Today’s question comes from Stephanie. Here it is:
Thank you for asking if any of your subscribers had any retirement questions. I am 48 years old and I plan on retiring at 67 years old. I make approximately $70k a year. I have deferred compensation through my employer which I am currently contributing $400.00 per month. The employer is taking out approximately 8% for my retirement. I used the Social Security tool and the estimate at retirement (if the system doesn’t dissolve) will be approximately $1100.00 per month. I have about $30k in a Roth IRA right now. I have another $125k in mutual funds that I am not happy with. Here’s my question(s). I am thinking of putting the $125k in an annuity. I am concerned that I will not have enough money to live on after retirement. If my relatives are any indicator of life, I will probably live to be pretty old. My grandmother was 103, my other great grandmother was about 105, etc… Do you think I will have enough money to live on? How do I base that because today’s prices are not going to be the same as 18 years from now? I own a home, but I am no where close to paying it off. I live modestly, but I love traveling and want to continue to have this luxury after retirement. I am not married and I do not have any children. Please tell me what you think. Thank you for your assistance.
Great question, Stephanie. Here are a few things for you to think about…
You should definitely plan for a long life time given what you said about your grandmothers. And retirement can be a long time even if it doesn’t last up to age 100. If you retire at 65, it’s not uncommon to live into your 80’s. That’s about 20 years right there.
You’ve got some great things going for you. Here they are:
- You have a Roth IRA of $30K! Awesome!
- You make a strong income of $70K per year!
- If I understand your situation correctly, you are contributing approximately $5,600 to your 401k each year (Employer is withholding approximately 8% of your $70,000 income).
- You have 19 years of more investing and contributing to do before retirement.
- You said you live modestly. That is wonderful for so many reasons.
Depending on how much you spend each month, that will play a huge role in whether or not you will have enough money for retirement. The more you save and boost your investment portfolio, then the more likely you will have enough money for retirement.
AND on the flip side of the equation, the less you spend in retirement, the more likely you will have enough money for retirement. You can work the equation from both ways.
But don’t make yourself miserable cutting back on expenses to the point you are unhappy. Money is just a tool to live the life we want. As long as your plan will work, there’s no sense in cutting back to the point you are not living the life you want.
So your main question of “Do you think I will have enough money to live on?” is going to be greatly affected by your living expenses. Fortunately, you said you live modestly. That’s awesome when you can live a fulfilled life without being extravagant. This is all about lifestyle, and I firmly believe buying things doesn’t bring happiness long-term.
So I already think you’ve got your head on straight and are well on the way to making even more good decisions in the future.
At your age (48), it would be good to see how your retirement plan would be affected with Social Security income included at age 67, as well as a scenario without Social Security being available. For younger investors like you (and me) I’m not convinced the system will be providing the same level of benefits that it’s currently providing.
I do believe those already drawing Social Security (or near to drawing it, say in their late 50’s and older) will probably be safe to expect this income source to continue throughout their lifetime. But at age 48, or younger, it might make sense to look at a scenario assuming Social Security benefits are available and another scenario where they are not available.
Concerning your mutual funds, if you aren’t happy with them, try to determine “why” you aren’t happy with them. If it’s because they have performed poorly recently (like in 2015 and the first 2 months of 2016) keep in mind that good investing takes a long-term perspective. They may be a good investment for you but they may also NOT be a good investment. Just don’t let recent performance be the only determining factor.
You said you wanted to put them into an annuity. Annuities are typically safer places to put money. That leads me to believe you may be upset about your mutual funds because of recent losses. Before you make a change, be sure to do your due diligence. Fixed annuities will protect you from market risk, but they’ll have much lower growth potential. That may not be a good idea for someone as young as you.
If you choose a variable annuity, many of these have high fees. They may offer some insurance benefits, like death benefit of at least your original deposit, and some income guarantees. But again, at your age, these benefits may not be worth the expense to you. The fees on a typical variable annuity will hamper its growth potential long-term.
Again, whether or not you have enough to retire in 19 years will depend on your spending requirements. The higher your spending requirements in retirement, then the more important it is that you are invested in such a way as to have higher growth potential.
If you need higher growth long term to fund your retirement this will affect the types of assets you choose for your portfolio. If you don’t need the higher investment growth to fund your retirement spending needs, then why take on more risk than necessary in your portfolio?
And as for expenses in the future, a good industry-wide standard for inflation is to use 3%. For example, if a person’s expenses are $50,000 a year right now, then in 19 years from now that would be approximately $87K. These are estimates since some years inflation may be higher, and other years it may be lower.
So you’ll want to have an annual follow-up with yourself each year. At this annual meeting with yourself, you can update your figures on your expenses. How has inflation impacted them over the last 12 months?
You can also update your files with your latest account statements and general overall financial picture. Consider this your “State of the Household Address” each year.
So some good first steps you can do right now would be:
- Calculate your current expenses and estimate if you will still need to spend that much in retirement. You can estimate between 60-80% income replacement ratio for retirement needs. FYI: this is just an estimate.
- Monitor your progress.
- Update your files so you can see your progress. (I’d recommend getting a 3-ring binder to put a balance sheet, account statements, latest tax return, etc.)
- If you are Excel savvy, use it to add up your investment contributions over the next 19 years, as well as assume a growth rate on your investments. What is the historical growth rate of your existing mutual funds? That would be a good place to start for your projected growth rate.
- Using these estimates, what is your investment projected to grow to in 19 years?
- Take 4% of this investment’s estimated value at the end of 19 years. This is based on the 4% safe withdrawal rule, which is only an estimate to help establish guidelines. Is that figure enough to cover your estimated future (inflation adjusted) expenses?
Financial planning software can do these calculations rather quickly. But if you don’t have access to this, then the next best thing is to use Excel. It’s not as good, but it’s better than nothing.
Answering the question, “Do I have enough to retire?” is important. No one knows exactly what the future holds, especially over a 19 year period, but it is absolutely important to begin planning and making educated estimates and projections of the path you need to be on to have retirement success.
The fact that you are thinking about this already shows how important planning ahead is for you. Keep on this track.
Hope that helps and best of luck!