We’re in our 50s with $1.5m saved – an expert revealed the ‘last five years’ before and after retirement are essential

AS individuals approach retirement, especially those in their 50s, planning becomes crucial for a comfortable future.

In a recent YouTube video, financial expert Jacob Duke explored the case of a couple aiming to retire at age 60 with $1.5 million saved.

They faced critical questions about their financial readiness.

This includes when to take Social Security, whether they could sustain a $6,000 monthly budget, and if Roth conversions would benefit their retirement strategy.

Duke explained everything in his video on the topic.

FINANCIAL LANDSCAPE

Profile:

• Bob, 55, and Sue, 53, wish to retire early, with Bob targeting age 60 and Sue at 58.
• Their total net worth is approximately $1.5 million, largely composed of their primary residence valued at $750,000 (with a $200,000 mortgage).

Assets Overview:

• Bob’s 401(k): $632,000
• Sue’s 401(k): $270,000
• Joint savings: $85,000
• Health Savings Account (HSA): $7,500
• No brokerage account holdings.

Goals:

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• They want to spend $6,000 per month, excluding mortgage payments and healthcare costs, which are projected to be around $1,000 monthly before qualifying for Medicare at age 65.

Income:

• Bob earns $170,000 annually
• Sue makes $82,000 annually'

KEY CONSIDERATIONS

A major decision revolves around when to start receiving Social Security benefits.

Bob's projected benefit at full retirement age is $3,000 monthly, and Sue’s is $2,200.

Early withdrawal (at age 62) reduces monthly benefits, while delaying (up to age 70) could enhance their financial stability during retirement.

Where to save your retirement money

There are several different places where you can put the money you save for retirement. Each has different tax advantages, but not all of them are available to everyone.

401(k) - an employer-sponsored retirement account. Contributions are made pre-tax and many employers will match a certain percentage of your contributions. Taxes are paid when the funds are withdrawn in retirement.

Roth IRA - an individual retirement account. Contributions are made post-tax but withdrawals in retirement are not taxed.

TSP (thrift savings plan) - a retirement savings and investment plan for Federal employees and members of the uniformed services. They work similarly to 401(k)s but may have more limited investment options.

Pension - an employee benefit that commits the employer to make payments to the employee in retirement. Pensions are becoming increasingly rare.

Duke points out that a strategy where Sue takes her benefits early, and Bob waits until full retirement age could optimize their income.

With their desired monthly budget of $6,000, it’s essential to consider all expenses, including mortgage payments, healthcare, and lifestyle costs.

Duke emphasizes reviewing their budget to ensure they can live comfortably without overspending.

Roth conversions can play a significant role in retirement planning, allowing funds to grow tax-free.

This might be advantageous for Bob and Sue as they prepare for retirement and begin to withdraw funds.

The couple's current investment strategy is conservative, at 60% stocks and 40% bonds.

Duke recommends a more aggressive approach, such as shifting to an 80/20 allocation.

As a result, it could potentially increase their overall returns and help meet their retirement spending goals.

Delaying retirement by one or two years could significantly impact their financial outlook.

By continuing to work, they would increase their savings and allow their investments more time to grow.

The next five years are going to be maybe one of the most important time periods throughout their whole savings journey and their career to make sure that they are ready for retirement.

Reducing their monthly discretionary spending could also bolster their retirement funds.

A reassessment of their lifestyle expenses might yield additional savings that could be redirected toward retirement savings or investments.

THE LAST FIVE YEARS

Duke emphasizes the significance of the last five years of employment and the first five years of retirement as critical periods for financial planning.

The next five years are "going to be maybe one of the most important time periods throughout their whole savings journey and their career to make sure that they are ready for retirement," Duke said in his video.

Bob and Sue’s case highlights the complexities involved in preparing for retirement, particularly when aiming for an early retirement.

By strategically addressing their Social Security options, investment strategies, and lifestyle choices, they can enhance their chances of achieving a secure and enjoyable retirement.

Individuals in similar situations should consider these strategies and consult with financial professionals to tailor plans that suit their specific needs and goals.

MOVING FORWARD

When discussing retirement planning for Bob and Sue, it's significant to consider the significant implications of Required Minimum Distributions (RMDs) once Bob passes away at age 82.

After this event, Sue must withdraw RMDs as a single filer, which results in a notable increase in her tax rate.

These RMDs will grow larger each year based on the balance in their tax-deferred accounts, potentially pushing Sue into a higher tax bracket.

To mitigate the tax impact, transferring funds from their tax-deferred accounts to a Roth IRA is essential.

This strategy not only helps manage their tax burden but also facilitates tax-free growth, allowing them to fill up the 12% tax bracket during their early retirement years.

By strategically converting assets to a Roth IRA, they can save a significant amount on taxes over their lifetime.

The possibility of moving into the 22% tax bracket can yield substantial tax savings as well.

By age 72 or 73, if Bob and Sue fill up the 22% bracket, they can effectively eliminate RMDs and other taxable income, meaning that their Social Security benefits may become tax-free as well.

With only a modest pension and no other significant income, they would enjoy tax-free income while having all their assets in a Roth IRA.

This scenario provides them the freedom to travel and enjoy their retirement without the burden of additional taxes.

However, it is important to note a caveat: they currently lack sufficient cash and tax-deferred assets to cover the taxes incurred from these conversions.

Therefore, withholding some taxes from the conversion amount may be necessary, which is not the most optimal approach.

Ideally, if they had cash available, it would be more effective to pay taxes separately rather than withholding from the conversion.

Nevertheless, the long-term benefits of executing Roth conversions during their "gap years" are substantial.

By investing more aggressively in their Roth IRAs and carefully evaluating their annual tax strategy, Bob and Sue can significantly enhance their financial outlook in retirement.