Earlier this month, Mrs. RB40 (my wife) came home from work in a huff and gave everyone a hard time. Turns out, her boss is leaving soon and her job will most likely change. She really enjoys her current job so this upcoming change unsettled her. Luckily, we already achieved financial independence so she has more choices than many of her coworkers. Things have calmed down a bit since then. She plans to stay for a while and see how everything shakes out. For now, she’ll stick to her 2020 early retirement target date. Anyway, it is a good time for us to go over her retirement benefits and see where she stands. Should she work longer to increase her pension and other retirement benefits?
The first part of Mrs. RB40’s retirement benefits is her 401k plan. She started working with her current employer in 2006 and she maxes out her 401k contributions every year. When she retires in 2020, she can rollover this 401k plan into a traditional IRA or just keep it with her employer. Both choices are good. Her employer’s 401k plan has very low fees and it is a great place to park her retirement fund and let it accumulate.
However, if she wants to access this stash before turning 59 ½, then it’s best to roll it over into a traditional IRA. Once there, she can build a Roth IRA ladder by doing a partial conversion every year. This way she can access her retirement fund and avoid the 10% early withdrawal penalty. You can read more about the Roth IRA ladder here.
Her 401k plan did very well over the last 12 years. She started with nothing in the account and now it is worth more than $360,000. This is why I think the 401k plan is awesome. You won’t even miss the money because it comes out of your paycheck before you see it. Most workers should contribute as much as they can to their 401k.
This 401k plan is easy because it doesn’t matter when she retires. She will get to keep the whole amount whenever she retires.
Next is Social Security benefits. This one is pretty easy too. Mrs. RB40 has already worked long enough to receive Social Security benefits. She can start receiving the full benefit when she turns 67. Alternatively, she could start collecting when she turns 62, but the benefit will be reduced. Both cases are a long way off so we won’t see these checks anytime soon. I think it’s probably best to delay the Social Security benefit until she turns 67. That way, she’ll get the full amount.
Her current Social Security benefit estimate is around $2,400/month. This Social Security estimate will decrease a bit if she retires early because her future earnings will be less.
This is the tricky one. Mrs. RB40 is lucky enough to work for an employer with pension benefits. Their pension program is somewhat complicated so I’ll just give an estimate.
When Mrs. RB40 retires in 2020, she will be 46 years old. That’s way younger than the usual retirement age and she won’t be eligible for pension right away. However, she can defer her pension benefit until she turns 62.
From what I understand, Mrs. RB40 will receive about $1,100/month from this program when she turns 62, assuming she retires in 2020 and defers it. At this rate, working a few years longer won’t make a big difference in her pension benefit. Each year will be incremental. She’d need to work many more years to increase this benefit significantly.
I haven’t looked at her pension benefit closely before so this is a pleasant surprise. I thought she wasn’t going to get anything. $1,100/month is a very nice bonus. As a comparison, my pension benefit from 16 years at Intel will be about $350/month when I turn 65.
She won’t get this pension benefit when she retires in 2020, but it will be there when she turns 62. I think that’s fantastic.
Lastly, there is one more great benefit from her employer – healthcare coverage. However, she probably won’t be able to take advantage of this one. If she works here until she turns 57, then she can keep her healthcare coverage into retirement. This is a huge benefit for early retirees. However, Mrs. RB40 is just 44. I don’t want her to work full time for 13 more years. 57 is a long way off.
We are on her health insurance plan right now and it’s great. The premium is affordable and the coverage is good. We’re very happy with this plan and our doctors. This is my biggest worry when Mrs. RB40 retires in 2020. We’ll probably get a silver plan through healthcare.gov. This will cost us about $500/month. Mrs. RB40’s current plan is better, though. It costs less and has better benefits. Too bad she can’t keep it after she retires early.
However, there is a hack. From what I read, she can go back to work when she’s 56 in 2030. She can enroll in the employer sponsored health insurance plan for a year and retire again at 57. Then she can keep this health insurance forever. This sounds like a good trick, but I doubt she would want to go back to work full-time at that point. Also, this hack might not work by then. Things change all the time.
We’ll have to note it down and investigate this again when she’s closer to 57. This trick might come in handy if healthcare cost continues to skyrocket in the US.
Early Retirement Summary
In summary, Mrs. RB40 has a pretty sweet retirement package. She won’t be able to take advantage of everything right away, but the benefits will be there for her in the future. Here are the important dates.
- Early retirement in 2020 – Mrs. RB40 retires early at age 46, around midyear. We’ll get health insurance from healthcare.gov and go with medical tourism for expensive procedures.
- Roth IRA ladder from 2020 to 2030 – Over this 10 year period, she can build a Roth IRA ladder to avoid the 10% early withdrawal penalty.
- Back to work in 2030 – Mrs. RB40 turns 56. Maybe she’ll go back to work for a year to get good health insurance coverage? This is entirely optional.
- Retire again in 2031 – Mrs. RB40 turns 57. She can retire after working for one year and keep the health insurance.
- Begin withdrawal from her retirement accounts in 2034 – She turns 59 ½. At this point, she can withdraw from her 401k and traditional IRA with no penalty. My back-of-the-envelope calculation indicates she can withdraw about $2,400/month. This is a very rough estimate based on 4% withdrawal.
- Receives pension in 2036 – She turns 62 and receives her pension benefit, about $1,100/month.
- Medicare in 2039 – Mrs. RB40 turns 65 and becomes eligible for Medicare.
- Social Security benefit in 2041 – She turns 67 and receives full social security benefit, about $2,400/month.
Why she shouldn’t work longer than 2020
Mrs. RB40’s retirement looks great to me. The most challenging period financially will be the first 14 years, from 2020 to 2034. She will need to figure out how to fund her expense while minimizing withdrawal. It looks okay for now because our passive income + blog income are enough to cover our living expense. We will build a Roth IRA ladder and use it to cover any shortfall.
Once we both turn 59 ½, then withdrawal will become much easier. We can withdraw from our retirement accounts as needed. A few years after that, pensions and social security benefits will start rolling in. At that point, our retirement finance looks golden and we’ll probably both fully retire to a life of leisure.
I really don’t think she needs to work longer than 2020 unless she really wants to. Her finances look really good. There is income from various sources and the total amount looks very good.
Adding my retirement fund to the mix
If we take my retirement accounts and various hustles into consideration, the picture looks even rosier. I’m pretty sure our retirement income will be over $10,000/month. That should be more than enough for a comfortable retirement.
For a more comprehensive look, I put everything into the Retirement Planner at Personal Capital. This tool is really neat because it takes our current portfolio into account.
We are in excellent shape. Our projected retirement spending ability is $25,467 per month. That’s a lot of money. I think 8.6% annual return is probably too high, though. Anyway, our retirement looks good financially.
We might even have some money left over for a small legacy to our son.
Do you have a pension? How long will you have to work to receive it? Will it be enough to fund your retirement?
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Image credit: Eutah Mizushima
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.