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Help Me Retire: We have $8 million saved for retirement, are in our early 50s and want to retire early, but are worried about healthcare expenses — what can we do?

July 22
00:52 2021

Dear MarketWatch, 

My wife and I are 50 and 52 and live in Boston. Our current combined annual income is around $ 400,000. We have around $ 6 million in non-retirement investments (stocks, bonds, cash). Another $ 2 million is invested in 401(k) plans. Our house is fully paid for and we have no other responsibilities.

Our yearly expenses are between $ 100,000-$ 150,000 depending on what type of vacations we take. 

1. Based on these numbers, can we retire early (say in the next couple of years) and age in place?

2. One big unknown is the cost of health insurance. We currently get our health insurance through my employer which is a very generous PPO plan that allows us to see any specialist without a referral. I am not sure if there are insurance plans that we can buy which can provide a similar type of flexibility. How can I find out more about it?

S.P.

See: I’m 56, my husband is 57 and retired. We have about $ 750,000 saved and a military pension. I’m ‘tired of working in America.’ Can I retire in three years?

Dear S.P., 

Congratulations on amassing such a robust retirement nest egg — $ 8 million is a true feat. 

Oftentimes, when I respond to letters like yours, where the person has millions of dollars saved, I get feedback from other readers who are frustrated because they think all that money will make retirement an absolute breeze. The truth is, the money definitely helps — there’s no question about it — but if you don’t have the right plans and protections in place, or you don’t keep to some sort of reasonable budget that allows you to live within your means, you could be at risk of falling short in your retirement too. There are also plenty of surprises that could derail your goals, just as they can for anyone. 

There are a few things you should think about first before retiring early, even though based on the numbers you have provided and the fact that your annual expenses align well with your total savings, you “should be in pretty good shape,” said Leyla Morgillo, a certified financial planner at Madison Financial Planning Group. 

“Retiring early requires careful monitoring as there are a number of variables that could throw them off track — market volatility, a lower investment return environment, higher inflation or higher taxes, just to name a few,” she said.  

Because you’ll be depending heavily on investment markets for your income, you will have to ensure your portfolios meet your goals and needs, and react accordingly when they do not, she said. For example, if the markets decline significantly in one year, try to cut back on your discretionary spending, so you don’t dip too low into your investments — they’ll already be reeled back because of the volatility, and you’ll want to keep as much in there as you reasonably can for when the markets bounce back. 

Plus, “retirement is not a one and done event,” said James Guarino, a certified financial planner and managing director of Baker Newman Noyes. Your annual spending should be calculated and evaluated every year anyway. 

You didn’t mention if you expect to have any other income streams after you retire, but that’s something you should think about, Morgillo said. Having multiple sources of income is always safer than one, but especially when the main source is in investment portfolios. 

This of course does not mean you’re in danger if you were to retire now. Far from it. Edward Jastrem, a certified financial planner and director of financial planning at Heritage Financial, ran a very basic test in his financial planning software with a few assumptions: that you retire now and receive no more earned income, pick up the tab for out-of-pocket healthcare costs, have a “balanced” portfolio with investment returns, see a general inflation of about 1.92% and healthcare cost inflation of 6%, receive modest estimates for Social Security benefits at Full Retirement Age, and he set your life expectancy to age 95. He did not account for any other one-time expenses or specific income tax details. This scenario was just to see, with very baseline information, what you could be looking at in an early retirement. 

Jastrem found that the plan looks healthy, as most people would have assumed. But there’s plenty more to analyze, he and other financial advisers said. Take the actual investments themselves, for example. 

“The largest risk for this couple is lack of productivity from their assets,” said Alex Klingelhoeffer, a certified financial planner and wealth adviser at Exencial Wealth Advisors. “I often see folks who are too conservative with their investments versus those that are too aggressive. In fact, I would say on average 90% of clients that come to me with this situation are under-invested.” 

There are plenty of investment strategies an adviser could suggest that would allow you to continue spending what you need to in an early retirement while having the money work for you during the decades to come. Keep in mind, these points here are just the beginning. With so much in assets and the goal to retire more than a decade before your full retirement ages, there are so many ways a financial planner could make all the difference for your specific situation. If you’re not interested in working with a financial adviser regularly, you can find one who charges on an hourly basis, or make plans to meet only annually or biannually. They’ll be much better-versed in what your next steps should be.  

Klingelhoeffer suggests reviewing your asset allocation, as well as the actual location of your investments and the tax implications it may bring. For example, traditional 401(k) plans are not taxed until withdrawal. “When we have growth in our retirement accounts, we are also growing our future tax liability at regular income tax rates,” he said. “When we grow assets in taxable accounts, we have growth at capital gains tax rates, which are currently 10-15% lower than regular income tax rates.” 

“Ultimately, investing is about both what you earn and what you keep,” he said. “By having better asset location, we can increase the what-we-keep side of the ledger, and not have Uncle Sam get as much of our hard-earned income.” 

Tax diversification is just as important as asset diversification, too. When withdrawing, try to avoid jumping into a higher tax bracket than necessary and utilize Roth conversions if and when appropriate, Guarino said. 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey

You mentioned health insurance was a main concern, and I can see why. Healthcare costs rise every year, and they only get more expensive as a person ages. You can look into your state health insurance marketplace for insurance options. 

“The good news is that these days with the exchange, healthcare coverage is more a matter of having an extra expense in retirement and not a matter of whether a person can get coverage in the first place,” said John Scherer, a certified financial planner and founder of Trinity Financial Planning. Based on a quick look at what was available in the highest priced premiums (the platinum level coverage) in the Boston area, health insurance costs for two would be around $ 2,500 a month, or about $ 30,000 a year. 

The good news: you can afford that without having to worry about withdrawing too much money in an early retirement, Klingelhoeffer said. “Given their comfortable spending level, there is certainly room in their budget for a premium healthcare plan if they choose to purchase one,” he said. 

You should also carefully consider what insurance you’ll need, such as long-term care coverage, as well as home, auto and umbrella policies you’ll require before you retire, Jastrem said. Not everyone is a fan of long-term care insurance, since it can get expensive and not everyone will eventually need it in their old age, but if you’re self-insuring, looking into it — if only in planning — could be worthwhile. And don’t forget to create an estate plan, complete with important documents like a healthcare proxy and will, and to make sure your assets pass the way you want. 

Be willing to be flexible in the future, and understand that what you want or where may change and that will affect your retirement as well as your financial picture, Guarino said. 

“Will they be able to maintain their home or will they want to or need to move to a retirement community?” he said. 

The last consideration I’ll leave you with (there’s just so many things to talk about when discussing retirement planning) is something I tell everyone: think carefully about what you’ll do with your time in retirement. Early retirement isn’t for everyone — some people absolutely love it, while others find themselves bored and back in the workplace in a few years. If you retire together, expect to make some daily adjustments if you’re not used to spending so much time together in the house. One of my favorite pieces of advice for couples who are retired together is creating an “activity jar” with each person suggesting various things they’d like to do on any given day, such as go to the museum, try a new restaurant, explore the next state over and so on. You may also want to look into volunteering or consulting work, which brings many retirees joy. 

“If they retire at a very early age, most of their friends will still be working, so they run the risk of having ‘no one to play with’ in retirement,” Scherer said. “That is not a reason not to retire, but one thing that people don’t often consider as they plan their lives.” 

Readers: Do you have suggestions for S.P.? Add them in the comments below.

Have a question about your own retirement savings? Email us at [email protected]

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