My husband and I would like to retire at 62; he's 60 and I'm 59. We have $425,000 in a thrift savings plan, $40,000 in my IRA, and about $500,000 in real estate assets. We have no credit card debt. We owe $9,000 on a 2008 car and $58,000 on our home mortgage at 5.33 percent (and own another home free and clear) and have a HELOC (home equity line of credit) on which we may owe up to $162,000 once we're through renovating the second property. When we retire, we'll have about $65,000 a year in retirement income from our two pensions and our Social Security. Are we okay?
How Are They Doing? Select one:
A. More than okay! Enjoy the early retirement!
B. Inpretty good shape but could do a little better.
C. Aren't as financially secure as they think.
D. Retiring early would be a mistake.
E. They're kidding themselves!
Suze's Grade: C
I hate to say it, but things are not as rosy as they seem. In one breath this couple says they own their home free and clear, and in the next they say they're planning to run up a $162,000 HELOC on that home. So they won't own it free and clear after all. And a home equity line of credit is especially risky in this current economic environment. The interest rate on a HELOC is variable, and it's important to understand that while interest rates are at historic lows, they won't be forever. When interest rates rise, so, too, will the cost of a HELOC. Anyone with a HELOC should be aware of that risk, but it's especially dangerous for retirees living on a fixed income.
Speaking of retirement: There's no way I can give a grade higher than C if this couple retires with debt. It's interesting that they share their income in the letter but not their fixed expenses. I get the sense that they aren't entirely clear what their monthly living costs are. Most people don't have a clear picture of those expenses; typically, people underestimate those costs by at least $1,500 a month.
The fact that they have $65,000 in annual retirement income sounds great. But my guess is they're not factoring in taxes. I will. Let's estimate that after paying federal and state taxes they have $50,000 or so in net income. Is that enough to cover their expenses? And they should think carefully about the $425,000 in the TSP retirement account. Yes, it's a large sum, but given how young they are, they'd need to withdraw just a small amount each month to ensure they don't run through it too fast. How small is small? A basic rule of thumb is to start your annual withdrawal rate at just 4 percent a year, and then adjust that sum each year to keep pace with inflation. So that's $17,000 in the first year, or about $1,420 a month. After tax that might come to about $1,100 or so. Add it all up, and it looks like their combined income could be about $5,300 a month after tax. If they can honestly say that will be more than enough to live on comfortably in retirement, great. But I think after they assess their debt and living costs, they may find it makes sense to keep working for a few more years so they can retire debt-free.
Next: The surprising reason Suze approves of this woman's savings plan