most advantageous to leave on death because your beneficiaries don’t have to pay taxes on the balance for 10 years.
taxable bucket
Since you have funds in your brokerage account and cash, you probably don’t need to access Roth funds early. The goal is to have enough cash on hand to cover your expenses from the time you retire until Social Security kicks in and your RMDs start immediately. Then, if you need it, you can choose which account is best for you.
If you retire at age 60, you’ll need to cover expenses of $70,000 a year for about 10 years left.
This is where a good financial planning software can come in handy. Because the software allows you to calculate exact numbers and input all these variables and time frames. But just by looking at the bucket and doing a little behind-the-scenes analysis, you can see that the $1.25 million you have now will definitely cover your expected expenses. In fact, most of it will be skimmed off the top, meaning that even a modest return of 7% can actually increase your account over that period.
However, predicting your retirement expenses is not an exact science. Perhaps $70,000 per year may actually be a low amount, especially if you don’t factor in future medical costs or other emergencies. Or maybe once you retire, you might want to have a little more freedom while you’re still healthy and having fun.
And when the time comes to put your spurs on, you may decide that’s not what you want to do. There is a possibility that you will get some kind of job in the future, but it will be driven by your passion, not your bank balance.
You can also participate in conversations about retirement. .
