We have $ 8 million in retirement savings, we’re in our 50s and want to retire early, but we’re worried about health care costs – what can we do?
My wife and I are 50 and 52 years old and live in Boston. Our current combined annual income is approximately $ 400,000. We have about $ 6 million in non-retirement investments (stocks, bonds, cash). Another $ 2 million is invested in 401 (k) plans. Our house is fully paid for and we have no other responsibility.
Our annual expenses are between $ 100,000 and $ 150,000 depending on the type of vacation we take.
1. Based on these numbers, can we retire early (say over the next two years) and grow old in place?
2. A big unknown is the cost of health insurance. We currently get our health insurance through my employer which is a very generous PPO plan that allows us to see any specialist without a referral. I’m not sure if there are any insurance plans that we can buy that can offer a similar type of flexibility. How can I find out more?
See: I am 56 years old, my husband is 57 years old and retired. We saved about $ 750,000 and a military pension. I’m sick of working in America. Can I retire in three years?
Congratulations on building such a strong retirement nest egg – $ 8 million is quite an achievement.
Often times when I reply to letters like yours where the person has saved millions of dollars, I get comments from other readers who are frustrated because they think all that money will make retirement a game of. child. The truth is, money certainly helps – there’s no question about it – but if you don’t have the right plans and protections in place, or if you don’t stick to some sort of sane budget that allows you to live within your means. , you may also miss your retirement. There are also a lot of surprises that could derail your goals, as they can for anyone.
There are a few things you should think about before you retire early, although based on the numbers you provided and the fact that your annual expenses are a good match for your total savings, you “should be in pretty good shape” said Leyla Morgillo. , a certified financial planner with Madison Financial Planning Group.
“Taking early retirement requires careful monitoring as there are a number of variables that could derail it – market volatility, lower ROI environment, higher inflation or higher taxes, to name a few. -a, ”she said.
Because you will depend heavily on investment markets for your income, you will need to make sure that your portfolios meet your goals and needs, and react accordingly when they don’t, she said. For example, if the markets go down significantly in a year, try to reduce your discretionary spending, so that you don’t drop too much in your investments – they will already be reversed due to volatility, and you will want to hold on to as much as you can reasonably. the rebound of the markets.
Plus, “retirement is not a one-off event,” said James Guarino, certified financial planner and CEO of Baker Newman Noyes. Your annual expenses need to be calculated and evaluated every year anyway.
You didn’t mention if you expected to have other sources of income after you retire, but it’s something you should think about, Morgillo said. Having multiple sources of income is always more secure than one, but especially when the main source is in investment portfolios.
This of course does not mean that you are in danger if you were to retire now. Far from there. Edward Jastrem, a certified financial planner and director of financial planning at Heritage Financial, performed a very basic test in his financial planning software with a few assumptions: that you retire now and no longer receive earned income, pay the note. for pocket health expenses, have a “balanced” portfolio with returns on investment, see general inflation of around 1.92% and health cost inflation of 6%, receive modest estimates for benefits social security system at full retirement age, and set your life expectancy at 95 years. It did not take into account any other one-off expenses or any particular tax details. This scenario was just meant to see, with very basic information, what you might consider when you retire early.
Jastrem found the plan to sound healthy, as most people would have assumed. But there’s a lot more to analyze, he and other financial advisers said. Take the investments themselves, for example.
“The biggest risk for this couple is the lack of productivity of their assets,” said Alex Klingelhoeffer, certified financial planner and wealth advisor at Exencial Wealth Advisors. “I often see people who are too conservative with their investments compared to those who are too aggressive. In fact, I would say that on average 90% of the clients who come to me with this situation are underinvested.
There are many investment strategies an advisor could suggest that would keep you spending what you need in early retirement while making the money work for you for decades to come. Keep in mind that these points are just the start. With so many assets and the goal of retiring more than a decade before full retirement age, there are so many ways that a financial planner could make all the difference for your specific situation. If you’re not interested in working with a financial advisor on a regular basis, you may find one who bills on an hourly basis, or plan to only meet annually or every two years. They will know much better what your next steps should be.
Klingelhoeffer suggests reviewing your asset allocation, as well as the actual location of your investments and the tax implications that may have. For example, traditional 401 (k) plans are not taxed until withdrawal. “When we have growth in our retirement accounts, we also increase our future tax debt at regular tax rates,” he said. “When we develop assets in taxable accounts, we grow at capital gains tax rates, which are currently 10-15% lower than usual income tax rates. ”
“At the end of the day, investing is about both what you earn and what you keep,” he said. “By having a better location of assets, we can increase the what we keep side of the ledger, and not let Uncle Sam get so much of our hard earned income.”
Tax diversification is just as important as asset diversification. When withdrawing, try to avoid jumping into a higher tax bracket than necessary and use Roth conversions if and when appropriate, Guarino said.
Read the MarketWatch column “Retirement Hacks” for practical advice for your own retirement savings journey
You mentioned that medicare was a major concern, and I can understand why. Health care costs increase every year, and they only get more expensive as a person ages. You can check your state’s health insurance market for insurance options.
“The good news is that today, with the swap, health care coverage is more about having an extra expense in retirement and not about whether a person can get coverage first. take place, ”said John Scherer, a certified financial planner. and founder of Trinity Financial Planning. Based on a quick overview of what was available in the most expensive premiums (platinum level coverage) in the Boston area, health insurance costs for two people would be around $ 2,500 per month. , or about $ 30,000 per year.
The good news: You can afford it without having to worry about withdrawing too much money during early retirement, Klingelhoeffer said. “Given their comfortable level of spending, there is certainly room in their budget for a premium healthcare plan if they choose to purchase one,” he said.
You should also carefully consider what insurance you’ll need, like long-term care coverage, as well as the home, auto and umbrella policies you’ll need before you retire, Jastrem said. Not everyone is a fan of long term care insurance because it can be expensive and not everyone will need it in old age, but if you are self-insured it can be worthwhile to examine it – if only to plan -. And don’t forget to create an estate plan, complete with important documents like a health care power of attorney and a will, and make sure your assets go out the way you want them to.
Be prepared to be flexible going forward and understand that what you want or where can change and that will affect your retirement as well as your financial situation, Guarino said.
“Will they be able to maintain their homes or will they want or need to move to a retirement community? he said.
The last consideration I’m going to leave with you (there is so much to say when discussing retirement planning) is something I say to everyone: think carefully about what you will do with your retirement. Early retirement isn’t for everyone – some people love it, while others get bored and return to work in a few years. If you’re retiring together, expect to make some daily adjustments if you’re not used to spending so much time together at home. One of my favorite tips for retired couples together is to create an “activity pot” with each person suggesting various things they would like to do on a given day, such as going to the museum, trying a new restaurant, exploring the next state and so on. You may also want to turn to volunteering or consulting work, which is popular with many retirees.
“If they retire very early, most of their friends will continue to work, so they run the risk of having ‘no one to play’ with when they retire,” Scherer said. “That’s not a reason not to retire, but something people don’t often consider when planning their lives.”
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