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I am 54 years old and have 26 years of service as a nurse. We follow the rule of 80 (your age plus years of service = 80) in our retirement plan. It will cover my health insurance. My pension will be about $7,000 a month less taxes. I have a combined $750,000 in a 403(b) and a Roth IRA. I also have $150,000 in stocks that are not performing well, $250,000 in real estate that makes $600 a month, and $100,000 in cash. Can I retire now?
–Robin
Between your pension, your retirement accounts and your investment properties, it looks like you’ve built up a solid nest egg. Whether you can retire now depends on whether the after-tax income from those assets is enough to meet your spending needs and desires, so let’s look at what that after-tax income might look like.
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I need to make some assumptions to crunch the numbers and give an answer. First, I have assumed that the $750,000 in your 403(b) and Roth IRA is divided as follows:
$550,000 in your 403(b). All this money is before taxes.
$200,000 in your Roth IRA. This account has been maintained for at least five years.
Second, I have assumed that $100,000 of your stock account comes from contributions, that the remaining $50,000 is long-term capital gains, and that your withdrawals from this account are two-thirds basis and one-third capital gains.
Third, for Social Security purposes, I have assumed that your salary has been $84,000 per year and that you begin collecting your benefit at age 62.
Finally, for tax purposes, I assume you are single and have no dependents. (If you would like more information about creating a retirement plan, consider contacting a financial advisor.)
A 54-year-old woman thinks about her future retirement.
With those assumptions in hand, we can use the 4% rule to estimate the amount of money you can safely withdraw from each account, in addition to your pension, and run it through the TurboTax tax estimator to calculate the after-tax income you’ll have available for your spending needs.
I’m going to start by ignoring your 403(b), since you’re only 54 and withdrawals from that account would likely be subject to a 10% early withdrawal penalty before age 59 1/2. I’ll add that account in the next section.
However, I will include your Roth IRA, since you can withdraw up to the amount you contributed at any time and for any reason without penalty. (Please note that if you are under age 59½ and have held the account for less than five years, you will owe taxes and a 10% penalty when you withdraw investment gains.)
Taking all that into account, here is your estimated annual pre-tax income from each source before age 59½:
Pension: $84,000
Roth IRA: $8,000 (tax free)
Stock account: $6,000 ($2,000 long-term capital gains)
Investment property: $7,200
That’s a total pre-tax income of $105,200. When I run those numbers through the tax estimator, I get an estimate of $13,138 in taxes owed, leading to an after-tax income of $92,062 per year or $7,672 per month. (And if you need more help calculating your income and taxes in retirement, consider talking to a financial advisor.)
Once you turn age 59½, you can start taking penalty-free withdrawals from your 403(b). Using the 4% rule, that adds another $22,000 in pre-tax income, bringing your total pre-tax income to $127,200.
When I add that to the tax estimator, his estimated taxes owed are now $18,196. That gives you an after-tax income of $109,004 per year or $9,084 per month.
Once you turn 62, you can also start collecting Social Security.
I ran your numbers with the Social Security Administration’s Quick Calculator assuming you retire at age 54 and earn $84,000 per year. Your estimated benefit at age 62 is $1,564 per month, which is $18,768 per year.
Adding that to our tax calculator brings your total pre-tax income to $145,968 and your estimated tax due to $22,024. That leaves you with an after-tax income of $123,944 per year or $10,329 per month. (Social Security is a crucial source of retirement income, and a financial advisor can help you plan for it.)
An important consideration here is that I don’t know what state you live in and therefore haven’t taken state income taxes into account. Depending on where you live, that could reduce your after-tax income by a few percentage points.
That said, if the above after-tax figures can comfortably meet your needs, you’re probably in good shape. If it’s close, you’ll probably want to dig deeper and possibly work with a financial planner to get a more personalized answer. And if that after-tax income is less than you need, it’s probably a good idea to keep working until the numbers work in your favor.
A financial advisor can guide you through the often complex retirement planning process. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can take a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The IRS has announced higher limits for 401(k) and IRA contributions for 2024. Savers with 401(k) will be able to contribute up to $23,000, while those who are 50 or older will be able to save an additional $7,500. The contribution limit for IRA accounts will also increase, from $6,500 to $7,000. IRA owners who are age 50 or older can save an additional $1,000.
Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
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Matt Becker, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about tax and personal finance topics. Do you have any questions you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAsset AMP platform nor is he an employee of SmartAsset, and has received compensation for this article.
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