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Tag: retirement planning
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At 55 years old, I will have worked for 30 years — what are the pros and cons of retiring at that age?
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Dear MarketWatch,
I currently own one home, no mortgage with rental income. I own another home that will be paid off the year I turn 55. Both valued at $750,000. I have a 401(k) and other stocks and investments totaling another $750,000. My debt will be all paid by the year I turn 55.
I have been on my job for 27 years. It will be 30 years when I’m 55. What are the disadvantages and advantages of not working after 55 years of age?
Dear reader,
It is completely understandable that you would want to retire after working for 30 years, especially when you have rental income, but I would caution you to take this decision very seriously and find a few backup plans.
One big pro of waiting until 55 is the fact that you get to withdraw from your current 401(k) at that age. It’s called the Rule of 55, and not everyone knows about it. Usually, savers have to wait until they’re 59 ½ years old in order to take distributions from their retirement accounts, such as 401(k) plans and IRAs. An early distribution incurs a 10% penalty, plus taxes.
The Rule of 55 gives workers a break if they want to tap into their 401(k) and have separated from their current job for any reason.
But you probably don’t want to tap into that 401(k) — or at least, you shouldn’t want to do that.
If you stop working at 55, you’re halting a major source of income. Rental property is great, and having no mortgage over your head is a huge plus, but will it be enough to cover your everyday expenses and the unexpected for decades to come? Retirement isn’t what it used to be — people are living longer, which means every dollar you have for retirement needs to last until you die. If you retire at 55, you could potentially be in retirement for 30 years — or more. Do you think your nest egg and any other sources of income, like Social Security and rental income, could cover you for that long?
Some people would say $750,000 in a retirement account is more than enough, but others would argue it is not. Of course, it also depends on what your annual expenses are, what future spending could look like if you were to fall ill or need to change something from your current lifestyle. And do you have any other money set aside for various circumstances, like repairs on either of your homes?
You could look to see what other sources of income may look like (for example, what can you expect from Social Security?) but you should still find a few backup plans for income so that you’re not sweating it out later in life. Not to be a Debbie Downer, but rental income may not be enough to make ends meet or keep you from distributing too much from your retirement accounts. Also, do you have money set aside to offset your costs if your property is vacant for a little while?
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
Also, don’t forget about healthcare. If you’re not married to a spouse who has health insurance through an employer, what would you do? Medicare eligibility starts at age 65, which means you would need your own health insurance for an entire decade, and that can be quite expensive.
Instead of retiring fully, is there another job you may be happier working? Or some type of part-time gig you could take on? A huge bonus would be if this job comes with health benefits, as well as another retirement account you could keep putting money into until you’re ready to fully retire.
I know this may not have been the answer you wanted to hear, but it’s absolutely worth considering every possible good and bad thing that could come out of retiring early. But as with everything else in life, you need to strike a balance — finding work you can do that brings in an income, while also enjoying your life now. It’s not easy, but it’s worth it to plan this out a bit more before you celebrate the big 55.
Readers: Do you have suggestions for this reader? Add them in the comments below.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
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I’m a single dad maxing out my retirement accounts and earning $100,000 – how do I make the most of my retirement dollars?
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Dear MarketWatch,
I make over $100,000 a year, and expect to for the foreseeable future. As of now, I am contributing 8% of my income to my 403(b) with a 3% 401(a) match; all Roth. It would be more, but I am maxing out a Roth IRA and an HSA as well each year. I am a single father with a 9-year-old daughter, and do not have plans to marry, so I’m planning everything as single. I expect house to be paid off when I (plan to anyway) retire at age 65. I plan to collect Social Security at 67.
My question is, should I move my 403(b) & 401(a) income to pretax dollars, since I expect to be in a lower tax bracket echelon once I retire? Or leave it at Roth. I’m hoping for some advice on what would generally be the most prudent option to maximize retirement dollars.
Dear reader,
First, congratulations on maxing out your Roth IRA and HSA and contributing to your other retirement accounts — managing that while being a single dad and paying off a home is no simple task.
You’ve asked the age-old retirement planning question: should I be investing in a traditional account, or a Roth? For readers unaware, traditional accounts are invested with pretax dollars, and the money is taxed at withdrawal in retirement. Roth accounts are invested with after-tax dollars upon deposit, and then withdrawn tax-free (if investors follow the rules as far as how and when to take the money, such as after the account has been opened for five years and the investor is 59 ½ years old or older).
As you know, the rule of thumb for choosing between a Roth and a traditional account comes down to taxes. If you’re in a lower tax bracket, advisers will typically suggest opting for a Roth as you’ll be paying taxes at a lower rate now versus a potentially higher one later. For a traditional, you may be better off if you’re in your peak earning years and expect to drop a tax bracket or more at the time of withdrawal.
One of the greatest challenges, however, is knowing future tax brackets. You may think you’ll be in a lower one now, but you can’t be sure. We also don’t know what tax rates might even look like when you get to retirement. The current tax rates are expected to increase in 2026, when the brackets from the Tax Cuts and Jobs Act are set to expire. Congress may do something before that, or after of course.
Check out MarketWatch’s column ‘Retirement Hacks’ for actionable advice for your own retirement savings journey
That being said, if you believe you’ll be in a lower tax bracket in retirement, it doesn’t hurt to have some of your money go in a traditional account. Having tax diversification can really work in your favor, too. It allows you more control and freedom when retirement does come, as you’ll be able to choose which accounts you withdraw from and how to save the most on taxes. The more options, the better.
You should do your best to crunch the numbers now, and then make a plan to do it every year or so until you get to retirement. Here’s one calculator that can help.
Make estimates where you have to, and factor in inflation — I’m sure we’ve all seen how inflation can impact personal finances in the last year alone. There are a few other things you can do to make these calculations. For example, get a sense of what your Social Security income may be by creating an account with the Social Security Administration, which will show you what you could expect to receive in benefits at various claiming ages. Also add in any other income you may get, like a pension.
After you calculate what you expect to spend in retirement, you can figure out what your withdrawal needs will be — and how that will impact your taxable income depending on if the money comes from a traditional or Roth account. Remember: Withdrawals from Roths do not increase your taxable income, whereas traditional account investments do when taken out.
Keep in mind, Roth IRAs have one really great advantage over traditional accounts — they are not subject to required minimum distributions, which is when investors must withdraw money from the account if they haven’t yet done so by the mandatory age. Traditional employer-sponsored plans, like 401(k) and 403(b) plans, are subjected to an RMD. Roth employer-sponsored plans have also had an RMD, though the Secure Act 2.0, which Congress passed at the end of 2022, eliminates the RMD for Roth workplace plans beginning in 2024. (The Secure Act 2.0 also pushed the age up for RMDs to 73 this year, and age 75 in 2033.)
Traditional versus Roth accounts are just one piece of the puzzle in retirement planning, though. There are many other questions you need to ask yourself, and a financial planner if you’re interested and able to work with one. For example, what rates of return are you anticipating on your investments, and how are your investments allocated? What state do you live in now and will that change in retirement (that will affect your taxes). Are you concerned about leaving behind an inheritance, and have you considered life insurance? And even before you get to retirement, as a single dad, do you have a will, healthcare proxy and disability insurance in the event something unfortunate happens?
I know this may feel overwhelming, especially when you’re taking into account calculations and estimates for years and years from now, but it will all be worth it. Consider working with a qualified financial planner, or talking to someone at the firm that houses your investments, and don’t feel obligated to stick with whatever you choose until you retire. As with many things in life, retirement plans tend to change and adapt as you do.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Readers: Do you have suggestions for this reader? Add them in the comments below.
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My fiancé and I are 60. His adult daughter is opposed to our marriage — and insists on inheriting her father’s $3.2 million estate. How should we handle her?
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What advice would you give to a widow and widower considering marriage on how to manage finances — and deal with adult children?
We are both 60 years old and plan to work a few more years, mostly for health insurance. We both have about $1.5 million in retirement savings accounts. Our spouses’ 401(k)s and IRAs rolled into our accounts.
I have another $500,000 in a brokerage and he has almost another $1 million. We both own homes with $300,000 mortgages. Mine is worth $500,000, Paul’s (not his real name) home is worth $1 million. We have no other debt.
We both have one married, and one unmarried child that we help. We both have two grandchildren.
We should be set up very well. Here’s the concern: His married, well-off daughter is very aggressive about inheritance. She wants the family home retitled in a trust. She wants all life insurance and brokerage beneficiaries in her name. Her brother has had drug-addiction problems, so she’s cutting him out even though it seems he’s the one who will need help.
“‘She wants the family home retitled in a trust. She wants all life insurance and brokerage beneficiaries in her name.’”
The daughter isn’t thrilled about our relationship and suggests we just live together. For religious reasons, I would never do this. Grandma shacking up? What example would I set for my grandchildren?
As a widowed couple, we are realistic enough to plan for the time one of us is left alone. Paul has diabetes, high blood pressure and already sees a cardiologist. What if he has a heart attack? Stroke? Or if he dies?
What’s a fair way to mingle finances and allow security for me should he predecease me while allowing Paul’s daughter to ultimately inherit?
By the way, my children have never raised money as an issue. After we both cared for spouses through cancer, they know life is short and just want us to be happy.
Happy to Have Found Love Again
Dear Happy,
She is overstepping the line, and overplaying her hand.
The first rule of inheritance is that it’s not yours until the decedent’s money is sitting in your bank account. Your fiancé’s daughter can make all the demands she likes, but the only thing your fiancé has to do is say, “You don’t need to be concerned. My affairs are all in order. I’ve always taken care of my own affairs, and I am not changing now.”
How your fiancé decides to split his estate is entirely up to him, and can be done in consultation with a financial adviser and attorney, taking into account each of his children’s individual needs. For instance, if you move in together, he could give you a life estate, allowing you to live in the home for the rest of your life, and dividing the property between his two children thereafter.
Given that you have your own home, however, you may decide to rent it out, and move back there in the event that he predeceases you. There are so many ways to split an inheritance. You could look at the intestate laws of your state, and follow them. In New York, the spouse inherits the first $50,000 of intestate property, plus half of the balance, and the kids inherit the rest.
“Paul” may decide to set up a trust for his son, so he can provide an income for him over the course of his life. If he has or had issues with addiction, this will help him while not putting temptation in his way with a lump sum of money. The best kind of trust is the one that deals with any recurring issues directly, and takes into account the person’s circumstances.
Martin Hagan, a Pennsylvania-based estate-planning attorney who has practiced for four decades, writes: “First, it would authorize distributions only if the beneficiary is actively pursuing treatment and recovery. Second, it would limit distributions to paying only for the expenses incurred in carrying out the treatment plan that will have been developed for the beneficiary.”
You have $2 million collectively in a retirement and brokerage account and $200,000 equity in his home, and you can use these next seven years or so to pay off your mortgage, while your fiancé has $2.5 million and $700,000 in equity on his home. You are both well set up for retirement, and let’s hope you have many years to spend together.
The financial services industry has many opinions. You should, advisers say, have 10 times your salary saved by the time you’re 65 years old. You don’t mention your salary, but I would be surprised if many people in America had that much money saved, especially given all of the unexpected events — divorce, illness, job loss — that can occur in the intervening years.
You also have other priorities than dealing with an aggressive daughter/daughter-in-law. AARP suggests that most people should look into long-term care insurance between the ages of 60 and 65, around the time most people are eligible to qualify for Medicare. If you do it earlier, it can serve as a savings account in the event that you never need long-term care, AARP says.
As retirement columnist Richard Quinn recently wrote on MarketWatch, everybody’s circumstances are different. “Living in retirement isn’t about averages. It isn’t about what other people do or the opinions of experts, especially online instant experts who don’t know anything about you and have yet to experience many years of retirement themselves.”
Don’t give too much oxygen or power to your future daughter-in-law. Her father should give her a stock answer, and be firm. If she persists, he can say, “The subject is closed. I need you to respect the decisions I make about my own life, respect my privacy on these matters, and it would be nice if you would be happy for us, and support us in our marriage together.”
You can’t change people. But you can change wills.
You can email The Moneyist with any financial and ethical questions related to coronavirus at qfottrell@marketwatch.com, and follow Quentin Fottrell on Twitter.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
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