I’m 58 and have $700,000 in 401(k)s and IRAs. I have no credit card debt, no car loan payments, and no student loans. I sold my house in California and paid cash for a house in Texas, so I don’t have a mortgage. I’m retired military and make about $2,200 a month after taxes. My living expenses are $3,000 per month, including property taxes. In my situation, how can I pay all living expenses without working? I won’t see Social Security for seven years.
– Derick
It sounds to me like you’ve done a fantastic job saving and putting yourself in a position to meet your needs throughout retirement, even in the pre-Social Security years. However, since you are not yet eligible to make penalty-free withdrawals from your retirement account, you need to think about how best to meet your monthly cash flow needs until age 59.5. (And if you need more help with your retirement plan, consider speaking to a financial advisor.)
Covering the deficit
Your monthly net military pay ($2,200) and your monthly living expenses ($3,000) mean you have a deficit of $800 per month that you will need to cover through a combination of your savings and possibly Social Security . That equates to $9,600 per year.
Let’s ignore Social Security for now, since you won’t be collecting it for several years. However, we will come back to this later.
The 4% rule states that you can withdraw 4% of a balanced retirement portfolio each year with little risk of ever running out of money. In fact, you may end up with more money than you originally had, depending on how your investments perform.
If we apply the 4% rule to the $700,000 in your retirement account, that means you can safely withdraw $28,000 in your first year of retirement. The rule also requires 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 many reasons why it may make sense to adjust your withdrawal rate up or down depending on your specific situation.
But in this case, the safe withdrawal amount of $28,000 is so much higher than the $9,600 you need that I would feel very confident if I were you. As long as you stick to a sensible and consistent investment plan and your annual withdrawals are generally between $9,600 and $28,000, you should have more than enough money to meet your needs. (And if you need help building a retirement plan for the future, consider working with a financial advisor.)
Where can you withdraw the money from?
The only thing that’s tricky here is that you’re 58 years old and you’re not allowed to make qualified withdrawals from your retirement account until you’re 59.5 years old. This means that your withdrawals until then may incur an additional 10% penalty.
If we assume that you have just turned 58, you still have 18 months until you turn 59.5. At $800 per month, that’s a total of $14,400 you’ll need on top of your military income before you can make penalty-free withdrawals.
So how do you come up with that $14,400? You have several options.
First, you may have enough funds in your checking and savings accounts to get you through the next 18 months, or at least part of it. I would start there.
Second, if you have a Roth IRA, you can withdraw up to your contributed amount at any time and for any reason without taxes or penalties, even before age 59.5. This is the next best option for dealing with the next 18 months.
Finally, you can always simply withdraw the money from your 401(k) or traditional IRA account and pay the 10% penalty. It’s not ideal, but we’re talking about a penalty of around $1,500 to $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 not to have to pay this amount, but given your situation it doesn’t seem like it would significantly impact your ability to meet your retirement needs. (A financial advisor can help you further evaluate your retirement options.)
What about Social Security?
In a few years, you will also be eligible for Social Security contributions, and that will tip even further in your favor.
Using the SSA’s quick calculator, I entered October 1, 1965 as my birth date, October 2023 as my retirement month, and current year earnings of $40,000. With these variables, your estimated monthly benefit at age 62 would be $959 in today’s dollars ($1,127 in estimated inflation dollars).
That $959 would probably be enough to cover your entire $800 deficit, although it depends on the specifics of your tax situation. In any case, it seems likely that once you start collecting Social Security, you may not even need to make regular withdrawals from your retirement account beyond any RMDs.
Of course, you could delay taking Social Security until your full retirement age of 67, or even until age 70, which would increase the monthly benefit you receive. You definitely have the retirement funds necessary to do both. So it would just be a matter of running the numbers and deciding which route you feel most comfortable with. (If you need further help planning for your Social Security, consider speaking with a financial advisor.)
Bottom line
The bottom line is that you are in very good shape. Even without Social Security, you will have more than enough retirement savings to meet your needs. And once Social Security takes effect, you may not need to draw heavily on those retirement savings at all.
The worst-case scenario I can imagine is the possibility of paying a 10% penalty for early withdrawals from your 401(k) or traditional IRA account to meet your needs before you turn 59, are 5 years old. But given your situation, even that should only be a minor inconvenience.
Tips for Finding a Financial Advisor
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Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It is important that you find someone you trust to manage your money. As you weigh your options, consider asking an advisor these questions to ensure you are making the right choice.
Matt Becker, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question you would like answered? Email [email protected] and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
Image credits: ©iStock.com/Fertnig, ©iStock.com/Larisa Stefanuyk
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