A different kind of investment question…

There's stuff I know, and stuff I don't know. I'm not always good at following my own advice. 
 

Now I'm facing retirement, and I'm realizing I really don't know anything about the financial aspects of starting this phase of life. 
 

There's some good stuff about what I've done, and some bad. But I really don't know how to position myself for this next phase. 
 

The particulars... I'm 61.  Going through a divorce.  I have no pension or retirement benefit from my employer (so I am entirely self funded). I make a good income, and have a good nest egg. The only insurance I have is through my company, so I will lose it when I retire. I won't qualify for Medicare until I'm 65.  I'm just about ready (mentally) to retire. 
 

Most of my net worth is in managed investment funds (I know... bad idea). Some of it is retirement  accounts (with mandatory withdrawals). I'm unsure of the advantages and disadvantages of changing to index funds at the is stage in my life. 
 

I'd like to retire.  Don't want to collect SS until 67. And I'm not sure about the health insurance impact (I'm in very good health and never needed the insurance, but things can change quickly at my age). 
 

I've always been good at saving. Not always good at enjoying what I've saved. I want to change that (but also need to have enough to self-fund retirement). 
 

It's time for me to make some big life changes and reposition myself for retirement, but I'm really not sure how to do that. 
 

Any thoughts?

First, I'm sorry to hear about your divorce.  I'm sure that's not easy for you on many levels.

Others will have more detailed advice than I can offer, but generally, take distributions from non-Roth IRAs first and save the Roths for last so you can maximize their tax-exempt growth.

For Social Security, it's a matter of odds.  If you delay starting it until 67, that's 60 payments you will miss versus starting next year.  On the flip side, your monthly payout will go up approximately 8% for each year you wait.  So basically you have to figure out if the larger payment for a shorter time will add up to more than the smaller payment for 5 extra years... which ultimately depends on a reasonable estimate of your life expectancy.

On the health insurance front, This Thread Is Relevant To My Interests.

Good luck!

I stay out of these threads, as 5 people will have 20 opinions. These threads often delve into the ones "which car is best for me," or "what is your insurance rate," way too many factors. 

Having said that, sorry to hear of your divorce. Can't be easy.  IF you need anyone to talk to feel free to reach out, you know where to find me. 

I'll echo the sorry about the divorce. 

I can't offer a ton here but I did go through the math of when to start receiving social security estimated numbers from the SSA. I did everything from 62 to 70 and the lines all cross somewhere around 79. So for me if I think I am going to die before that number then the earlier the better. If you look at the chart below unless you are really far outside of the cross over point the difference between early and late withdrawal isn't massive. Note the chart goes from 62 (0 years) to 95 (33 years).

I'm sorry to hear of your divorce.

Similar situation here (58.5 and I'll retire in four years or less).

#1...what do you currently spend.

#2...what will change (health insurance - no more saving for retirement - tax rates)

#3...what percent of your portfolio are you comfortable spending per year.

The "Four Percent Rule" has been well tested but we are currently experiencing very unusual economic conditions and the rule assumes retiring at 65 so you'll want to adjust down to somewhere between 3.0% to 3.5%.

So, if you want to live on 100K per year with little risk of outliving your money, you'll need somewhere between 2.85M and 3.33M in your portfolio.

Of course, you'll eventually get SS and Medicare but I ignore that in my calculations and just think of them as extra insurance.

Here's are very simple calculator I use to run what-if scenarios...the key thing to note is the diminishing returns associated with being super conservative (i.e. waiting until you've accumulated much more than you think you need).

FWIW, I use a 3.25% draw rate and $140,000 per year so once I've got a 4.3M+ portfolio - hasta la vista baby. 

In reply to NY Nick :

Great graph...thank you for sharing it.

If I only had to think about myself, I'd start collecting as soon as possible and just invest the money.  Yes, I'd be forfeiting the diversification but I'd be avoiding the risk of dying early and getting little or none of the 420K+ my employers and I have paid into the system over the years.

However, I make a lot more than my wife and she's seven years younger than I so she'll likely spend ten years after I die (three year longer life expectancy) getting half of my SS as a survivor benefit.

I'm just going to play it by ear...if I have no need for the money and my wife's health is good, I'll hold off.

Imho, an honest budget is really needed. And w/o job healthcare, you probably will use the ACA choices. And because of that, my input is done. 

Not much to add other than also sorry to hear about the divorce. 

And I totally understand being mentally ready to retire. I'm basically there now.  I'm fried... the last thing I needed was another assignment away from home. But here we are... 

At 52, I'm hoping to retire at 60 - when one can withdraw from a 401k account penalty-free.  Then collect Social Security at 67 (earliest for my age).  My house is small so utility and tax costs are comparatively low, so SS should cover that or least put a big dent into it. 

I don't know about the 4% rule... my intention is to try living on less than that. 

Health insurance is definitely something I ponder as well. I hope to have enough saved in my HSA to use that to cover me through some sort of a ACA insurance option until I qualify for Medicare. 

Then what... tinker with my cars... play my guitars... travel around in my camper van for a month or three each year to biking areas.  Maybe take up a bit of gardening in an attempt to grow my own food.  It's all a roll of the dice, but I figure I'll have a few years before most of my free time will be caring for my mother, who is only 22 years older than me and will be in her early 80's when I hope to retire.

NY Nick said:

I can't offer a ton here but I did go through the math of when to start receiving social security estimated numbers from the SSA. I did everything from 62 to 70 and the lines all cross somewhere around 79.

Wow, thank you.  That's fantastic info.

In reply to RX Reven' :

That's a great strategizing tool.  Thanks for sharing the link.

The first thing you need to do is figure out your current spending and understand which expenditures will remain after retirement and for how long. I had to factor in the mortgage for a number of years for example. The divorce will likely complicate things. Start thinking about cash flow rather than gross income as tax rates and income will change. Once I gave my financial advisor my pre-retirement spending he generated a spread sheet that showed when I would run out money. He used the typical 4% withdrawal but was adamant that my spending would drop and he was right. The only scary thing about your scenario is health insurance. It's expensive and life can throw a curve ball at you, just look at my situation the last eight months.

Edit: I'll add that I retired at 56 and bridging from there to Medicare was a significant expense to factor in.

DeadSkunk (Warren) said:

 

Edit: I'll add that I retired at 56 and bridging from there to Medicare was a significant expense to factor in.

My current plan has me retiring between 52-55. Could you expound on the #s a bit?

In reply to RX Reven' :

I just ran my current numbers through that calculator you linked to. My sons would love the answer it spit out.

Yes. The expense budget is a huge issue. And I don't have any way of knowing a few things until the divorce is resolved. 
 

How important is it to consider a low fee index fund (instead of a managed fund) when time is no longer on my side?

Ive enjoyed the input of the advisor, but honestly I'm not too sure how worthwhile some of his advice is any more. 

In reply to mr2s2000elise :

I was 56 and my wife was 52. This was in 2008. I stayed with the Blue Cross plan I had at work except it was on my dime. The cost was $1689/month until I went to Medicare and then it dropped to $894 for my wife alone. I could have reduced costs by using higher deductibles or a health savings account, I chose to stay with the convenience of a premium plan. Two years later I was getting a triple bypass and the bills would have given me a heart attack if not for the insurance.

Take a few weeks off and marinate on the future.  This is a big change and your head is probably not in the right place now.  A few weeks somewhere or travelling may help, it couldn't hurt.   

Working part time doing something different that gives health insurance might not be bad.  As long as you are working the subsidy from obamacare is excellent.  If your income drops below a certain level you may qualify for medicaid, which is not a terrible thing.  

In reply to porschenut :

Good advice

I don't think that paying fees for what's likely sub-optimal performance will ever benefit you, so I'd pursue converting to the index funds. That said, the difference is usually small and is more important with compounding over time. I'd consider it fine tuning rather than something that will have large benefit right away.

You'll need to determine what your expenses might be. That's probably not possible until the divorce is done and you've had some time to acclimate to what your life is like on the other side.

It seems like the real question is, how do you bridge the gap between now and age 65 or 67. That's a question with tons of possible answers. If you're willing to work a low stress job for the insurance, it could probably allow you to retire sooner as the income would help, and it would reduce your healthcare costs.

I know that this group has tons of very smart people that are always willing to help, many of whom have done very well for themselves and navigated this stretch already but I'd strongly consider posting a case study over at the MMM forum. They nerd out about this stuff the way that we nerd out about cars. You can remain more anonymous, while sharing exact details about numbers, account types, etc. That will get you tailored advice based on your specifics. And it's free.

I've been watching a few vids recently about this topic & the one takeaway I had was relating to the life expectancy charts. The presenter stated how those charts contain infant mortality, accidental death & anything else that can occur earlier in life. These all skew the average age lower. So once you're nearing retirement, there's actually greater odds of you living past the average age. I think he said to use 85-90 given no preexisting conditions or any other health concerns. 

In reply to Pete Gossett (Forum Supporter) :

That's an excellent point.

Given my family history, I don't expect to see 90. But I'm not willing to bet against myself, either.

Not only that, but the average age tends to go up.  Probably the best estimate (sorry for the bummer here) is to look at you parents and add a bit.

Regarding managed funds, I don't think there is any real advantage to a managed fund, they certainly go down with the market when it goes down and don't go up any faster.

Ian F (Forum Supporter) said:

At 52, I'm hoping to retire at 60 - when one can withdraw from a 401k account penalty-free.

That information is not entirely correct. I'm guessing the 52 part is spot on. But in the US, the rule of 55 allows one to withdraw from a 401k in the year they turn 55 without penalty with some caveats. 59.5 is the age for other typical retirement accounts.

Secondly, while the original question was about financial planning, I've found almost half of the retirement advising I have done ended up being about planning life. People think they can replace work with hobby only to realize the hobby is way more expensive full time - typically in terms of physical expense on their bodies.

Many people think that retirement means that one stops working, but the better reality is that one stops being employed. Without the work, ones life tends to lose value at which point it is a quick trip into the grave. So advise everybody to have a work plan; house work, yard work, hobby work, charity work, grandkids, neighborhood kids, knowledge enrichment work. Doing nothing leads to death.

I like the idea of taking SS as soon as possible and throwing that money into investment accounts. All of the charts I've seen compare the money one gets from the government at the younger age versus the money one gets from the government at the older age, but I've never seen one that shows the opportunity cost of not investing that money oneself for those years.

The other question that is pertinent to the discussion is legacy planning. Are you hoping to balance things to the point that the check to the undertaker bounces or are you planning on leaving something for somebody? The investing strategy changes depending on end game.

My personal strategy has been to have 1 large cap index fund, 1 mid cap index fund, 1 small cap index fund, and 1 international fund. A basic four fund portfolio. When my father retired I set up the same thing for him but instead of the small cap index I put him in a balanced fund. Over the last decade, he has been taking RMDs and buying vacations and cars from that retirement account and living on his pension & SS. That retirement has almost tripled over the last 7 years despite the withdrawals and the rough market of late.

In reply to Johnboyjjb :

That's a strategy I hadn't considered

In reply to Johnboyjjb :

What are some of the funds you have preferred?  Are they managed, or self?

VLCAX Large Cap

VIMAX Mid Cap

VSMAX Small Cap

VXUS International

VTSMX Balanced (Total Stock Market)

There are variations of these 5 (Admiral, growth, dividend, etc.) but they are the basis for most (uncertified) advice I give. And I use the Vangurad index funds and convert them to the nearest Fidelity funds when necessary. Two reasons, I remember the Vanguard names better, and I like Vanguard and Fidelity as brokers.

Sorry to hear about the divorce!  

I'm 62 and trying to figure out how to eat when I retire.

Most everything has been covered above.

You will need a budget!   Remember, this is about cash flow so delaying drawing social security increase that monthly check, but if you need it sooner, take it!

Health insurance with Medicare can start at 65.  From what I could figure out in the last few weeks, that will be starting around $170/mo.