Spouse's upcoming retirement

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Topic Author
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Spouse's upcoming retirement

Post by kd2008 »

I would like some input on our over all readiness from this esteemed forum.

Ages: 40 (me)/60 (DH)

DH is planning to retire around 62.5 yrs of age. He has enough hobbies, loves nesting (aka home and yard projects), probably will require to devote some of his time taking care of MIL (78 yrs today) who doesn't drive but is healthy and has longevity in family. I will continue to work - as to how many more years I do not know. I am guessing till I am 55 yrs old. Less would be of course better.

Tax bracket: 12% Fed, 5% State (based on taxable income; not gross)

This will remain the same with DH retired.

Annual expenses: $48K ($16K mortgage, $32K rest)

We expect the expenses to creep up to $60K - because of Medicare costs, may be some some extra travel etc once DH is 65.

Debts: Mortgage $204K @ 2%; 15 yrs remaining

Assets:
Taxable = $465K
DH 401k + IRA = $470K
My 401k + IRA = $536K
My Roth IRA = $320K
DH HSA = $13K
My HSA = $24K

Total = $1,828K

Yearly addition to savings as of now:
DH 401k = $32K (includes catch-up and match)
my 401k = $48K (includes mega back door roth) + $6K in profit sharing (not guaranteed; I do not include it in my total below)
IRAs =13K
HSA = $8K

Total = $101K

Upon DH's retirement, I expect it to reduce to $40K or less.

SS strategy: Based on opensocialsecurity tool and Mike Piper's comment, our situation represents essentially two single individuals given the large age difference. So DH could claim around age 70 to maximize. We have landed on age 67 as our evaluation point. At that point we will take a call based on health, finances and any desire to spend it earlier on extra travel while we can etc.

DH SS expected to be $24K annually at age 67 if he stops working today. Will not increase much with additional years of income.

LTC: Self-pay

Healthcare: Currently we are each on our own employer's plan. DH's plan is way better than mine. Upon retirement, DH will be on my employer's plan - same network and insurance company and all our providers covered on both plans. At 65, DH will go on Medicare. My employer is less than 20 employees, so Medicare will be primary.

This is how I am evaluating readiness:

$1828K - $24K*7 = $1660K (basically funding 7 years of SS till it starts)
3% of $1660K = $50K (3% withdrawal rate)
So $50k + $24K = $74K per year funded so far.

Hopefully, the safety margin will improve as DH gets closer to retirement and I continue to work in his retirement.

Is there anything we have not considered?
What could we do better?
As far as my retirement date, how soon could it be? One of my reasons to continue to work is that a long retirement timeframe will expose itself to more sequence of returns risk etc. Plus healthcare for me till I reach Medicare age may require us to build a much larger margin of safety. Also there could be lumpy expenses like A/C, furnace, new car, new roof etc down the line.

Thank you!
invest4
Posts: 1905
Joined: Wed Apr 24, 2019 2:19 am

Re: Spouse's upcoming retirement

Post by invest4 »

Given your expenses, I think y'all are in very good shape and fully support your 3% withdrawal rate. Others who have more experience with retirement, may have more specific questions or advice. As far as your own retirement, I would just keep working over the next 5 years or so and then reassess. There will be a number of considerations...medical for example (how will you manage until medicare?). You will also have a better handle on how spouse's retirement is going for the both of you (as expected or some unexpected surprises...either positive or not so much).

Congratulations to both!

Best wishes.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Spouse's upcoming retirement

Post by Watty »

kd2008 wrote: Sat Sep 18, 2021 7:24 am Annual expenses: $48K ($16K mortgage, $32K rest)

We expect the expenses to creep up to $60K - because of Medicare costs, may be some some extra travel etc once DH is 65.

Debts: Mortgage $204K @ 2%; 15 yrs remaining

Assets:
Taxable = $465K
......
Is there anything we have not considered?
What could we do better?
Unless I missed it you did not mention how much home equity you have. You cannot really count that as an investment but it is important in your overall picture and it is a good safety net.

Even though the interest rate is low I would go on and pay off the mortgage. There are lots of opinions on this but with your husband being retired you should have a significant percentage of your asset allocation in bonds so it is hard to justify having a lot of bonds that pay something like 1% when you are borrowing money at 2%.

It would be good to at least rerun your numbers as if you paid off the mortgage to see how they look.

Having a no mortgage payment may also allow you to keep your income low so you can qualify for an affordable care act subsidy after you retire, but there is no way to know what that will look like in the future.

Having a paid off house would also reduce your sequence of risk, here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
infotrader
Posts: 568
Joined: Tue Feb 28, 2017 1:39 pm

Re: Spouse's upcoming retirement

Post by infotrader »

I think you are in good shape.
I would like to present a question for us: what will be the best strategy for positioning tax deferred IRA and Roth in this case, since the income is pretty low and the husband will delay SS until 70 (good idea):
1) Don't do any 401k for wife, but only contribute to Roth for both after husband's retirement.
2) Do contribute to 401k to max for wife, but as a trade-off, convert husband's tax deferred balance to Roth up to the 12% ceiling. Due to further the delay of RMD as proposed, the husband probably will not need to take RMD at all.
3)? I cannot think of any other option better than the above, so your turn....
Topic Author
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Spouse's upcoming retirement

Post by kd2008 »

invest4 wrote: Sat Sep 18, 2021 9:05 am Given your expenses, I think y'all are in very good shape and fully support your 3% withdrawal rate. Others who have more experience with retirement, may have more specific questions or advice. As far as your own retirement, I would just keep working over the next 5 years or so and then reassess. There will be a number of considerations...medical for example (how will you manage until medicare?). You will also have a better handle on how spouse's retirement is going for the both of you (as expected or some unexpected surprises...either positive or not so much).

Congratulations to both!

Best wishes.
Thank you. Yes, we will reassess my retirement date as we get further along down the line and have a better idea about how his retirement is going.
Topic Author
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Spouse's upcoming retirement

Post by kd2008 »

Watty wrote: Sat Sep 18, 2021 9:17 am
kd2008 wrote: Sat Sep 18, 2021 7:24 am Annual expenses: $48K ($16K mortgage, $32K rest)

We expect the expenses to creep up to $60K - because of Medicare costs, may be some some extra travel etc once DH is 65.

Debts: Mortgage $204K @ 2%; 15 yrs remaining

Assets:
Taxable = $465K
......
Is there anything we have not considered?
What could we do better?
Unless I missed it you did not mention how much home equity you have. You cannot really count that as an investment but it is important in your overall picture and it is a good safety net.

Even though the interest rate is low I would go on and pay off the mortgage. There are lots of opinions on this but with your husband being retired you should have a significant percentage of your asset allocation in bonds so it is hard to justify having a lot of bonds that pay something like 1% when you are borrowing money at 2%.

It would be good to at least rerun your numbers as if you paid off the mortgage to see how they look.

Having a no mortgage payment may also allow you to keep your income low so you can qualify for an affordable care act subsidy after you retire, but there is no way to know what that will look like in the future.

Having a paid off house would also reduce your sequence of risk, here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Good point about reducing sequence of returns risk by paying off the mortgage.

My thinking is keep paying it on schedule and let taxable assets appreciate (not a guarantee). When we have a date for my retirement and the mortgage is not paid off yet, then consider paying it off in full.
Topic Author
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Spouse's upcoming retirement

Post by kd2008 »

infotrader wrote: Sat Sep 18, 2021 9:31 am I think you are in good shape.
I would like to present a question for us: what will be the best strategy for positioning tax deferred IRA and Roth in this case, since the income is pretty low and the husband will delay SS until 70 (good idea):
1) Don't do any 401k for wife, but only contribute to Roth for both after husband's retirement.
2) Do contribute to 401k to max for wife, but as a trade-off, convert husband's tax deferred balance to Roth up to the 12% ceiling. Due to further the delay of RMD as proposed, the husband probably will not need to take RMD at all.
3)? I cannot think of any other option better than the above, so your turn....
I do have an elaborate spreadsheet on realizing 0% LTCG, ROTH conversions, when to do pretax 401k or Roth contributions etc. But I have realized that while it works well in a spreadsheet, real life is a bit more complicated. I have it if needed but we plan to take each year and assess the situation on what combination reduces taxes and moves assets to non-taxable or lower tax basis so that in case I have to think about ACA subsidy, we have options and also have cash available to spend.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Spouse's upcoming retirement

Post by Watty »

kd2008 wrote: Sat Sep 18, 2021 12:53 pm My thinking is keep paying it on schedule and let taxable assets appreciate (not a guarantee). When we have a date for my retirement and the mortgage is not paid off yet, then consider paying it off in full.
There are lots and lots of threads and opinions about paying off a mortgage or not and there is no consensus. I like to turn the question around and ask, "If you had a paid off house then would you take out a new mortgage just to invest the money?". When you say it that way it sounds a lot riskier even though it is just about the same question.

There are also a lot of old threads you can look up about looking at a mortgage as being a negative bond in your overall asset allocation. The relationship is not exact but there is a lot of truth to that. Keep that in mind when you are figuring out what asset allocation you should have.
Topic Author
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Spouse's upcoming retirement

Post by kd2008 »

Watty wrote: Sat Sep 18, 2021 1:14 pm
kd2008 wrote: Sat Sep 18, 2021 12:53 pm My thinking is keep paying it on schedule and let taxable assets appreciate (not a guarantee). When we have a date for my retirement and the mortgage is not paid off yet, then consider paying it off in full.
There are lots and lots of threads and opinions about paying off a mortgage or not and there is no consensus. I like to turn the question around and ask, "If you had a paid off house then would you take out a new mortgage just to invest the money?". When you say it that way it sounds a lot riskier even though it is just about the same question.

There are also a lot of old threads you can look up about looking at a mortgage as being a negative bond in your overall asset allocation. The relationship is not exact but there is a lot of truth to that. Keep that in mind when you are figuring out what asset allocation you should have.
Thank you. Yes, I have read a few of them. My conclusion was it just depends on each person's comfort level with carrying the debt and risking investing in equities. Mortgage as negative bond is all semantics. Real life plays out much differently. A chunk of our taxable was invested near bottom around March 2020 upon sale of our previous home. The risk paid off and it has appreciated more than twice the life time interest on our mortgage. We understand we lucked out and it could have gone the other way. That's the way chips fall so it is important to make a decision based on your IPS and get on with your life.
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