I am a single woman with no children, I will be 63 this year, but my family has longevity, so I use 100 years as a life expectancy benchmark to plan my retirement.
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 purchased a $200,000 annuity for added security. I still have a $125,000 mortgage and will need a new car soon. My salary is $135,000 per year. I hope to continue working, but I don't take it for granted and want to prepare for the layoffs that seem to happen often.
I expect my expenses in retirement to be around $100,000 per year.Should I convert some of my savings to a Roth and take the tax now? And at what age can I retire without worry?
– Jan
I think you're in good shape. There are significant gaps in the information you have provided, but I will explain the reasonable assumptions I used to fill them before explaining where I think you stand. As for converting money to a Roth, yes, I think a Roth conversion strategy might be helpful for you, although I don't think I'd recommend doing it all at once. You may consider spreading the conversion over several years. (If you have similar questions about retirement planning, consider connecting with a financial advisor.)
I don't want to shy away from answering your question, so let me quickly walk you through some of the assumptions I had to make. I'm not saying these assumptions are “right” or that you should use them as a goal. Adjust them as necessary when making your final decision. »
Investments: You said you own $1.4 million in “stocks”, which I hope also includes bonds of various types, or that you at least plan to reduce your exposure to stocks in the near future . I thought you would have a classic 60/40 wallet retired.
Social security: Only knowing what a year of your salary is, I used the average Social Security benefit of $1,907. You can look at your own Social Security statement or income statement to get your specific benefit.
Annuity: I assumed you had a deferred income annuity and would start making a lifetime payment in five years. A popular online annuity estimator gave me a monthly payment of $1,618 and I assumed no increase in inflation.
(Keep in mind that everyone's retirement outlook is different. This is where having a financial advisor guiding you through the planning process can help.)
Given these assumptions, a Monte Carlo Analysis suggests that a reasonable retirement goal would be in your late 60s. However, with more careful and precise planning, you could potentially retire sooner.
For example, with a life expectancy of 100 years, you expect to have a longer retirement than most people will need to plan for. It is wise to incorporate this longer time frame as you have done. But have you specifically thought about how your spending might change along the way? In most basic retirement planning scenarios, we assume that expenses generally increase with inflation. That's what I did here, but that's not always the reality.
Medical costs tend to increase at a faster rate, while other expenses such as travel, entertainment, food and housing may decrease – especially in older age. Suppose you decide to plan to increase your spending for a while, but then decline in real terms as you physically slow down. You can then adapt your planning taking this into account. This could significantly improve your projections and give you the confidence to retire sooner.
One way to do 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 combined, your Social Security benefits and higher annuity payments will provide you with guaranteed lifetime income, reducing the risk of running out of money. If these sources can cover your needs, you might feel more comfortable retiring early, especially if you are in good health and long-term care insurance.
Again, I'm not saying that's what you should TO DO. I'm just giving you an example of something you could TO DO. Another powerful tool that can be of great use is the simple willingness to be flexible with your spending and spend a little less when the market takes a hit.
The main thing to remember is that you have different options depending on your planning preferences. (A financial advisor can help you build a retirement income plan tailored to your needs.)
Roth conversions are certainly worth considering and I suspect they would improve your retirement outcomes. However, I wouldn't do all of this at once. You're probably currently in the lower end of the 24% marginal tax bracket. Depending on your retirement expenses, you'll likely be in the 25% or 28% bracket if the Tax Cuts and Jobs Act will set in 2025 as is currently planned.
Doing Roth conversions 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. Pairing this with Social Security deferral, as mentioned above, could be particularly tax-efficient. Taxable income such as withdrawals from tax-deferred accounts and payments from your annuity can increase the portion of your Social Security benefits that is taxable, so making conversions before you start receiving them can reduce the tax on your benefits later.
Since you haven't specified how much of your $1.4 million is currently in tax-deferred accounts, it's difficult to know exactly what impact a flat-rate conversion would have on your tax rate. If you convert all of your tax-deferred assets now, they could be spread across the marginal tax rates of 24%, 32%, 35%, and 37%.
Rather than doing this, you might consider spreading it out so you don't subject yourself to these higher rates. You can start by aiming to fill the 24% bracket (then 28% after TCJA) each year. (This type of tax planning is an area in which a financial advisor I might be able to help you.)
Generally speaking and based on some assumptions, I think you're in a good position, even given your expected longevity. I think you can put yourself in a better position by thinking carefully about how you want to plan for your retirement income and spreading out your Roth conversions over multiple tax years. You may find that a personalized approach to retirement can provide a more optimal outcome.
If you have tax-deferred retirement accounts, you will need to plan required minimum distributions (RMD). These mandatory withdrawals begin at age 73 (75 for people who will turn 74 after December 31, 2032). Smart assets RMD Calculator can help you estimate your first RMD amount. Keep in mind that failing to meet your RMD may result in a tax penalty.
A financial advisor can help you plan RMDs, execute Roth conversions, and develop a holistic plan for retirement. Finding a financial advisor doesn't have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
Keep an emergency fund on hand in case you face unexpected expenses. A emergency fund must be liquid – in an account that does not present a risk of significant fluctuation like the stock market. The tradeoff is that the value of cash can be eroded 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 prospects and offers marketing automation solutions so you can spend more time converting. Learn more about AMP SmartAsset.
