Click here – I decided to keep a part-time job that requires about 10 hours a week which should eliminate the need to withdrawal any funds from tax deferred retirement accounts.
I have been working on our estimated income and expense budget for full-timing in an RV. Figured it would be a good idea to also highlight a few decisions I had to make when updating the financials during retirement planning. This is going to be a long post so you might want to skip to individual sections that interest you.
I’m planning to review our financial plan over time to make sure we are on track just in case we have to make sudden changes in our savings habits. As of March of 2016 we are still looking good.
But first a disclaimer – I’m not a financial planner or accountant so consider that when you read about my decisions. I’m including only as much detail as it relates to Karen’s and my situation. I suggest you check with other sources for more details. Personally I’ve always valued my accountant’s opinion over a paid financial planner who is selling a product. Fortunately, as a business major most financial stuff comes easy to me.
- Regarding Social Security
Karen may be taking her social security early (at age 62) as she is a few years older than me. If she is working part-time at age 62, we may delay a year or two for her as I’ll still be earning a fulltime income. Every year you delay taking Social Security the life-time benefit goes up around 6% a month. That’s huge because in comparison I’m only planning to be able to take 4% out of our 401k type investments. Or in other words, earning an extra 6% safely in retirement is nothing to take lightly. Karen retired at 58 and as of now is considering a part-time job doing something she would enjoy. Her eventual Social Security benefit will be reduced as she will have a few years with no income. No worries, she already worked 35 years which is the maximum period Social Security uses to figure your benefit.
We will decide at the time I’m 62 if I’ll take it early. Even at 62 years of age, my social security benefit is higher than Karen’s. So if I die before her she has an option of using my higher social security benefit rather than her own.
Social security has an added benefit in that it can go up with inflation which is something to think about. There are other considerations when you are married that I’ll not go into detail about. One area is when a spouse can file for the benefit at full retirement, then delay taking the benefit. While drawing the equivalent of 50% of what your spouse collects without them losing any benefit.
You also have to think about the penalty if you have earned income in addition to social security of more than $15,480. Earned income is money you earn from an employer that does not include other income such as pensions. In our case, with our expected budget living full-time on the road, this will not be an issue as our earned income requirement is well below $15,480. Here is a link for how the Social Security Administration figures reduced benefits.
You may also want to determine how taking social security early will influence what income tax you pay.
What’s important to me is the fact that if I took social security at 62, the break-even is 12 years. In other words I’d be 79 before I’d lose any actual benefit from taking it early. It’s not surprising that 79 years old is near the average life expectancy of a male. My folks died younger than that. Karen’s side of the family seems to live longer. Some say if you took the money early and invest it until your full retirement age the break-even is closer to 16 years. I’d personally not place social security income into any investment that has much risk.
Right now I’m leaning towards taking social security at age 62 but will wait to make the decision based on if we need the money and my health at the time. Since we have pension income this decision is not as important a consideration.
If you really want the boring nuts and bolts of Social Security, Howard at RV Dreams completed a detailed analysis, and then added to it in a second post. Here is a 2016 link. He is a lawyer with an accounting degree.
- Corporate Pensions
I worked for a major corporation for a number of years and back then they had pension plans. In 2014 they sent out notices offering a buy-out package. I sat down with the Account Manager who handles some of our 401k funds (Waddell and Reed) and had him run the numbers. They were unable to match the rate of return offered by the pension if I were to invest the entire lump sum with them. This included at ages 55, 60 and 65. The pension is also guaranteed compared to placing it in the risky stock market. Buying an annuity would also not match the rate of return provided by the pension. So I decided not to take the lump sum payout.
- Government Employee Pension
Here in Missouri law enforcement can retire as early as 50 under a state retirement system. As a county employee I’m also eligible under another plan. As of 2014 I have five years left (age 56) before I’m vested in this plan. It will be hard to not retire at 56! Part of the county retirement also includes a program similar to a 401k, called a 457 plan, which I continue to participate in. One reason not to leave at 56 is that both retirement plans are based off the highest three years of income which will go up in the future. I’m doing my best to suck up all the overtime I can get these last few years which inflates the annual income used to figure the pension benefit. (update as of 7/1/15 – I’m working hard to leave at age 56. Decided it’s not worth waiting to hit the road for a number of reasons.)
- Survivor Benefits in Pensions
Most pension plans have a survivor benefit and such is the case with my corporate and law enforcement pensions. If I elect to take a little less benefit each month, Karen can receive anywhere from 25% to 100% of my pension if I die first. I received a comment on a forum that I should compare what it would cost me in reduced pension, to pay for the survivor benefit, compared to the costs of life insurance. I’m delaying that decision until a few months before retirement. Although it would cost less per month to buy the life insurance policy now rather than waiting until I’m older. Another important point about pensions when compared to social security is that the monthly amount received through my pension never goes up, regardless of inflation. So the buying power of the pension money is less every year.
I have two goals to meet in all of this. First to make sure Karen is okay if I die and second to have the income to live without working much while on the road. Our budget requires we earn, or save by working for a camping spot, a total of $6,000 per year.
I’m using 7% as the expected earnings rate on the 401k account until retirement. We are planning to take out 4% each year after retirement for at least the first six years. There are a couple of ways to figure how much you can take out without wiping out the principal to early. The 4% is an old rule but still makes sense in my opinion. There is other math involved that considers inflation. Right now my account is 90% stocks and 10% bonds. Without going into more detail I’ll just suggest we will be using a ratio of 60% stocks and 40% bonds or similar at retirement. My preferred way to invest has been dollar-cost-averaging into well managed mutual fund accounts. By this I mean putting the same amount in weekly or monthly regardless of how well the market is doing.
Lastly, I’ve maxed out any amount I’m able to place in a 401k where my employer matches.
Something many people do not know is that according to the IRS, those that retire early may have access to their 401k without the 10% early withdrawal penalty. This includes after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55. If you work as a public safety employee you can take distributions from your 401k plan without penalty if you leave your job after age 50. Another exception to the 10% early withdraw penalty has to do with “substantially equal payments”. These equal payments are complicated. I just wanted to let you know exceptions exist if you want to follow-up on it. There are different rules for IRAs and of course it may make sense to withdraw from a Roth IRA before a traditional IRA because you don’t pay income tax on a Roth IRA.
Note for public safety workers: As I understand this, consider rolling a simple or traditional IRA into your 457 plan if you want to control how much you withdraw each month, otherwise you have to go with equal substantial payments.
- Other Assets
We have other assets that I’m not going to go into detail about. I do plan to keep an eye on the market value of some of those assets as selling them is figured into our financial plan. We are expecting to use some of the proceeds from those assets in our exit strategy when we come off the road.
- The Unknown
I’m thinking this is where a lot of luck, and being diversified in sources of income will come in handy. I have no idea what the economy will look like this far from retirement. If the stock market has tanked, I might not want to withdraw from a 401k or IRA. That’s where pensions and being young enough to work on the road will come in handy. This might drive a decision to take social security early. Perhaps having a diversified 60% in stocks and 40% in bond like funds will shield the account a little.
8. Healthcare – Our greatest unknown.
Where do I start! I can summarize it by – I’m reading everything I can get my hands on. Karen will be of Medicare age by the time we are both retired. The plans I’m seeing out there for me right now are something we can afford. The actual budgets I used to estimate our expenses were those of long-time travelers who had to provide their own healthcare as well.
Good luck with your decisions and I hope I gave you a few things to think about.
A guy told me this joke the other day, sorry if it offends anyone but it’s a good one. A doe staggers out of the woods and says “that’s the last time I’ll do that for five bucks.”
Let me know if you have anything to add to the list.