Congratulations, you’re a millionaire and you didn’t know it (thanks to pensions)

Dear Fix My Portfolio,

My husband and I plan to retire in 4 years, shortly after we turn 62. He currently makes $97,000 a year and I make $48,000. We’ve been careless with our money in the past, living paycheck to paycheck, going into debt and borrowing against our Savings Savings Plan, so now we’re trying to do damage control and get on the road to retirement. We are empty nesters.

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We’re at a point where we can really start trying to grow our money, but we’re not sure if we’ll be able to make big in the next few years. We only have $140,000 saved and my husband will get around $1,500 a month from a pension and I will get $1,800 a month. We plan to take Social Security at age 62.

I realize that I looked at the magic retirement date and tried to figure out how to have $1 million (impossible with our salaries) and didn’t consider that our money will continue to grow throughout our retirement. This brings additional worries, because I want to retire, but now I realize that 30 years of retirement is almost as long as my working life. I know how much money I’ve made over the years and I’ve made it.

I’m starting to panic about whether or not we’ll have enough money to last us. What can we do better?

Number cruncher

Dear Number Cruncher,

Here’s some good news for you: you’re already a millionaire. Congratulations.

Close enough, anyway. If you really crunch the numbers – using an annuity calculator and other tools – you can figure out the current value of your pensions. I’ve given some basic numbers based on your scenario and it shows that if you and your spouse collect those pensions for for 30 years, even at 1% growth for cost of living adjustments, that’s worth about $1 million in today’s dollars.

It can be hard to see that big number when you’re just looking at the monthly amount and thinking about what to do with it. The sum of your combined pensions at $3,300 per month is not nearly as much as your combined monthly income now, even after taxes. But it adds up, especially if you add two Social Security checks along the way. That should be enough to calm your panic for now. You can get away with it because you put in the time at your jobs to pay for them with pensions.

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If you want to feel more secure, there are a few things you can do over the next four years and into your early retirement years to improve your situation.

Social security strategy

The first is to think about your Social Security claim strategy instead of taking both at the first opportunity at age 62. “I would delay Social Security, especially for higher earners,” suggested Stephen Chen, Boldin’s previously known chief executive. as New Retirement, a financial planning platform. The idea is that every year before the full retirement age of 67, your lifetime benefit is reduced – it’s 30% less if you take it at 62. On the other hand, after this age, it increases by 8% per year. up to 70.

It might not be fun to think about, but eventually one of you may die, and actuarially, it’s more likely to be your spouse, who is the biggest winner. In this case, as the surviving spouse, you could switch to his benefit, which would be higher. Having one larger check will still be less than having two checks, but it will help make up the difference when it matters most.

Save more now

With 4 years to go, you can maximize your income savings to boost yourself. Taking into account your pensions, having $140,000 saved is nothing to do. When you have pensions and Social Security to cover your living expenses, you can keep that money in reserve to pay for emergencies and medical expenses or anything else that comes up later that you need. This situation has been in the news lately as people (myself included) have examined the finances of Vice Presidential candidate Tim Walz, who is in a similar position with little savings and a lot of retirement.

While you are still working for the next 4 years, try to maximize the amount you save in your retirement accounts. You can both keep up to $30,000 in your 401(k)s this year, given that you’re over 50, and that amount increases each year for inflation adjustments. If you can shift your tax payments now and your retirement plans have a Roth option, this might be your best option. The goal is to get a variety of account types—some pre-tax, like your 401(k) or pensions, some taxable, like in a brokerage account, and some tax-free, like be a Roth. This way you can maximize your tax efficiency when you start spending your money in retirement.

Stress test your plans

If you’re still feeling a little uneasy about your prospects, the best thing to do is to crunch more numbers. The technical term for this is “stress testing” your portfolio. You can do this on your own if you’re willing to deal with it, or you can use calculators available on the Internet or account custodians, or you can pay for help. The main thing you want to do is not think about a big number like $1 million that you need to save, but focus more on what you will spend.

“You have to build a budget,” Chen said. And then? See how to understand a safe withdrawal rate.

Some people talk about 4%, which is a good number. But you may be able to take more, depending on your situation and economic conditions. With retirement income, you may be able to take less and leave your core savings for longer, letting them grow.

The next step is to think about your spending in buckets – you have a bucket in cash to spend over the next year or two, then another bucket in fixed income products like bonds for 3 to 5 years, and then the rest invested in stocks for later.

“One thing to know is that you are not alone,” Chen said. “Most people are concerned about this issue. There is one way to that, and that is through financial literacy.”

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