Do I have enough money to retire?

By Walter Updegrave, senior editor


(Money Magazine) -- My wife and I are 62 years old, have about $1.6 million in retirement savings and $250,000 in discretionary funds. We have no mortgage or debt payments. I get $12,500 a year from a pension and we both work part-time.

We plan on taking Social Security at 64 and each should receive about $20,000 a year. Still, she worries about our finances and I can't convince her that we have enough to retire. What do you think? -- Mike, Champaign, Illinois

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You've given me a lot of information about how much you have in savings and what you'll get from your pension and Social Security. But you haven't said a word about how much will be going out -- i.e., what you'll spend in retirement.

So without being able to balance your potential income against your likely expenses in retirement, it's hard for me to say whether your wife's concerns are justified.

That said, the facts that you've been able to amass an impressive nest egg and that you're not carrying a mortgage or any other debt suggests to me that you and your spouse are prudent in your financial habits.

I'd also expect that you have probably lived below your means most of your life, by which I mean that you lived a less grand lifestyle than you could have if you'd chosen to spend more and save less during your career.

That's important because it implies that you and your wife aren't likely to have to dramatically reduce your spending after retiring, which is often the case for people who live large rather than save and then find themselves having to dramatically scale back their lifestyle in retirement.

So, all in all, I wouldn't expect you and your spouse to have much trouble maintaining something close to your current standard of living when you retire. Indeed, by doing a few back-of-the-envelope calculations using the information you've provided, it seems pretty clear that you should be able to count on a fairly substantial income throughout retirement.

I don't want to suggest that a 4% initial withdrawal rate is the be all and end all of retirement income planning. It's not, as I've noted before. But just as an approximation, if we apply the 4% rule to the $1.85 million you have saved ($1.6 million plus $250,000), you come away with annual inflation-adjusted income of $74,000 a year.

Throw in your estimated $40,000 a year in Social Security benefits, and you're up to $114,000. Add your $12,500 pension and your part-time earnings, and you and your wife are probably looking at a potential annual income of more than $130,000 a year, at least initially, I stress that this is a rough estimate.

I haven't taken income taxes into account, so you would less than this estimate in actual spending income. It's also important to remember that, unlike Social Security, your company pension probably isn't indexed to inflation.

If that's the case, the purchasing power of that piece of your income will decline over time. You and your wife may also decide that you no longer want to work part-time. So chances are you won't have access to that income throughout retirement.

Even with all these qualifications, however, you and your wife appear to be entering retirement well prepared. Still, your wife does have doubts. So my feeling is why not address them by doing a more thorough analysis that looks in greater depth at both the income and the expense side of the ledger?

That way both of you will come away with a much clearer idea of where you actually stand.

If you're okay doing this sort of assessment on your own, you can go to an online tool like T. Rowe Price's Retirement Income Calculator and plug information about your savings and investments, your estimated Social Security benefit and other sources of income and what you expect to spend, and you'll get an estimate of your odds of being able to meet your spending goals throughout retirement.

You can also run other scenarios -- higher spending, lower spending, different investment strategies, retirement dates, etc. -- to see how different assumptions affect your prospects.

By doing this, you and your wife should come away with a pretty decent idea of the sort of margin of safety you have under different scenarios. If either or both of you have concerns, you can always decide to make adjustments, such as spending less, retiring later or working a few more years part-time.

One other issue you'll want to consider (if you haven't already) is health insurance. If you already have coverage from a previous employer or from your part-time work, great. If not, though, then you'll likely want to seek out private insurance until you can apply for Medicare at age 65. You can't get Medicare until age 65.

If you're not up for doing this evaluation of your retirement prospects on your own, you can always have an adviser help you do it. Given the amount of savings you have, I'm sure most advisors would be more than happy to take you on as a client for an annual fee. But you don't have to go that route.

Financial planners in the Garrett Planning Network are willing to work on a flat fee or hourly basis, while online services like MyFinancialAdvice.com allow you to get in touch with planners by email or phone who can address a wide range of financial issues. The hourly cost is usually in the $150-to-$200 range.

The bottom line, though, is that I think you ought to use your wife's apprehension as an opportunity for both of you to gain more insight into your true retirement readiness.

If closer inspection of your resources finds you can retire comfortably, great. You can both relax. But if your evalution turns up issues you need to address, well, better to do so now than find out a decade into retirement that you weren't as prepared as you thought. To top of page

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