How does one invest for pre-retirement?

[mrpaseo]

I hope it is not the goal for people to work until they are 59 1/2 to draw on their retirement accounts.

Let's say I want to retire at 50, and do not want to draw on my retirement portfolio until 65.

How do I prepare for income between 50 and 65?

All opinions welcomed.

[~bs]

retiring at 50 is hard. Some people can retire at 55 mainly because they have a good lifetime pension and medical benefits from their company/government. You'd be losing the last 15 years of your working life, when income is typically the highest, and have to have your savings last for 35 years or more.

To retire at 50, you'd ideally have a paid off house, and A LOT in investment type assets. Enough that you can draw down dividends or interest yearly without dipping into the principal.

[scfr]

I hope it is not the goal for people to work until they are 59 1/2 to draw on their retirement accounts.

Let's say I want to retire at 50, and do not want to draw on my retirement portfolio until 65.

How do I prepare for income between 50 and 65?

All opinions welcomed.

This is a HUGE question. I don't plan to retire at 50, but the goal of my husband & I is to have enough saved so that he can pursue a major lifelong dream which could roughly equate to his "retiring" at 50. His 50th b-day is imminent, and we've been working towards this for most of our 20-year marriage. Based on our experience, this is what I suggest:

- Are you married? If so, then you must make sure that you and your spouse are on the same page, working towards the same goal. Unless you have a huge income, it's not going to work if your spouse is a spender.

- Start working towards the goal as soon as you can. (It has taken us 20 years.)

- Keep your lifestyle & expenses low. Live way, way, below your means. Remember that the "treat" you are giving yourself is an early retirement. Remind yourself of this often.

- Have your house paid off by 40. Don't be "house poor." Keep home equity a fairly low percentage of your total net worth.

- Max out pre-tax retirement savings.

- After maxing out pre-tax retirement savings, save as much as you possibly can post-tax.

- You'll have to run the numbers for yourself, but saving 50% of your income is a ballpark number to start with. Save more than 50% if you can.

- Invest much more conservatively than what the typical "rules of thumb" would suggest for someone your age. Remember that your peers are planning to retire 15 years after you. I'm pushing 50 and already have a fair amount in the Vanguard Retirement Income MF.

- Give some thought to how you'll handle medical care between when you retire and Medicare kicks in. If you have an opportunity to save in a HSA (available only if you have a high-deductible health plan), then do so ... to the max. Give it more thought as you get closer to 50.

- As far as where the income will come from to live between 50 to 65, that will depend on where you have saved & invested: rental properties? balanced mutual funds? dividend-paying stocks? Treasuries (we have an account at Treasury Direct and quarterly interest payments are automatically deposited in our bank account)? part time or freelance work (if that fits with your personal definition of "retired)? A ladder of CDs or bonds that will mature each year between 50 & 65?

- Be prepared to make some major changes - Would you be willing to relocate to a lower part of the country or overseas to a less expensive location in order to make the dream of retiring at 50 come true?

- If the above doesn't sound appealing, then simply adjust your plan and decide to retire a bit later and accept that it is your choice and be happy with working a bit longer.

What ever you decide to do, good luck!

[mrpaseo]

Alright, let's see...

My wife and I have been together for about 19 years, we have the same thought process. We started thinking this way when we were 23 (She's 3 days older than me). We are currently 40 years old.

I retired out of Active Duty Army at the age of 39 last July. At this time, I do not work and do not plan to work (With my wife's blessing). That said, I do have a life long pension (That is if the government continues to pay retirees) and we do have medical for life (Tri-care prime).

Our modest home is paid off (Paid it off three or four years ago) but we do have a HELOC. This is our only bill and we pay $200 a month towards the balance (And about $65 in interest) (Besides household bills). Both vehicles are paid in full (1994 and 2007) and the Harley (2011) is paid in full as well.

My wife still works (Her choice) as a manager of a store and tells me she loves her job and intends to work until she is 50.

Our retirement portfolio amounts to $86,000 (Her 401k and our ROTH IRAs). She currently puts 26% of her income into the 401k with a company match of 4%.

We also invest at least $100 a week (Every Friday) into his and hers ROTH IRA (That's at least $200 per week).

We recently talked to a Financial Adviser and she said we are on the right track (Medium risk earning 8% on average). If we continue with this, we should live pretty good come age 65.

After that, we have no additional investments aside from some Precious Metals (Not a lot, just some Silver and Gold) and some collections that I have been doing since I was a child (Meaning no Mutual Funds/Stocks). Which is why I am looking for guidance on a way to invest/save money for the time period between 50 and 65. We can probably put about $250 - $500 more (Beyond the retirement portfolio) away per month to prepare for this time frame.

As it stands, we can live at the same standard on my retirement pay (Thanks to having the house paid off and the medical coverage without either one of us working), my wife works because she loves the job and we pretty much invest most of her income and the remainder is used to support the job (Gas/veh maint/food etc).

What did I forget?

Thanks.

[kork13]

My biggest question is in regards to your pension... Does the pension cover all of your expenses with room to spare? You're still relatively young, so many of your expenses would still be considered low (of particular note, medical). Tricare is likely to see changes over the next decade to make it more affordable (currently a huge budget-buster for the military), and your medical bills will only increase. So your pension needs to have plenty of buffer over your expenses if this is going to work for you. Speaking bluntly, $84k is really a quite dreadfully meager level of savings for this point in your life, considering your plans. I understand that most of your wife's pay is going to increase that, but you may find that lacking even still. What is your goal for increasing your savings? $300k? $400k? With $300k, that will only provide about $1000/mo of income.

As for how to invest it, that goes back to how well your pension covers your expenses. Can you afford to save it all in retirement accounts that are inaccessible until 59.5? If you aren't confident there, invest it in a regular taxable account. For allocation, I would be about even (50/50) between stocks for growth & individual high-yield bonds. Do NOT get into bond funds right now, because once rates start to rise, bonds funds will likely lose value. If you hold good quality, individually-issued corporate, municipal, & federal bonds, your income stream will be protected. As rates rise, you'll want to progressively buy higher rate bonds as well. As you approach full retirement, transition some of your stock holdings to quality high-yielding company stocks that will provide the necessary boost to your income (as you eventually come to need it).

Last, and perhaps foremost, don't be dead-set on you're current plans. When you get to age 50 (or preferably before), evaluate your position & decide if you really can afford to fully retire. If necessary, consider a small job for yourself to increase cash flow & savings. Bottom line,a plan can be great (and this sounds like an attainable & enjoyable one), but you have to be realistic about your plans as well. Look hard at your plans & make good assessments of what actually is really possible for you.

[kv968]

We recently talked to a Financial Adviser and she said we are on the right track (Medium risk earning 8% on average). If we continue with this, we should live pretty good come age 65.

After that, we have no additional investments aside from some Precious Metals (Not a lot, just some Silver and Gold) and some collections that I have been doing since I was a child (Meaning no Mutual Funds/Stocks). Which is why I am looking for guidance on a way to invest/save money for the time period between 50 and 65. We can probably put about $250 - $500 more (Beyond the retirement portfolio) away per month to prepare for this time frame.

As it stands, we can live at the same standard on my retirement pay (Thanks to having the house paid off and the medical coverage without either one of us working), my wife works because she loves the job and we pretty much invest most of her income and the remainder is used to support the job (Gas/veh maint/food etc).

What did I forget?

Thanks.

Do you currently get your retirement pay? And if you do and can live at the same standard on it, how much more income are you looking for during that 50-65 period?

[mrpaseo]

My biggest question is in regards to your pension... Does the pension cover all of your expenses with room to spare?

Yes, and we have always lived this way (On my pay alone) and we have always lived below our means. That said, with our current budget, we can live on my "Retired" income alone.

You're still relatively young, so many of your expenses would still be considered low (of particular note, medical). Tricare is likely to see changes over the next decade to make it more affordable (currently a huge budget-buster for the military), and your medical bills will only increase. So your pension needs to have plenty of buffer over your expenses if this is going to work for you.

My pension allows us $500 - $700 extra (Over our current budget), if it ever came to us living on my income alone, we could limit some luxuries an live comfortably. Also, I am not against going back to work if need be.

Speaking bluntly, $84k is really a quite dreadfully meager level of savings for this point in your life, considering your plans. I understand that most of your wife's pay is going to increase that, but you may find that lacking even still. What is your goal for increasing your savings? $300k? $400k? With $300k, that will only provide about $1000/mo of income.

I agree, and I appreciate you speaking frankly. We would have much more but with the economy the way it has been, and a hit we took when the NASDAQ popped a few years back, we opted to pay everything off before I retired with the understanding that we either need more money or less bills in retirement. More money is not guaranteed as we can not foresee the future, but less bills is easy to solidify by simply not having them.

As for how to invest it, that goes back to how well your pension covers your expenses. Can you afford to save it all in retirement accounts that are inaccessible until 59.5? If you aren't confident there, invest it in a regular taxable account.

My plan at the beginning of the year was to max out the retirement accounts this year (About $2,300 per month). Maintaining this would built to just over $2M at age 65 (Our goal retirement draw age) if we stopped investing at age 50.

For allocation, I would be about even (50/50) between stocks for growth & individual high-yield bonds. Do NOT get into bond funds right now, because once rates start to rise, bonds funds will likely lose value. If you hold good quality, individually-issued corporate, municipal, & federal bonds, your income stream will be protected. As rates rise, you'll want to progressively buy higher rate bonds as well. As you approach full retirement, transition some of your stock holdings to quality high-yielding company stocks that will provide the necessary boost to your income (as you eventually come to need it).

I know nothing about any of these. At the moment, I have everything in mutual funds save for one company stock through my wife's 401k. We have the 401k split into three different funds.

Last, and perhaps foremost, don't be dead-set on you're current plans. When you get to age 50 (or preferably before), evaluate your position & decide if you really can afford to fully retire. If necessary, consider a small job for yourself to increase cash flow & savings. Bottom line,a plan can be great (and this sounds like an attainable & enjoyable one), but you have to be realistic about your plans as well. Look hard at your plans & make good assessments of what actually is really possible for you.

I totally understand and agree with you here. Just because I am currently not working (Retired) does not mean I am against going back to work. I am looking for ways to either support our goals (Through education) and will search for other sources of income (Passive income), if that does not work, I don't mind getting dirty. At the moment, we are doing some projects around the house.

Thank you.

[mrpaseo]

Do you currently get your retirement pay? And if you do and can live at the same standard on it, how much more income are you looking for during that 50-65 period?

Yes, my retirement pay is now not when I am 60 like reservists get. Since I was Active Duty for over 20 years, the retirement pay starts the month we exit service.

As for how much more? Well, we have 10 years of inflation in front of us and though my pension does offer annual raise to counter some of the inflation but not all. We also would like to do some traveling. Between 50 and 60 before we are to old to get around.

We want to live comfortably and have the ability to travel a few times per year (2 - 3 times). Nothing crazy, and we are talking within the USA, out doors stuff as well as see the sites.

Thanks.

[Like2Plan]

You're still relatively young, so many of your expenses would still be considered low (of particular note, medical). Tricare is likely to see changes over the next decade to make it more affordable (currently a huge budget-buster for the military), and your medical bills will only increase.

Unfortunately, I think this is spot on with Tricare. They are always making proposals to offload more of the cost on to the individual one little baby step at a time. Not all proposals are adopted by congress, but I think it would be safe to say that the individual will be paying more (possibly much more) for coverage under Tricare 10 years from now.

[Like2Plan]

Our modest home is paid off (Paid it off three or four years ago) but we do have a HELOC. This is our only bill and we pay $200 a month towards the balance (And about $65 in interest)

What is the remaining balance and interest rate on the HELOC?

Which is why I am looking for guidance on a way to invest/save money for the time period between 50 and 65. We can probably put about $250 - $500 more (Beyond the retirement portfolio) away per month to prepare for this time frame.

If you save 250-500/month for the next 10 years, do you think that be enough to cover the gap for the years between 50 and 65? You will be saving 10 years to cover 15... How much do you have to be earn on your savings in order to achieve your goal? How much risk tolerance do you have?

One option that I was thinking about was I bonds--if your risk tolerance was low and you didn't need much gain. (Minimum term of ownership: 1 year, Interest-earning period: 30 years, Early redemption penalties: ◦Before 5 years, forfeit 3 most recent months' interest-After 5 years, no penalty).

[mrpaseo]

Unfortunately, I think this is spot on with Tricare. They are always making proposals to offload more of the cost on to the individual one little baby step at a time. Not all proposals are adopted by congress, but I think it would be safe to say that the individual will be paying more (possibly much more) for coverage under Tricare 10 years from now.

I agree, currently we pay $12 for a routine visit and $30 for an Emergency room visit. There is a co-pay of $12 on medications (I get mine free on post but there are some meds that require a co-pay) and I believe there are different costs for different meds though at this time we do not require any additional meds that cost).

[mrpaseo]

What is the remaining balance and interest rate on the HELOC?

Exactly $17,000. 4.65% costs us approx $65 per month in interest. We are applying $200 per month towards the principle. We do not intend to use the HELOC anymore.

If you save 250-500/month for the next 10 years, do you think that be enough to cover the gap for the years between 50 and 65? You will be saving 10 years to cover 15... How much do you have to be earn on your savings in order to achieve your goal?

With a pension, we need only to supplement our income and we can eat through the principle in the 50-65 years knowing that we will have our retirement portfolio to fall back on come 65. Keep in mind we can tap into our retirement portfolio if we need to at 59.5, that said, we understand plans change.

Thanks.

How much risk tolerance do you have?

I would say about medium risk, I still have time to recover but do not like the idea of risking it all on black

One option that I was thinking about was I bonds--if your risk tolerance was low and you didn't need much gain. (Minimum term of ownership: 1 year, Interest-earning period: 30 years, Early redemption penalties: ◦Before 5 years, forfeit 3 most recent months' interest-After 5 years, no penalty).

I know nothing about bonds except that they give very little return. I am looking to earn 6%-8%.

[mrpaseo]

Doing some quick calculations.

If I save $500 a month for 10 years earning 7% I will amass: $88,701.60

If I keep the money in the same accounts earning the same amount, I can pull $6,209 per year or about $517.42 per month from the interest.

I would set the funds up with a DRIP until I need the money then have the amount deposited into a checking account rather than re-investing the capital gains/dividends.

I can then take the amount in the checking account at the beginning of the year and divide it by 12 and then have that amount transferred to my working budget on the first of each month.

Each year the amount would be different but what I would most likely do is save a little rather than transferring the whole amount. For example, if I did earn $6,209 in the first year, and could transfer $517, I would probably transfer $400 or $450 and let the remaining balance carry over to the next year. This way I can almost guarantee a set amount monthly during this time.

With each of our plans/budgets, we usually have a fail-safe incorporated into the plan to ensure success.

[~bs]

Is that 7% after inflation? I think most income stream calculators tend to be overly optimistic because they don't consider the effects of inflation and our government's monetary policy. I think 3-4% as a real rate of return on the overall stock market to be a more conservative number.

[bjl584]

I plan to retire as early as possible. Hopefully it will be before I can access my 401K and my Roth.

I have a taxable account that I regularily contribute to. I can access that anytime without penalty.

Also, I plan to have all debt paid off as early as possible.

Finally, I will most likely semi retire 10 years or so before I can access my retirement accounts.

A combination of having a large taxable account to draw from, having no debt, and working part time should allow me to "retire" early.