Grugger’s Way

Retirement Challenge One is Keeping Solvent

Assuming that I could maintain financial solvency, I elected to take early retirement. I also hoped to maintain my lifestyle with minimal adjustments.  Before making that major decision I had to be able to answer a couple of questions; questions that concerned my spouse as well, since my early retirement would also involve her financial solvency. 

We can already see that my spouse’s job is critical to short-term solvency; if she had to quit work today, I would have to seek regular employment again.  For now, she intends to continue to work. With that much decided, the long-term solvency questions revolve around income replacement when she does take retirement, and the increasing cost of living that we will have to accommodate AFTER she retires. 

Virtually ALL financial advisors say we should base our retirement income planning on the three pillars:  Social security, company pensions or 401K, and savings/IRA.  I can’t find fault with that yet because I haven’t been retired but a few months and I’m not social security eligible yet. 

Cost of living increases in Social Security and in most retirement pensions don’t really keep up with expenses.  The Social Security System itself could not finance the increases that retired folks would like to see.  Additionally, the increasing premiums for Medicare eat up so much of the cost of living increase so as to be embarrassing to the government. Moreover, the solvency of the Social Security System is questionable, even during my remaining lifetime; but that is a subject for another day. 

My spouse and I realize that we cannot depend upon the government to ensure our solvency; therefore it will be up to us.  Now, having decided that we are in charge of our own survival, the question becomes the means. 

We are indeed fortunate that she is still working.  That gives us some leeway in financial planning, in that we can maximize her pre-tax contributions to an IRA.  If she should suddenly acquire HUGE increases in pay we might be able to fund a 401K instead of the IRA, which would be significantly more than the IRA would allow.  All in all, if we can survive in the short-term prior to my reaching full retirement age in six years, and if we can delay withdrawals from my IRA and 401K until she retires, we should be okay, assuming that the investments we now have earn a decent rate of return, i.e., meet or exceed the inflation rate.

The question of WHEN to draw Social Security benefits will soon be upon me.  The amount of the full-retirement-age benefit is reduced by about eight percent for each year–earlier than full retirement age–that one elects to begin benefits.  I figure that unless I could invest the entire amount of my annual social security benefit and earn more than eight percent per year in interest, dividends, and capital gains distributions, I would be better off not even drawing any benefits until full retirement age.  I may have to re-think this at some future point, but for now, that is our plan.

The big remaining question is determining the WHEN of my wife’s retirement.  That is not possible yet, since she is fully committed to full time employment until it is not fun anymore.  Lucky for me, since I have found that I am spending just about the same amount of money for gasoline, etc., as I was prior to retirement, and now that I am home during the day, there are all kinds of projects that I can get working on…and every single one seems to cost money.

All I know is that once she retires we will find many ways to spend even more money: traveling, fixing up the house, new stuff, etc.  I’d better stop now before I get myself into hot water here. 

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