Wish to retire in 7 yrs. and request financial advice

[afr]

Hi,
I'm currently 60 yrs. old(wife is 55) and would like to retire in 7 yrs. We had a very late start due to a poor business decision I had made-Vanguard accounts

TIRA(non-deductible)-STAR-$132,000/wife-$104,000(we both max yearly)
ROTH IRA(started when we qualified and will contribute towards this yr due to income drop)-STAR-$16,000/wife-$17,000
We were in the 24% tax bracket and I was planning on doing gradual Roth conversions in retirement, when I anticipate being in a much lower tax bracket.

joint taxable account-
VEXAX-$4600
VGHCX-$13,000
VMLTX-$17,000
VTIAX-$8500
VTSAX-$74,000

401k(pooled office account thru my employer and managed with Raymond James-about 60%equity/40%fixed, no match and unable to accept any rollovers. I max out yearly and keep in order to reduce my taxable income)-$335,000 Wife has no 401k available

Emergency cash account with AMEX online savings(earning 1%)-$49,500

Currently have $149,700 remaining on a 30 yr fixed mortgage of $233,[email protected]%(home currently worth ~$350,000) and we also add an extra $500/mo principal pmt.
Auto loan with $11,250 remaining on a loan of $13,[email protected]%

Any advice would be appreciated. Thank you

[Peds]

STAR is an old fund. No reason to use anymore
healthcare fund shouldnt be in taxable.
sucks about raymond james.
refinance home, wouldnt add extra.
stop buying cars with loans.

so you didnt actually give important info.....
total income, savings rate, marginal rate (fed + state)

you have 750K in investments (ignoring house). all i can see you saving is 31.5K/year. at 6% for 7 years you will have 1.4MM. so you can spend 56K + delayed SS.

is that enough? iono....you didnt say.....

[jfoxcpacfp]

Did you realize you can do backdoor Roth conversions every year, no matter how much income you earn in a year? If not, let us know and we’ll provide some links.

How much do you make in a typical year? How much of that do you save?

[Andrew Musbach]

Here is a high level of the overview/process you can DIY to get an idea of where you stand. I like to start with the big picture of where you are now versus where you want to be before trying to do some of the tax planning strategies or looking at the investment funds.

Step 1 – Get organized (which you’ve already done a good job doing here)

• List out all your investment assets (IRAs, taxable accounts, bank accounts, 401ks)
• List out all your income sources (Social Security, pensions, part-time work in retirement, etc.)

Step 2 – Understand your expenses

• Annual “base” spending – things like property taxes, food, health insurance, etc.
• Annual variable expenses – traveling, eating out, entertainment, etc.
• One-off expenses – weddings, new cars, family trips, etc.

*If you want to do a very simplified exercise to look at a ballpark of your spending, you can take your gross income (line 1 on your tax return) and subtract your taxes (state and federal). Then subtract out anything you saved to a bank account or taxable investment account. If you didn’t save it, then you spent it.

Step 3 – Understand how much you’ll need to withdraw from your investment accounts

• Annual expenses (step 2) – annual income sources (step 1) = amount needed from investment accounts

*Again, this is a simplified exercise here, as you get closer, you’ll want to be more refined with your strategy of when to take Social Security and that will impact this equation.

Step 4 – Check if your investment withdrawal rate is “safe”

• There is a general rule of thumb that if you have a diversified portfolio of stocks/bonds you can safely withdraw approximately 4% from your investment accounts each year.

*So, looking at step 3, divide the amount you need from your investment accounts each year by your total portfolio value. If you did this exercise today, you’d most likely see that your withdrawal rate would be too high, which is why you are planning to work 7 more years.

Looking at your ideal lifestyle and subtracting out your future income sources, you can back into roughly what your investment account total would need to be in order to fund your retirement by multiplying the amount needed from your investment accounts each year by 25 (reverse engineering the “4% rule”)

After you have an idea of what size portfolio you’ll need, then you can work into what you need to save in order to reach that portfolio size in 7 years.

A couple other random thoughts:

1. Look at refinancing your mortgage (rates are below 3% now)
2. Consider investing the extra $500mo to try and increase the amount you’re saving for retirement in the hopes of earning more than the new lower refinanced mortgage
3. Consider investing more of the emergency fund to try and earn a higher return. With $50k in cash, you’re losing money by default given you still have the mortgage at 4%. You want to make sure you have a comfortable cushion though, so peace of mind is worth it too.
4. Before doing a Roth IRA conversion, you want to compare your tax bracket today to where you expect to be in retirement. When you no longer have your salary from work, you’ll have more flexibility with your tax planning. Without knowing your full situation, it’s hard for anyone to give specific advice on what makes sense for you.
5. Continue looking to maximize your tax-advantaged saving space first (whether a Roth v. Traditional contribution makes sense would also require a better understanding of your overall situation).
6. Look to see if you can make an in-service withdrawal from your 401k to your IRA since over 59 ½. This would likely lower your expenses as I am sure Raymond James is charging a fee with limited investment options.
7. Have a plan for claiming Social Security and understand when would be best to file for benefits.
8. Your wife will be 62 in 7 years, so have a plan for healthcare costs prior to Medicare at age 65 because private insurance is very expensive.

No specific recommendations, but just some ideas that will hopefully help you as you think through this!

[afr]

STAR is an old fund. No reason to use anymore
healthcare fund shouldnt be in taxable.
sucks about raymond james.
refinance home, wouldnt add extra.
stop buying cars with loans.

so you didnt actually give important info.....
total income, savings rate, marginal rate (fed + state)

you have 750K in investments (ignoring house). all i can see you saving is 31.5K/year. at 6% for 7 years you will have 1.4MM. so you can spend 56K + delayed SS.

is that enough? iono....you didnt say.....

What fund/funds would you suggest switching/exchanging our IRA's to? STAR seems fairly conservative and diversified. The healthcare fund has done pretty well I think. If not in taxable account, then what? Simply discontinue any further contributions to it?

[afr]

Did you realize you can do backdoor Roth conversions every year, no matter how much income you earn in a year? If not, let us know and we’ll provide some links.

How much do you make in a typical year? How much of that do you save?

2019 our MAGI was $245,000. I max out my 401k and our IRA's. My 2019 basis was $66,000 and my wife's was $53,000. Its going to be significantly lower this yr. since we were both on UE for a few months.

[afr]

My monthly NET varies but averaged about $12,000(in 2019) and my wife is about $2200/mo. Currently, not even close for me. My last biweekly check was for $2200.Though I'm still receiving the federal $600/wk bump til the end of July.

Our current monthly expenses-
IRA contributions-$1166
mortgage-$2008(includes escrow and extra $500 principal payment)
medical-$1325(neither of us are offered medical thru work)
food-~$600
car pmt-$398
cell phone-$250(for 4 phones)
cable/internet-$250
HOA-$170
That's what I can currently recall. I know there's some more(utilities,disability,life,auto,malpractice ins.,etc).

[nephron]

You are close enough to retirement that you can probably figure out what you want to/expect to spend on an annual basis. I would make that calculation, they multiple the number by 25 and compare it to your net assets to figure out when you will have enough to retire. You are spending a lot for cable/internet and your cell phone bill is very high for four phones. I don't think that you should have a car payment at age 60 and you will need to pay off your house before you retire. Once you figure out your number, you should start living on less then that and save whatever excess you have for miscellaneous medical expenses that may come up. You can probably retire in 7 years, but it will probably require a significant lifestyle adjustment/spending cuts that you might as well get used to while you are still working to figure out if you need to work longer to prevent. I don't know if you still need disability insurance at your age as well.

[afr]

You are close enough to retirement that you can probably figure out what you want to/expect to spend on an annual basis. I would make that calculation, they multiple the number by 25 and compare it to your net assets to figure out when you will have enough to retire. You are spending a lot for cable/internet and your cell phone bill is very high for four phones. I don't think that you should have a car payment at age 60 and you will need to pay off your house before you retire. Once you figure out your number, you should start living on less then that and save whatever excess you have for miscellaneous medical expenses that may come up. You can probably retire in 7 years, but it will probably require a significant lifestyle adjustment/spending cuts that you might as well get used to while you are still working to figure out if you need to work longer to prevent. I don't know if you still need disability insurance at your age as well.

We're planning on selling our home and move to AZ into a home w/no mortgage. So no mortgage, medical for my wife(I'll be on Medicare so I'm figuring $500/mo for myself), $3300/mo SS for myself, wife a bit less 4 yrs later. Most of our money goes to mortgage and medical insurance. Assuming no car payment also.

[Tim]

•Social Security- use this to figure out a claiming strategy or at least get some numbers. https://opensocialsecurity.com/

To use this, you will need to use your own social security earnings record for both. It seems like your preliminary plan is for your wife to retire at 62 when you are 67. The social security projections assume continued earnings through full retirement age. Her projections will be overstated. So, the numbers and the claiming strategy may be off some. The question becomes whether she can afford to retire. Her social security and the healthcare costs will be potentially significant(cobra for 18 months or private insurance are expensive). The loss of her income, reduction of social security, and her healthcare costs would be a serious hit. These need significant attention. The only way out is for her to continue working. Triple benefits if that is possible. Note: my spouse continued to 64 primarily for the healthcare, retired 18 months and used Cobra. Loss of income and paying healthcare will be a huge drain on your savings. That is the biggest impact on her. If you both work one additional year, that is the second largest. Same if you both work an additional year. The question is do one or both need to work.
• Retirement spending- you didn’t mention property taxes, insurance and maintenance. Get a good handle on your housing annual costs. Don’t forget things like roofing/HVAC and painting. Transportation and food are the the others. Personal and the cable/cell expenses as well. Rough numbers are fine.
•Fidelity has a Retirement income planner you can plugin your income, expenses, savings and retirement dates and get an idea how long funds will last. It has 3 market returns, significantly below, below and average. I wouldn’t use average but if your are short, that indicates your plan has problems. Their are other free planners as well.
•Retirement assets, Retirement income, Retirement spending are the variables. Work longer, save more, reduce expenses are the only controllable factors. That means you may plan on selling the house which is your largest expense after you stop working and reach Medicare.
The purpose of this is to give you the fastest way to see if your plan is feasible or if you need to rework the planned retirement dates or the house/mortgage. Medicare is not “free”, you will have “supplemental insurance” to cover your 20%.
Get yourself some numbers to work with and refine as needed. Seven years is a long time. Once you have a big picture, you will have a good idea how comfortable you are or whether your plan will work. Refine as needed. Housing, transportation, healthcare and food and miscellaneous are your big retirement core expenses. Good luck.

[afr]

Not sure, but how do people retire with less than 500k in assets?

[Tim]

Not sure, but how do people retire with less than 500k in assets?

I don’t intend to be snarky. They run out of money , including selling the house and rent with government assistance is one path. The standard of living is a forced reduction to social security. Government assistance has asset limitations for rent subsidies.
They reduce living expenses to social security and retirement savings withdrawals. Thumbnail, 4% of $500k is $20k + SS. Can you live on that in AZ?

[afr]

I don’t intend to be snarky. They run out of money , including selling the house and rent with government assistance is one path. The standard of living is a forced reduction to social security. Government assistance has asset limitations for rent subsidies.
They reduce living expenses to social security and retirement savings withdrawals. Thumbnail, 4% of $500k is $20k + SS. Can you live on that in AZ?

Gonna figure we’ll be close to 1 million plus SS. No debt plus 3% SWR might be doable

[Tim]

Gonna figure we’ll be close to 1 million plus SS. No debt plus 3% SWR might be doable

There you go! Sounds like your plan is to cut expenses to a sustainable level. Best choice to spread any cuts over multiple years. From what I have read, the biggest boost is stretching out an additional year of earnings. Six years from now you will make some choices. Too bad you can’t tell how long retirement lasts.

I forgot one strategy, family steps in. I got stuck with that 3 times. Learn to say no.

[Hatton]

I would really start tracking your expenses down to the penny. This will help you find things you can eliminate. It also really lets you drill down on the 3% SWR calculation. Really at the retirement age you are looking at 4% would be ok if the nest egg is big enough.