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I was recently conversing with a coworker about finances. I am ecstatic that I am already exchanging financial knowledge in my new role. This office skews a bit older than my last office. However, I think there are still going to be some riveting conversations to be had.
He retired from the federal government and returned as a contractor. He retired in his 50s, and he has a nice pension that pays him 70% of his highest three salaries. So clearly he’s not poor. But when we started to talk about why he still works, I initially thought that he was going to share that he loves doing so and making a difference.
That was my perception because I remember my best friend’s father loving his government job in the 80s so much. So why quit a job you love to stay at home when you could make a difference in the workforce?
Not Ready To Retire
I have to admit that I was taken aback when my co-worker admitted that he doesn’t feel secure for retirement. That was why he continues to work.
I then asked him his “number” was. He said that he wanted $2 million to feel secure in retirement. To me, $2 million is a pretty big number, especially since he receives a nice monthly pension. So I asked him how he derived that number. He admitted that it was a nice round number and thought it made sense. He also told me that if he had enough to retire, that he would retire tomorrow.
Average Person & Retirement
As a side note, the average 55-64 year old currently has $104,000 in retirement savings. At a 4% withdrawal rate, that means that the average retiree can withdraw $350 from their retirement savings account every month.
According to the latest figures, the average retiree receives $1,400 in Social Security benefits. This means that the average retiree will live off of $1,750 a month, or roughly $21,000 a year. In contrast, if my co-worker can achieve a $2 million investment portfolio, he would be able to withdraw $80,000 per year, plus his $50,000 pension and also whatever else he would get from Social Security.
Leaving Enough for His Wife
He believed that if he reached $2 million, that his wife would be taken care of if something were to ever happen to him. His biggest fear was leaving her penniless. While this seemed a bit extreme, I have heard from other people that they share a similar fear if they passed.
After hearing his story, we talked about putting some numbers to paper so that we could get a better feel of his finances. When we first sat down he admitted that he had no idea how much he was spending, or even how much he needed to retire.
This took me a little aback. Here was a 65-year-old man with no idea what he needed for retirement. Although, he was sure that he wasn’t secure enough for retirement. I didn’t quite understand why he was so sure if he had never run through the numbers.
So, I’d love to tell you that we sat down and knocked out all the numbers together, but that’s not what happened. He wanted to go home and talk with his wife. It took about three weeks before he finally got back to me with all of the figures.
His Financial Situation
When he was finally ready, he was thorough as he had everything organized nicely in a spreadsheet that was easy to follow. His demeanor had changed because he actually knew what was going on at that point and gained confidence.
When we examined the numbers, it turned out that he was spending $120,000 a year maintaining multiple properties, vacations, golf memberships, eating out, and enjoying life outside of work.
While that number was higher than I expected, it gave us a great launching pad to determine how much he actually needed to retire.
He said that through his government pension, he received $50,000 a year. He anticipated taking $30,000 from Social Security when he turned 70 since he wanted to maximize the his Social Security in retirement. His wife worked part-time throughout her career and would receive benefits of $10,000 when she turned 70 as well, which would be shortly after him.
I thought those numbers seemed great. $90,000 per year coming in, or roughly 75% of their income needs, was not too shabby. So I wanted to help him determine where the remaining $30,000 would come from.
All over the web, you’ll find that the “perfect” amount that you should withdraw from your account. Some people swear by the 4%, Trinity Study Rule. Others advocate a more conservative approach of the 3% rule. They believe that we are in a different environment than in the past. Then there are some people who say to put all your money in the S&P 500 and live off the current 2% dividend and never touch your principle.
I’m not going to tell you which is the best strategy to use. In some ways, I’d say whatever makes you feel most comfortable and helps you sleep at night.
If we were to use the Trinity Study Rule of 4%, he would need a portfolio of $750,000 in order to meet his retirement needs. If we decided to be more conservative and use the safe withdrawal rate of 3%, he would need $900,000. Finally, if he wanted it to be bullet proof and utilize the 2% dividend, he would need $1.2 million.
Nowhere Close to $2 Million
As you can see, my co-worker doesn’t need to come anywhere close to $2 million. It was definitely assuring news for him.
He also revealed to me that he had $1,200,000 saved in retirement. So I told him he definitely had enough to retire today. I said even if you took out $70,000 for the next 5 years and then drop down to $30,000 after that, you would have more than enough to cover retirement for the rest of your life.
I reminded him of his previous statement that he would retire tomorrow if he had enough today. He responded saying he was a bit scared to do this. But he thanked me and said that he was relieved by the numbers. Despite the numbers though, he said he’d probably work at least another year, or until he felt ready.
In the PF community, most of us are ready to jump into retirement as quickly as possible. So hearing someone say that they’d like to work an extra year just to feel more comfortable seems a bit foreign to me.
For all I know, there could be something else going on that I’m not privy too. But it definitely pains me to see him at work doing something that he doesn’t care for, when he clearly has enough money to retire.
However everybody has a reason, and I can’t be too hard on him. I’m still trying to work through my own dilemma of whether I should work longer or retire early.