After spending 27 years at a single company, I retired last December at the age of 59 and now have access to my 401(k). My salary has been roughly $100,000 annually, with bonuses that fluctuate. My husband is also retired and receives Social Security but still has insurance coverage. We own our home and car outright and, fortunately, have no debts. Recently, my 401(k) has seen a return of about 57%. Over the past three years, my average income has been around $125,000, giving me approximately $15,000 in cash annually. Given my upbringing in a low-income household, I tend to be very cautious about financial risks.
Our monthly expenses run about $2,000, primarily due to pet fees and taxes. We’re not big spenders or vacationers. I do have an additional $400 monthly premium for health insurance until I turn 65. I’ve been considering whether to take on part-time work to cover these insurance costs. Is this a sensible route to take? How can I ensure I’m financially ready for this new phase in life?
As per Steve Sexton, an expert in retirement planning, you appear to be starting this next chapter in a robust financial position. Owning your home and car free and having low monthly expenses, along with substantial savings in your 401(k) and cash reserves, bodes well for you. However, seeking advice from a financial advisor might also be beneficial. There are resources available that can match you with a fiduciary advisor to help guide you through this transition.
Your husband’s Social Security benefits, combined with the interest from your CDs, pretty much cover most of your essential costs. With over $575,000 saved in your 401(k), you have ample support for a conservative withdrawal strategy. Sexton suggests considering part-time work to help with health insurance until you qualify for Medicare, which could ease some pressure on your finances in early retirement.
Managing Your 401(k)
Before fully stepping into retirement, it might be wise to reassess your investment strategy. Although your 401(k) has performed well recently, it’s crucial to ensure that your portfolio is focused on stability and income rather than aggressive growth that may have worked in the past.
Having worked with the same company for 27 years may mean you have company stock in your 401(k). Knowing about net unrealized valuation could help you save money on taxes in the long run if your stock has appreciated. Creating a tax-effective withdrawal strategy is also something to keep in mind, as simply relying on cash and CD interest can lead to higher taxes in the future.
Handling CDs
If interest rates decrease, the income from your CDs when renewed could be significantly lower, which might create unexpected financial gaps. It’s necessary to keep an eye on your cash and CD balances, as too much cash can introduce reinvestment risk. If interest rates fall, you might find that your current annual interest income diminishes over time. While being risk-averse can justify holding more cash, many retirees usually keep two to three years’ expenses in cash reserves. Gradually shifting some cash into longer-term investments could be beneficial.
However, focusing too much on safety can be risky. Although it’s important to prioritize safety, holding onto cash for too long can lead to inflation quietly eroding your purchasing power. It’s essential for low-spending households to maintain a portion of their investments geared towards long-term growth.
Other Considerations
Setting aside funds for future major expenses, like buying a new car, is also a good practice. Creating a sinking fund helps manage surprises and keeps your retirement withdrawals consistent.
Don’t forget to consider potential upcoming medical expenses, as they can be one of the largest financial variables in early retirement.
Choosing the Right Financial Advisor
Given your situation, working with a fee-only fiduciary planner who specializes in retirement income and investment management is advisable. This professional should assist you in structuring tax-efficient withdrawal plans, managing pre-Medicare medical expenses, and optimizing your Social Security benefits.
When searching for an advisor, look for someone with a Retirement Income Certified Professional (RICP) or Retirement Management Advisor (RMA) designation. They should have experience relevant to your circumstances and be clear about how they’re compensated. Focusing on planning and education is a positive sign.
In summary, having a trusted financial planner, even if just for an annual check-in, can keep you on track. This advisor can help you determine how to allocate resources effectively and may even suggest ways to increase your spending comfortably if desired. Your current financial discipline combined with contentment in your lifestyle is definitely an asset.
