54 yo trouble

[ferco]

I had lunch with a 54 y/o yesterday, who asked if I had any advice for her. She has 20K in savings, earns 50k year, has 40k in debt and wants to retire @ age 65 on 3k / month (after taxes) in todays dollars. I thought about it overnite and couldn't come up with a plausible solution. Any advice. BTW, they're currently only putting 3k per year into their 403b at work.

 

[Marketneutral]

The numbers do not work out.

She needs to sell her house and rent a small condo or apartment.

Sell her cars and get a good cheap used vehicle.

Either she takes drastic steps now or suffer later.

Appears she has lived it up for the last 54 years - she needs to feel the pain for the next decade to have any chance.

 

[JPatrick]

The numbers do not work out.

She needs to sell her house and rent a small condo or apartment.

Sell her cars and get a good cheap used vehicle.

Either she takes drastic steps now or suffer later.

Appears she has lived it up for the last 54 years - she needs to feel the pain for the next decade to have any chance.

Before you get carried away, I'd say a little more info would be appropriate.
*You say she/they.  Two people or one?
*What is the debt about? Good debt or bad?
* Whats the occupation?  Potential for second job?
* Where's the fat? Cars, trips, Corona?

 

[Howard]

Maybe she should buy a ticket on a real expensive cruise and hopefully latch on to some rich old guy, or girl, who knows anymore?

 

[Marketneutral]

Before you get carried away, I'd say a little more info would be appropriate.
*You say she/they.  Two people or one?
*What is the debt about? Good debt or bad?
* Whats the occupation?  Potential for second job?
* Where's the fat? Cars, trips, Corona?

11 years and she wants 3K (keeping up with inflation/after tax) per month?

She is going to need to cut off some limbs for this tree grow.  A good start would be thinking about downsizing. 

 

[wildcat]

Reverse mortgage if it applies to her situation.  It could provide a steady stream of income.  She should continue to work full-time until: 1) all of the debt is gone and 2) she has some additional savings - 3k isn't going to cut it (it almost sounds as if she doesn't really want it that bad).  I only recommend a reverse mortgage as a last resort and this appears to be the case.

 

[WhodaThunkit]

Hmmmm . . .403b? School/municipal employee? -- Does she have a pension, too? How about potential inheritance? Home equity?

 

[Spanky]

Visit the FIRECalc site and plug in the numbers.

http://www.fireseeker.com/

 

[Marketneutral]

Reverse mortgage if it applies to her situation.  It could provide a steady stream of income.  She should continue to work full-time until: 1) all of the debt is gone and 2) she has some additional savings - 3k isn't going to cut it (it almost sounds as if she doesn't really want it that bad).  I only recommend a reverse mortgage as a last resort and this appears to be the case.

That is a tricky one.  Will she have an equity built up?  A bad turn in the housing market and that can disappear faster then "paper gain profits" everyone was counting in 1999 with their tech stocks.  

Would be a major bummer to plan on a reverse mortgage now then age 65 comes and your home assessment 11 years from now will not cut the mustard.

 

[wildcat]

I'm assuming she does have a house and you seem to be assuming the housing market is going to go poof across the US. Without the appropriate information (like if she has a house and if she is in a pricey area) it is a bit too early to jump to conclusions don't you think?

 

[Martha]

Right Wildcat. We don't have enough facts to comment intelligently.

 

[maddythebeagle]

I think she could find out how much social security is going to kick in and if she is in a state that taxes it. That could get here part of the way there.

 

[Marketneutral]

I'm assuming she does have a house and you seem to be assuming the housing market is going to go poof across the US.  Without the appropriate information (like if she has a house and if she is in a pricey area) it is a bit too early to jump to conclusions don't you think?

Housing prices will fall back to the norm. Raising slightly below wage increases.

Telling her to count on a reverse mortgage was jumping to a conclusion, don't you think?

 

[Spanky]

Let's assume the following case:

Married,
both are 54 yrs of age
no other savings, pensions, house, inheritance, ...etc
both will retire at 67
both are making $40K/yr now
saving = 20,000
IRA contrinution = 3K /yr until 67
monthly expense = 3,000

According to the social security calculator:
Monthy benefits = 2,624 (1,312 x 2)

Income need to cover Expense: 3,529 (tax rate of 15%)

Shortfall: 3,529 - 2,624 = 905

Portfolio: 20,000 + 25,590 (discounted at 3%, 10 years, 3,000 per year) = $45,590.

4 % withdrawl = 45,590 * 4% = $1,823 (sufficient to cover the shortfall)


That means that they should be able to retire at 67 (if we assume SS will fullfil its promise)

 

[WhodaThunkit]

I must be reading this wrong -- isn't the shortfall monthly,whereas the portfolio withdrawal is yearly?

 

[brewer12345]

Very nice, Spanky.  Alternatively, she could start considering early semi-retirement at 65 or so (a la ESRBob's work, which I haven't had time to read yet).

 

[Mr._johngalt]

Let's assume the following case:

Married,
both are 54 yrs of age
no other savings, pensions, house, inheritance, ...etc
both will retire at 67
both are making $40K/yr now
saving = 20,000
IRA contrinution = 3K /yr until 67
monthly expense = 3,000

According to the social security calculator:
Monthy benefits = 2,624 (1,312 x 2)

Income need to cover Expense: 3,529 (tax rate of 15%)

Shortfall: 3,529 - 2,624 =  905

Portfolio: 20,000 + 25,590 (discounted at 3%, 10 years, 3,000 per year) = $45,590.

4 % withdrawl = 45,590 * 4% = $1,823 (sufficient to cover the shortfall)


That means that they should be able to retire at 67 (if we assume SS will fullfil its promise)

Not bad Spanky!  This stuff is interesting.  Wish I had more time to
crunch other folk's numbers.
Can't even take time to work on my own finances.................
(too busy posting).  

JG

 

[WhodaThunkit]

I don't think that this works. What am I missing? The shortfall is monthly. The annual portfolio WD doesn't seem to cover it.

 

[Marketneutral]

What about the 40K in debt?

What inflation rate are you using?

After tax?

The shortfall is much more then 905 per month - based on my simple factoring on this.

 

[Spanky]

I don't think that this works. What am I missing? The shortfall is monthly. The annual portfolio WD doesn't seem to cover it.

You are right - they will need $752 per month from somewhere or increase the withdrawal rate.

 

[Spanky]

What about the 40K in debt?

What inflation rate are you using?

After tax?

The shortfall is much more then 905 per month - based on my simple factoring on this.

It is assumed that the debt will have been paid off by retirement. The shortfall should be correct since it is in today's dollar (so does the expense of $3K)

 

[MasterBlaster]

There are lots of tragic cases out there like the friend of the OP. Actually there are many in much worse shape. For many of these people, they'll have to fall back on family members to make it through the duration or suffer the consequnces of their choices.

 

[Spanky]

You are right - they will need $752 per month from somewhere or increase the withdrawal rate.

I do not think increasing the withdrawal rate is feasible since it will be about 24%.

A better approach will be to limit the expense to $2,359 per month based on the following calculations:

Social security income = 2,624
4 % withdrrawal from portfolio = 152
--------------------------------------------
Total Income before tax = $2,776

Net income (after tax) = 2,359

 

[Marketneutral]

It is assumed that the debt will have been paid off by retirement. The shortfall should be correct since it is in today's dollar (so does the expense of $3K)

Great.  Thanks for the reply. Hopefully in 11 years we still have a 15% tax bracket.

 

[Texas Proud]

One problem is you are assuming she/they will get SS... she has a 403(b), and some will not get this benefit.

If you are a teacher in Texas, you will not... but you will get an annuity on your imcome... say she worked 30 years at 2.2 per year it is $26,400 per year from pension.. you only need to make up $10,000...