What Would You Do? #5

Aug 22, 2013 by

dice with question marksAfter reading my August 01 post “How Much Savings is Enough?“, Money Counselor reader “John” dropped me a note to ask my view on his family’s situation. He writes:

I’m 55 years old. Kids are grown and educated – debt free. Our only debt is our house which we should have paid off in 2 years (given no unforeseen catastrophes). Spouse and I have a combined retirement fund of $750,000. We can live on $40,000/year easily (including traveling) once the house is paid off. We should be getting (eventually) about $25,000 (combined) in social security. Our financial planner thinks we’ll be able to retire once our retirement funds are at $1M. I’m thinking we’re going to need more like $2M – given the cost of nursing homes etc. Our parents/grandparents all lived into their 90’s and spent many years in nursing homes. What do you think our # ought to be? Thanks much.

I sent John my thoughts, but I also suggested he might benefit if I turned his question into a post and let other Money Counselor readers give him their feedback. He said okay.

More Details on John’s Situation

Through a couple of email exchanges, John volunteered a few more interesting tidbits about his situation:

  • John’s currently invested 60% stocks/40% bonds. The allocation is set to adjust as he ages.
  • John plans to retire at age 65 (10 years from now) and his wife aims to retire at 62. Their combined annual income today is $172,000.
  • Neither John or his wife plan to take on any paid employment, at all, once retired.
  • John and his wife’s intent is to live in their current home until death or deteriorating health forces them to move. Their home is currently valued at $375,000.
  • John’s wife wants to stop for one year her significant 401(k) contribution—the first 6% of which is matched by her employer—and throw the money at the mortgage. Combined with other resources, the aim would be to pay off their ~$100k mortgage balance in one year.
  • Like many “retail” investors over the past 15 years, John says he’s taken a couple of big hits on his investments with damage in the six figures. Apparently that hasn’t made him stock-shy, as he’s still 60% invested in equities. Or perhaps the losses weren’t in stocks, John didn’t specify.

What’s Your Advice for John?

John’s initial question was whether I agreed with his financial planner’s thought that a $1 million nest egg is sufficient. John foresees the potential for a long life with high end-of-life expenses, so he’s concerned that $1 million isn’t enough. What are your thoughts?

What do you think of John’s wife’s proposition that she suspend her 401(k) contribution for a year to help pay off the mortgage faster?

And what do you think of a 60% stock/40% bond asset allocation when one is 10 years from retirement and has no plans for any non-passive income in retirement?

Thanks for your help.

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  • Well seeing John and his wife’s situation, paying off their mortgage loan early would make sense. They are very much right in foreseeing that their nursing charges would be high in future.

  • Thomas

    Great article, thanks very much

  • Greg

    Wow, very interesting question. I like that he is very conscious of the potential for high bills in a nursing home. No one wants to be a financial burden to their families later in life.

    My vote is stick with allocation plan to dial back with age, definitely do not stop 401k contribution – 100% match up to 6% is excellent and there is no way that contributing the money to the mortgage will make up for the matched amount (unless the market dives), and I think that he will likely need something over a million, but 2 million seems high. I assume most people will likely do some kind of work after retiring from their career, so that income plus other age-related benefits should ease costs.

  • What a good one. I agree with Greg in regards to no stopping the 401k contributions. You can’t make up for lost compound interest. I do think he should continue his allocation for now and just move it in a safer direction each year. Since they are not planning on retiring for another 10 years, then pay off the mortgage in the 2 year stretch that they had planned and continue investing.

  • squirrelers

    Have to say, I tend to agree that the $1 figure could very well be too low. This is probably going to be the case for a majority of people, simply not having nearly enough for retirement despite having what on the surface seems like a really good amount. That being said, John is probably doing much better than the majority of people his age I would think.

  • I agree, not enough. Retirement is changing rapidly, and catching many people close to retirement in the trap. In the past, retirement meant building a large nest egg, combined with a pension, and living off the cash from that. If you’re lucky, you’re just living off the interest and never touching the principal.

    These days, the securities markets are inflated by the artificially low interest rates, all the while everyone in them has an itchy trigger finger on the sell button. The thought of relying on a steady cash stream from that, and government payments via social security does not give me a warm fuzzy as a potential retiree.

    Personally, I’m aiming for cash flows from non-securities investments – rental property, business investments, even peer to peer lending. Almost anything to keep my cash flows as diversified as possible to avoid bankruptcy in event of any particular market going irrational.

    • Jack, I like your approach very much. Entrusting something as important as one’s retirement security largely to today’s securities markets is highly risky. And I’m not referring to the current valuation of markets but rather to modern markets’ inherent penchant toward self-destruction. But the Wall Street marketing machine has most Americans convinced that the only way to avoid eating cat food in retirement is to hand over the lion’s share of one’s nest egg to money managers. Thanks for pointing out that there IS another way!

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