A lot happens to a typical married couple over a 35 or 40 year working life.
Our lucky hypothetical parents moved up to a new house, raised the kids, bought more insurance, and ran their budget numbers about 8 times (every 4 years).
Now they are around 58 years old and considering early retirement.
They can answer in the affirmative only if they planned properly starting around age 25.
All those in their mid-50's can retire IF they are back in the savings growth mode.
They can take pensions and start to draw on savings vehicles set in place years before.
If they have indeed planned properly over the previous 40 years, retirement can come along a little (maybe a lot) sooner.
Let's look at these pre-retirement budget inputs and discuss what they really mean: A couple in their mid to late 50s, considering early retirement: 1.
YOUR TRADITIONAL MONTHLY PENSION CHECK = $2150: This is really a matter of working for a company or the government that provide a traditional pension.
The percentage of these "lucky" folks is decreasing.
But if you are one of them, your check will probably be based on the number of years you worked.
20 years seniority? You'll get 0.
20 times your average last few years of salary and it is taxed.
2.
401K(S) PRESENT BALANCES = $195,000 - A traditional pension is being replaced by the 401(K) which both you and the employer contribute.
Some employers contribute 0.
50c for every $1.
00 and some contribute "dollar for dollar" up to a certain percentage of your contributions.
Your investments vary from 401(K) to 401(K).
When you draw income in retirement most financial wizards recommend taking less than 4% per year from the balance so you don't run out of money too soon.
3.
MONTHLY INSURANCE PAYMENTS = $825 - This seems like a high number but it's quite realistic.
Add up life insurance, health insurance, Long Term Care, copays for drugs and that expensive health "issue" your spouse has and it can add up quickly.
Age 55 is probably the last time life insurance is relatively cheap.
Diminishing returns settle in after age 60 or so.
4.
TOTAL "NET MONTHLY" SPOUSE INCOME + YOUR WORK INCOME (part time?) + ANNUITY + MUTUAL FUND INCOME + OTHERS JOB MONTHLY NET INCOME? - Average next 5 to 9 years = $2150 OK.
This is the hardest one to add up.
The young need a plan to have "enough" 30 years or so later.
Plan now or suffer later.
Say you planned properly and have a good traditional pension or a lot in your 401(K) but your spouse does not.
He/She continues to work and intends to do it for the next 4 or 5 years.
The trick here is to actually still "like" your job in your late 50's.
Usually, you get tired of it and need to replace your salary with enough "pension, annuity, Mutual fund, or other (part time work?) income" that will pay the bills with some left over for savings growth.
When income from these vehicles exceeds your costs, your natural question is "Do I need to continue working or put my checks on automatic pilot and just supplement with other work if I get bored?".
5.
"MONTHLY" HOUSE RELATED PAYMENTS (MORTGAGE/RENT/TAXES) = $1500 - It is what it is.
You either had a lot of kids, or other problems, and still have a mortgage, or you don't.
Maybe you invested poorly and still have a mortgage or rent to pay.
The moral here? Don't take chances, don't panic and do something foolish, unless you can face the consequences of failure.
Your mortgage should be paid by the time you're age 55 or so.
6.
MONTHLY MEDICARE PART B? = $300 - When you're young this doesn't need to be in your plans.
When you are getting close to your 60's, realize you will face this expense at full retirement age and it's increasing every year.
7.
MONTHLY GROCERIES & PROPERTY MAINTENANCE = $550 - Budget the amount you need for these items.
Steak and lobster every day? Double it.
Peanut butter and jelly? Cut it in half (but prepare to increase your health costs for either extreme).
8.
MONTHLY UTILITIES = $275 - Typical for a scaled down, well insulated small house (1750 sq.
ft) with efficient HVAC, water, plus internet & cell phone.
9.
MONTHLY CLOTHES = $100 - This seems reasonable.
10.
MONTHLY ENTERTAINMENT & AUTO FUEL = $550 - This is for things like movies, restaurants, hobbies, and commuting cost for a full time or part time job.
Golfers etc.
should add maybe $200 more per month.
11.
MONTHLY EMERGENCY FUND = $200 - For when the old car or gas furnace gives up and needs replaced.
12.
IRA VALUES = $20,000 - This should probably be more than this.
Imagine if it were, say, $250,000 and it was a ROTH IRA.
And if it was a fast growing stock, the monthly 4% draw would be tax free! (Or a risky stock could reduce this IRA to ZERO) 13.
SAVINGS & CHECKING ACCOUNTS = $21,000 - So the bills are paid on time with liquid cash.
14.
BROKERAGE & OPTIONS ACCOUNT VALUE = $93,000 - Recommend a discount broker and doing your own research.
And solid stocks with a low PE (less than 15) and a PEG less than 1.
0.
A large, fast grower at a reasonable price.
Again, prepare to lose most or all of this.
Some "household names" are not around anymore.
15.
"OTHER" YEARLY EXPENSE - AVERAGE NEXT 4 OR 5 YEARS (VACATION COST, ETC.
?) = $3,600 How nice would it be to take 3 Long weekends and Disney every year? Or a couple long weekends per year and 2 weeks in Europe every 5 years? The above budget for this late 50's couple would yield the following liquid savings balance for each of the next 4 years: Age 58 to 62 extra savings balance = +$42,209, +$43,917, +45,826, +47,734 The effect of $1800 monthly Social Security payments starting at age 62, is also added below: Post age 62- extra savings including Social Security = +58,409, +$78,084, +101,358, +$124,633, +$144,307 Many of the above budget numbers are planned for in the early to middle years of life.
The trick resides in taking the time every 4 years or so to update your plan and ensure you are preparing for most of life's "what ifs".
Maybe this couple only had one child.
What is the difference if they raised 3 or 4 kids? What are your numbers?
Our lucky hypothetical parents moved up to a new house, raised the kids, bought more insurance, and ran their budget numbers about 8 times (every 4 years).
Now they are around 58 years old and considering early retirement.
They can answer in the affirmative only if they planned properly starting around age 25.
All those in their mid-50's can retire IF they are back in the savings growth mode.
They can take pensions and start to draw on savings vehicles set in place years before.
If they have indeed planned properly over the previous 40 years, retirement can come along a little (maybe a lot) sooner.
Let's look at these pre-retirement budget inputs and discuss what they really mean: A couple in their mid to late 50s, considering early retirement: 1.
YOUR TRADITIONAL MONTHLY PENSION CHECK = $2150: This is really a matter of working for a company or the government that provide a traditional pension.
The percentage of these "lucky" folks is decreasing.
But if you are one of them, your check will probably be based on the number of years you worked.
20 years seniority? You'll get 0.
20 times your average last few years of salary and it is taxed.
2.
401K(S) PRESENT BALANCES = $195,000 - A traditional pension is being replaced by the 401(K) which both you and the employer contribute.
Some employers contribute 0.
50c for every $1.
00 and some contribute "dollar for dollar" up to a certain percentage of your contributions.
Your investments vary from 401(K) to 401(K).
When you draw income in retirement most financial wizards recommend taking less than 4% per year from the balance so you don't run out of money too soon.
3.
MONTHLY INSURANCE PAYMENTS = $825 - This seems like a high number but it's quite realistic.
Add up life insurance, health insurance, Long Term Care, copays for drugs and that expensive health "issue" your spouse has and it can add up quickly.
Age 55 is probably the last time life insurance is relatively cheap.
Diminishing returns settle in after age 60 or so.
4.
TOTAL "NET MONTHLY" SPOUSE INCOME + YOUR WORK INCOME (part time?) + ANNUITY + MUTUAL FUND INCOME + OTHERS JOB MONTHLY NET INCOME? - Average next 5 to 9 years = $2150 OK.
This is the hardest one to add up.
The young need a plan to have "enough" 30 years or so later.
Plan now or suffer later.
Say you planned properly and have a good traditional pension or a lot in your 401(K) but your spouse does not.
He/She continues to work and intends to do it for the next 4 or 5 years.
The trick here is to actually still "like" your job in your late 50's.
Usually, you get tired of it and need to replace your salary with enough "pension, annuity, Mutual fund, or other (part time work?) income" that will pay the bills with some left over for savings growth.
When income from these vehicles exceeds your costs, your natural question is "Do I need to continue working or put my checks on automatic pilot and just supplement with other work if I get bored?".
5.
"MONTHLY" HOUSE RELATED PAYMENTS (MORTGAGE/RENT/TAXES) = $1500 - It is what it is.
You either had a lot of kids, or other problems, and still have a mortgage, or you don't.
Maybe you invested poorly and still have a mortgage or rent to pay.
The moral here? Don't take chances, don't panic and do something foolish, unless you can face the consequences of failure.
Your mortgage should be paid by the time you're age 55 or so.
6.
MONTHLY MEDICARE PART B? = $300 - When you're young this doesn't need to be in your plans.
When you are getting close to your 60's, realize you will face this expense at full retirement age and it's increasing every year.
7.
MONTHLY GROCERIES & PROPERTY MAINTENANCE = $550 - Budget the amount you need for these items.
Steak and lobster every day? Double it.
Peanut butter and jelly? Cut it in half (but prepare to increase your health costs for either extreme).
8.
MONTHLY UTILITIES = $275 - Typical for a scaled down, well insulated small house (1750 sq.
ft) with efficient HVAC, water, plus internet & cell phone.
9.
MONTHLY CLOTHES = $100 - This seems reasonable.
10.
MONTHLY ENTERTAINMENT & AUTO FUEL = $550 - This is for things like movies, restaurants, hobbies, and commuting cost for a full time or part time job.
Golfers etc.
should add maybe $200 more per month.
11.
MONTHLY EMERGENCY FUND = $200 - For when the old car or gas furnace gives up and needs replaced.
12.
IRA VALUES = $20,000 - This should probably be more than this.
Imagine if it were, say, $250,000 and it was a ROTH IRA.
And if it was a fast growing stock, the monthly 4% draw would be tax free! (Or a risky stock could reduce this IRA to ZERO) 13.
SAVINGS & CHECKING ACCOUNTS = $21,000 - So the bills are paid on time with liquid cash.
14.
BROKERAGE & OPTIONS ACCOUNT VALUE = $93,000 - Recommend a discount broker and doing your own research.
And solid stocks with a low PE (less than 15) and a PEG less than 1.
0.
A large, fast grower at a reasonable price.
Again, prepare to lose most or all of this.
Some "household names" are not around anymore.
15.
"OTHER" YEARLY EXPENSE - AVERAGE NEXT 4 OR 5 YEARS (VACATION COST, ETC.
?) = $3,600 How nice would it be to take 3 Long weekends and Disney every year? Or a couple long weekends per year and 2 weeks in Europe every 5 years? The above budget for this late 50's couple would yield the following liquid savings balance for each of the next 4 years: Age 58 to 62 extra savings balance = +$42,209, +$43,917, +45,826, +47,734 The effect of $1800 monthly Social Security payments starting at age 62, is also added below: Post age 62- extra savings including Social Security = +58,409, +$78,084, +101,358, +$124,633, +$144,307 Many of the above budget numbers are planned for in the early to middle years of life.
The trick resides in taking the time every 4 years or so to update your plan and ensure you are preparing for most of life's "what ifs".
Maybe this couple only had one child.
What is the difference if they raised 3 or 4 kids? What are your numbers?