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What to spend first in retirement?

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Feldspar7
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What to spend first in retirement?  Reply with quote  

I am quite uninformed when it comes to the smartest way to draw on retirement assets, so I thought I'd start here. Here is my situation:

My wife and I are both 62 and a half. I have worked, she has not. I plan on retiring very soon - within a year. Financially wise or not, it's what I am going to do. Here is my money situation as of today:

$0 debt
$1,050,000 in 401k/retirement fund (roughly 50/50 stocks and bonds) (taxable distributions).
$285,000 in cash.
$36,000 annually in SS benefits (combined) if I started them today (includes mine plus 1/2 for non-working spouse)
$700,000 in home value (I paid only $84,000 in 1991 dollars). I am perfectly happy to either stay in the house or sell it down the road if I need cash.

So I have $1,335,000 in spendable assets (w/o SS or home equity) and a net worth of $2,035,000.

We live pretty simply - e.g., buy used cars and keep them a decade, rarely eat out. Do nearly all home and car repairs myself. Our fun is usually long road trips. I feel that we can live on $80,000 or so per year.

My question is what makes the most economic sense in terms of tapping these assets. The cash has more buying power than taxable assets. Does it make sense to live for a couple years on just the cash (until I maybe have $100,000 left) so that my SS payments are larger later? Or should I live off 4% distributions (about $40K) and the rest cash for a much longer period to max out SS payments? Or take my 4% plus SS now and just invest the cash? Other?

Thanks for any advice to move my thinking to a higher plane.
Post Tue Dec 12, 2017 5:17 am
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boatswain2PA
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What is your annual cost of living? How is your health (a polite way of asking how long do you think you'll live). These are two critical questions that must be answered before you can possible answer your question.

Ignoring he SS benefits for a moment, let's talk about your drawdown.

If your annual COL is $80K (that's a Princely amount since you have a paid for house, no debt, and would have no taxes), you have 3.5 years of cash in the bank. That takes you to 66 years old without touching your $1.05 million in retirement. You are doing VERY well!!

That gives you a LOT of flexibility regarding how much risk you are willing to take with your $1.05M in retirement. Being at 50/50 stocks/bonds is pretty conservative, but you have 3.5 YEARS of cash (at $80K/year) to weather any future storm. Not sure if you need to be that conservative, but that's a value decision only you and your wife can make. Bonds haven't/don't make you very much, yet they are safer (as long as you don't hold Chicago municipal bonds, etc).

I think everyone agrees a correction is coming. Depending on your risk tolerance, you may be in a terrific position to move on that correction when it comes....either by investing your cash, or redistributing more of your bonds into stocks at that point. Of course, that involves risk....

If you want very low risk (understandable as you're in retirement, and with your apparent history), you may want to spend down your cash for the next two years (@ $80K/year leaves you with $110K in cash) as your retirement accounts continue to grow...then withdraw 4-5% annually from your retirement as living expenses.

As to when to draw from SS, well that depends on how long you live!

Congrats Feldspar...you're winning!!
Post Sat Dec 16, 2017 5:54 am
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Feldspar7
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Thanks. I thought maybe somebody would tell me I'm nuts to spend the cash first for some reason. As for health, I'm currently still upright, but based on family history I would not bet my own money that I will be around 30 years. That's partly why I'm ready now. Having grown up poor - family of 8 where both parents died not having saved a dime - I still have that perspective and don't crave a lot of expensive trappings. I did not start my serious "career" work life until I was 34, so everything I have has been accumulated in 28 years.

I'm fairly risk averse, but not as much as my 401k allocation would suggest. A few years back I turned over management to Financial Engines, and I've pretty much realized that I am paying them to simply apply some formula based on my age. I think I need to take back control. The clincher was recently when they allocated 11% to money market funds. Even I am not that risk averse.
Post Sat Dec 16, 2017 5:25 pm
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oldguy
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We were roughly on your position about 20 years ago, I retired at age 59.

I took SS at age 62, I figured that the time-value of the money, ie having the use of the money for 8 years, was worth more than waiting 8 yrs for the higher SS rate.

And we used our available cash, plus the sale of a rental house, for living expenses. In general, we used the tax-free money first - and let our taxable accounts continue to grow.

Then, at age 70.5, the RMD kicks in, you will be required to sell about 4%/yr and pay the taxes. So you procedure will change - instead of selling tax-free accounts you will be require to sell 401k funds.

Our 401 accounts nearly doubled between age 59 and 70.5. There is a fair chance that your $1,050,000 fund will be close to $2m when you start using it - ie, you'll need to sell about $80,000/yr and pay roughly $15,000 to the IRS.

In our case, when we sell off $80k, the fund 'fills back in' in less than a year. (Our return averages 6% to 8% so that covers the 4% RMD for us.)
Post Sat Dec 16, 2017 9:26 pm
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Feldspar7
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I had not thought of the time value of money in deciding whether to take SS early. The universal, albeit simplistic, advice is to wait as long as possible. I may follow your lead and take it now (62 1/2) or at 63, and then I can make may cash reserve last much longer without touching my 401k. Old Guy, how are your funds diversified now that you are older? I know you recommend an index fund by looking at your other posts, but are you still mostly in equities?
Post Mon Dec 18, 2017 3:18 am
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oldguy
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No, we're at about 60/40 stocks/bonds. Before retirement I stayed at 100% equities, we changed to 50/50 when we retired. (This year it's 60/40 mostly due to the Trump Bump, I'll re-allocate at RMD time).
Post Mon Dec 18, 2017 3:24 am
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