Originally published in the News Star on Sunday, October 18, 2015.
QUESTION: All my life I thought I would retire at age 65. But it now seems like I’ll have to work longer. I still owe money on my house and my 401K needs to grow more. How much of a difference can working a few more years really make?
ANSWER: Small steps can make a big difference in retirement planning.
Dee Lay and his wife (Fee Lay, of course!) arrive at age 65, trying to figure out if they can retire. It will be five more years before their house is completely paid off. Dee has about $500,000 in his 401K. After paying taxes, the mortgage and his 401K contribution each year, Dee and Fee spend about $5000 a month to live.
They go to see their financial planner, Les Werking, to find out if they are ready to retire.
“That all depends on whether or not either of you plan to live past age 80,” Les tells them. “Cause that’s about how long your money will last.”
Dee and Fee swallow hard and ask Les to run the numbers if Dee agrees to work five more years. “But what can working just five more years really do?”
“Quite a bit,” Les perks up. “That’s five years that you aren’t spending down your nest egg. Five years more of adding to it with your annual contributions. Five years more of growth of the money that is already in there. And…five more years for your Social Security to grow.”
They hadn’t thought about that last part.
“But I thought Social Security only goes up by the amount of inflation…and isn’t that little or nothing?”
“Ahh,” Les says smiling, “the inflation adjustment kicks in once you start taking your benefits. But every year you delay taking benefits beyond your ‘normal retirement age,’ the benefit rises 8%…every year. That means that if your benefit would have been $2,000 a month age at your age 65, it will grow to over $2,900 per month by age 70.”
Les pulls out a legal pad and his calculator… “So if you are due a $2,000 per month benefit at age 65, that means your wife is due 50% of that, or $1,000. By delaying taking your benefits until age 70, your benefit will go up to just over $2,900 per month. Your wife’s benefit will grow to about $1450 per month. Together your benefits will grow from $3,000 per month to about $4,400 per month.”
He continues, “Your 401K has about $500,000 in it now. That’s good, but not quite enough to get the job done for you two. If we just let it grow five more years, assuming we get a 5% growth rate (not guaranteed, but historically conservative), your $500,000 will grow to about $638,000. And if you continue to maximize your contributions as you have been, it will grow to about $770,000.”
He pauses and looks Dee and Fee in the eye. “Retiring today means you try to make it with $3,000 per month of fixed income and $500,000 of assets to last you a lifetime. By my calculations, that dog won’t hunt.”
“But,” Les smiles, “if you delay your retirement, working just five more years, you’ll have over $4,000 per month of fixed income and my projections show you having over $700,000 of assets in your retirement plan. According to that plan, your assets not only last as long as you do, they actually grow.”
Dee and Fee experience remorse and relief both at the same time. It would be nice to be able to retire now, but Les confirmed their fears – they don’t have enough.
But he also allayed their even bigger fear – that they never would. They find their remorse receding and their feelings of relief blossoming.
It would be nice to be able to retire now. But if you have to keep on working, it’s nice to know that those years will directly contribute to the financial freedom you’ve always wanted.
Until you plan, you’ll never know what little things might make a big difference in your retirement timeframe.
Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc. No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.