So often on my radio show, Money Matters, I get questions that, while specific to the caller, have resonance for many investors. That was certainly the case a couple of weeks ago when I got a handful of great, pertinent questions about the ins-and-outs of planning and saving for retirement.
While some may have details that aren’t exactly true of your particular circumstances, there is wisdom to be gained from each of these inquiries for everyone, from would-be retirees to seasoned career graduates.
Take a look at the questions I received, and their answers, to find out if any of the information is pertinent to where you are in your planning.
The first issue has to do with a Roth IRA.
A listener of the show, let’s call her “Barbara,” called in and asked about her Roth IRA. Barbara is married, she and her husband are both retired and draw a small pension and she is slated to begin receiving her Social Security benefits this month. All total, she’ll have about $2,500 to $3,000 in monthly income. Barbara asked an advisor if she could still contribute to her Roth IRA, and her advisor told her no. So, she was looking for a second opinion.
Unfortunately, her advisor was correct – Barbara is not eligible to contribute to her Roth any longer. That’s because you must have earned income to contribute, and, while Barbara does have a monthly income, it’s in the form of her pension and Social Security benefits, which aren’t considered as eligible earned income for Roth IRA purposes.
For those of you out there who are working and considering contributing to a Roth IRA, remember that there are income limits. If you’re single, the cap for Roth IRA contributions is $122,000, and if you’re married, the cap is $193,000. This means that a single person who makes $122,001 or more each year in earned income is ineligible to make a traditional Roth IRA contribution contribute to a Roth. Make sure to factor in how much you make before setting up a Roth IRA.
Our next question was on the topic of long-term planning.
The caller, “Stan,” told me that he and his wife have no debt – their mortgage is paid off (one of the traits of happy retirees), and they have no loans or credit card bills. Stan said that they live modestly and that their income is three times what they really need. Additionally, Stan and his wife have about $1 million in savings.
Where’s the problem, you ask. Well, Stan wanted to know how to go about preserving the money and leaving it to his adult children and grandchildren, two of whom have disabilities. When it comes to planning for children or grandchildren who are disabled, there are some special tools that you can use to make sure they get the best help and care they need. One of these tools is a Special Needs Trust.
I advised Stan to consult with an estate planning attorney to determine the best course of action for his wishes. Stan originally had told me that he planned to simply split the money between his adult children and let them take care of the grandchildren that way. While it may seem the simplest move, it may not be the most advantageous for the grandchildren. So, I suggested that Stan meets with a licensed professional in estates to determine the best course of action.
The next question I received, from “Dorothy,” was about whether she had enough cushion in her current TSP (Thrift Savings Plan) account and in Social Security and federal pension benefits to last throughout her retirement, and whether she should pay off her mortgage early.
Let’s walk through Dorothy’s situation. She is 64, single and still working. Her mortgage is $850 a month at 3.75% interest. She earns around $83,000 a year and contributes 7% to the TSP fund offered by her employer. So far, she has around $275,000 in the fund and plans to work another two years, putting her closer to $300,000. If she decides to take the annuity at retirement, it will pay her about $1200 a month.
Dorothy doesn’t own any “after-tax” stocks or bonds. But she does have a pension that will pay her $2,500 per month, and her Social Security, which will pay $2,300 per month at her full retirement age. All told, Dorothy is looking at around $6,000 a month in income. That’s pretty darn good, especially considering that Dorothy told me she only spends about $2,000 per month, including her mortgage.
So, Dorothy’s in good shape with her various income streams. And, while she’s worried about having enough money during retirement (because she, like many of us, feels nervous about the idea of an end to her employment paychecks), Dorothy is in a good place. Given her specific situation, I advised her to consider not paying off her mortgage just yet, because the interest rate is so low and she will have the mortgage paid off traditionally before retirement, and she should keep that extra money each month to add to her cushion.
Our final call was from “David.”
He is working and looking at seven more years in his career. Currently, David has about $280,000 in a 401(k), plus another $70,000 in cash. During the rest of his employment, David plans on investing an additional $40,000 per year. His question was one I get a lot: Will I be okay with this level of retirement savings?
Doing the math, David currently has $350,000, and by putting away $40,000 for the next seven years (assuming a conservative 5% of growth), he’ll grow his 401(k) to over $800,000. Now, here’s where one of my favorite rules of thumb comes in – the 4% Rule. The 4% Rule states that a retiree should be able to comfortably withdraw 4% of their initial retirement assets per year, and increase that amount annually to account for inflation, assuming a 50% to 75% portfolio allocation to stocks.
In David’s case, four percent of his $800,000 in savings is $32,000 a year. Now, that’s nothing to sneeze at. Plus, once David pairs that with his Social Security benefits, which will likely run in the $2,500 range, he’ll be looking at a retirement income of around $5,200, which, according to David, is enough to fund his specific retirement lifestyle. I like that for David. That’s the stuff of happy retirees.
No matter your situation, I hope you can take some nuggets of wisdom from the guidance I gave to these callers. Everyone’s journey towards a happy retirement is unique, but there are some commonalities among us all. And, if you ever want to discuss your particular set of circumstances, my team and I are here to help.