When to Retire

Oct 2018


Dear Rick:
My wife and I just received an inheritance, and I would like to know if you think we have enough to retire. My wife thinks we would be working for a few more years, while I think we should retire. Our current situation is that we have no debt and including vacations, golf and holiday presents, it costs us about $7,000 a month to live. Our assets are our house which is paid off, and worth approximately $250,000. You should know we do not plan to move, we plan to stay in our house for the long term. We also have about $100,000 between my wife’s and my 401(k) plans and another $75,000 in investments outside the 401(k). We have approximately $15,000 in savings. We have no pension, and we plan to take Social Security when we reach 62, which is about four years from now. At that time, between my wife and me, we will receive about $2,500 a month from Social Security. The inheritance that we are going to receive in the next few weeks is $500,000. My feeling is that if we invest the money wisely and watch our spending, we should be fine. What do you think?

Dear J.T.:
In reviewing your situation I agree with your wife that you should not retire at this point in time. There is no doubt that you have substantial assets, certainly more than most; however, that is only one part of the equation. The other elements that are just as important as your assets are expenses and life expectancy.

It used to be that people would tell you that when you retire, your cost of living goes down about 25 percent. That used to be true; however, what was also true back then is that you get a gallon of gas was 50 cents, it cost you four cents to mail a letter, and for five dollars you could buy a box seat at Tiger Stadium and have money left over for some refreshments. In today’s world, retirement is totally different. Your cost of living doesn’t go down; it actually increases the rest of your life. In the case at hand, considering your current age, you can easily be retired for 30 plus years. I can guarantee you that in 30 plus years, your cost of living is not going down, it’s increasing. Therefore, in any retirement strategy, you must build in the concept that you will need a rising income, not a fixed or shrinking income.

In your situation, considering the inheritance, 401(k) (net of taxes) and other investments, there is approximately $650,000 which can be used for retirement. The issue is what is a safe withdrawal rate that you can take from your investments, and at the same time make sure that you have money reinvested for your future needs? The general rule in the industry is that a safe withdrawal rate is four percent. Therefore, if someone had $650,000 to invest, they can take out $26,000 on a year-by-year basis. If you were to retire today before you received Social Security, your withdrawal rate would have to be approximately 13 percent. That high of a withdrawal rate would cause all sorts of financial difficulties down the road.

If you were to decide to retire now, you would have to significantly reduce your living expenses. I’m not talking about reducing it by 10 percent or 20 percent, but significantly higher. I know you probably don’t want to hear this, but my advice to you would be to delay your retirement until you receive your full Social Security Benefit which is probably going to be somewhere around 67. It would put you in much better shape for retirement. Not only would your inheritance have time to grow, but also your Social Security would be significantly increased, thus putting you in much better shape for retirement.

There is no doubt that a half-million dollar inheritance is substantial; however, what you have to focus on is how long that money has to last you. When someone retires in their late 50s, at a minimum, they have to plan that they’re going to be around at least another 30 years, and when you consider a 30-year time frame, a half-million dollars is not what it used to be.

As I’ve mentioned many times in the past, retirement is a brand new concept in the history of mankind and it’s not something that past generations had to worry about. In today’s world, we have to recognize how much longer we’re living, and that in many cases people are going to be retired for as long as they worked. Therefore, before you leave the job market and take your Social Security, you have to make sure you’ll have a strategy that can last you the rest of your life. In the old days, once you reached 70 you didn’t need much. Thankfully, those days are long gone.

Good luck!


If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com