I’m 58 and I have $700,000 in 401(k)s and IRAs. I have no credit card debt, no auto loan payments and no student loans. I sold my home in California and paid cash for a house in Texas, so I have no mortgage. I’m retired military and bring in about $2,200 per month after taxes. My living expenses are $3,000 per month including property taxes. How can I pay all living expenses without working in my situation? I won’t see Social Security for seven years.
– Derick
It sounds to me like you have done a fantastic job of saving and putting yourself in a position to support your needs throughout retirement, even in the years before Social Security. However, since you aren’t yet eligible to make penalty-free withdrawals from your retirement accounts, you’ll need to think about the best way to cover your monthly cashflow needs until you reach age 59.5. (And if you need more help with your plan for retirement, consider speaking with a financial advisor.)
Covering the Deficit
Your monthly take-home pay from the military ($2,200) and monthly living expenses ($3,000) means you have a deficit of $800 per month that you have to cover through a combination of your savings and eventually Social Security. That comes out to $9,600 per year.
For the time being, let’s ignore Social Security since you won’t be collecting it for a few years. We’ll come back to it later, though.
The 4% rule says that you can withdraw 4% of a balanced retirement portfolio every year with little risk of ever running out of money. In fact, you may end up with more money than you started with if depending on how your investments perform.
If we apply the 4% rule to the $700,000 you have in your retirement accounts, it says that you can safely withdraw $28,000 in your first year of retirement. The rule also calls on you to adjust your subsequent withdrawals for inflation each year.
Now, it’s important to note that the 4% rule is just a rule of thumb. There are plenty of reasons that it might make sense to adjust your withdrawal rate up or down based on your specific situation.
But in this case, that $28,000 safe withdrawal amount is so much higher than the $9,600 you need that I would feel very safe if I were you. As long as you stick to a reasonable and consistent investment plan and your annual withdrawals are generally between $9,600 and $28,000, you should have more than enough money to cover your needs. (And if you need help building a retirement withdrawal plan for the future, consider matching with a financial advisor.)
Where to Withdraw the Money From
The one tricky part here is that you’re 58 and are not allowed to take qualified withdrawals from your retirement account until you are 59.5. This means that your withdrawals may be subject to an additional 10% penalty between now and then.
If we assume that you just turned 58, you have 18 months until you reach age 59.5. At $800 per month, that’s a total of $14,400 that you’ll need on top of your military income before you can make penalty-free withdrawals.
So, how can you cover that $14,400? You have a few options.
First, you may have enough in your checking and savings accounts to get you through the next 18 months, or at least part of the way through. That’s where I would start.
Second, if you have a Roth IRA, you can withdraw up to the amount you’ve contributed at any time and for any reason without taxes or penalties, even before age 59.5. That’s the next best option for handling the next 18 months.
Finally, you could always just withdraw the money from your 401(k) or traditional IRA and pay the 10% penalty. It’s not ideal, but we’re talking about a penalty of around $1,500-$2,000 depending on exactly how much you need to withdraw to cover taxes and the penalty on top of your $14,400. It would of course be better to not have to pay that amount, but given your position it doesn’t appear that it would significantly impact your ability to support your retirement needs. (A financial advisor can help you assess your retirement options further.)
What About Social Security?
In a few years, you’ll be eligible to collect Social Security as well, and that will turn things even further in your favor.
Using the SSA’s quick calculator, I entered a birth date of Oct. 1, 1965, a retirement month of October 2023 and current year earnings of $40,000. With those variables, your estimated monthly benefit at age 62 would be $959 in today’s dollars ($1,127 in inflation-estimated dollars).
That $959 would likely be enough to cover your entire $800 deficit, though that does depend on the specifics of your tax situation. In any case, the likelihood seems to be that once you start collecting Social Security, you may not even need to make regular withdrawals from your retirement accounts beyond eventual RMDs.
Of course, you could delay Social Security until your full retirement age of 67 or even until age 70, which would increase the monthly benefit you receive. You certainly have the retirement funds to do either of those, so it would simply be a question of running the numbers and deciding which route you’re most comfortable with. (If you need more help planning for Social Security, consider speaking with a financial advisor.)
Bottom Line
The bottom line here is that you are in very good shape. You have more than enough retirement assets to cover your needs, even without Social Security. And once Social Security kicks in, you may not need to tap those retirement assets much at all.
The worst-case scenario that I can see is the possibility of paying a 10% penalty for early withdrawals from your 401(k) or traditional IRA to cover your needs before you reach age 59.5. But given your situation, even that shouldn’t be much more than a minor inconvenience.
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Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.
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