The November issue of Money magazine contains a bunch of retirement articles. It must be their retirement issue. I am planning to evaluate each article one at a time to see if I agree with their position. The first article is about preparing for retirement with a checklist for you to compare to at 10, 5, and 1 year out. Let’s do the 10 years out scenario today.
Money Magazine: Their target retirement saving is 12x your pay when you’re 65. At 10 years out, you should be at 7x your pay. If you’re not there yet, then you can try to boost saving or plan to work longer.
First of all, I disagree with using your current income as a bench mark. Your retirement depends on what you spend. If your expense is 50% of your pay, then you probably don’t have to save as much. For us, we didn’t save up 12x our pay before I retired from my engineering career. However, now that I’m not working anymore, we probably do have around 12x our current annual take home. People close to retirement age should examine their expenses and cut them before they retire. 12x also seems kind of low. I think saving up 25x your expense is safer. Working longer is a good option too, but I think working part time is the way to go when you are near retirement.
Unsync with spouse
Money Magazine: Many couples retire around the same time, but quitting in tandem may not be a good move. The average length of widowhood is 12 years, per the Center for Retirement Research at Boston College. If one spouse works longer, you can withdraw less from the portfolio in the crucial initial year.
I’ll have to agree with this. Some readers don’t like that I’m retired while Mrs. RB40 still works full time. The benefit of one spouse working is huge. The longer you can hold off withdrawal, the better off you’ll be during your full retirement. Keeping one spouse on the clock will help the whole household in later years. The spouse with a full time job will really help with the health insurance situation as well. It’s great for us that Mrs. RB40 likes working at her job.
Don’t quit on stocks
Money Magazine: Retirement in our modern age can last 30 years. We need to invest for growth and stock should make up 50% to 60% of your allocation.
I still believe that investing in the stock market is good for the long term. Right now, we have only 5% – 10% invested in bonds. Once I finish my 401(k) rollover process, I’ll increase our bond allocation to around 20%. We still have 20 years before full retirement and we’ll gradually decrease our stock holding and increase our bond allocation as we age. My current allocation for stock is around 80%. Personal Capital helped me come up with the right allocation for my age. My free financial planning session went really well and I learned quite a few things.
Keep the mortgage?
Money Magazine: If the rate is less than 5%, it’s probably better off to carry the mortgage and invest the extra money instead. Refinancing into a shorter term mortgage is also a good move.
Why pay off the mortgage early when the rate is so low? It really depends on your priority. Some people don’t like to owe money and want to pay off the mortgage as soon as possible. As for me, I think a mortgage is fine as long as you can afford the monthly payment. We are paying a bit extra and plan to pay off the mortgage by the time we hit full retirement.
Manage your career
Money Magazine: Expand your skill set and hang on to your job…
This is probably a good idea if you haven’t hit your retirement saving target yet. If you enjoy your job, then keep working and saving. On the other hand, if you hate your job like I did, then a good alternative is to work part time or find something else to do. You can work longer if you enjoy what you do. Don’t work for 10 more years in a job you hate because the mental stress can wreck havoc on your health.
Delay social security benefit
Money Magazine: The earliest you can claim social security benefit is at 62 years old. If you delay until full retirement (67), then your payment will increase about 6% per year. If you can hold off until 70, you will gain another 8% per year. If you live until 80 or 90, it’s better to delay the social security benefit as long as you can. Here are a couple of options.
- Stay on the job or work part time
- Take spousal benefits at full retirement age and then convert to your own benefit at 70.
I think holding off on the social security benefit is a good idea. However, if you have a health issue, then it’s probably better to take it right away. We plan to delay social security benefit as long as we can. It’s still 20+ years into the future so it’s hard to forecast right now. The spousal benefit thing is pretty complicated too. You need to research to maximize the benefit. Don’t file for spousal benefit before retirement age because it will be deemed as filing for your own benefit. This will prevent your benefit from growing.
All in all, these seem like good advice for the masses. For an early retiree like me, taking up a part time job or finding different ways to generate income will be the key to delaying withdrawal. We don’t plan to withdraw from our retirement funds until we’re in our 60s. It’s good to plan even if you are in your 20s or 30s. If you are able to save up 20x your annual expense, then you will have more freedom to choose whether to retire early or change career.
Continue: If you have 5 years before retirement…