“I also have a health-savings account with $300,000 through work to help us with medical expenses.” (Photo subjects are models.) – Getty Images/iStockphoto
I am 64 years old and my wife is 65 years old. We have $1.5 million in 401(k)s and IRAs and $90,000 in Roth IRAs. We are looking to retire next year. I will receive $3,000 in monthly pension which my wife will inherit upon my death. She will receive $2,600 in Social Security, and I am planning to wait until 67 when I will receive $3,800.
Our current salaries combined are $210,000. We have 2 homes with primary mortgages of $500,000 at 2.75%. Our other house has a mortgage of $300,000 at 2.75% and positive cash flow rent of $800 after paying off our mortgage payment. We have two challenges: tax optimization and ensuring our money lasts.
I also have a health savings account through work with $300,000 to help with medical expenses. I’m not looking to leave the kids any money other than at least a house. The properties are valued at $1 million each. What advice can you give about our plans to retire in 2026?
Now I am 64
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Between your Social Security and pension, you have an income of $112,800 per year guaranteed for life. – Marketwatch illustration
Congratulations on not leaving any money to your kids! (Except for one or both of your homes, which are a significant and generous inheritance.) I’ve said it before and I’ll say it again: Your assets are not your children’s inheritance unless they end up in their bank accounts upon your death. Until then, it’s your money.
With more than $1.5 million in your assets, rental income, future Social Security benefits, pensions and retirement funds, you’re in a very good place. In fact, between your Social Security and pension, you have an income of $112,800 per year guaranteed for life. And that’s your $9,600 annual profit before you dip into your IRA or your rent.
If you withdraw 4% a year from your IRA — and you’re able to withdraw much less than that — you’ll have another $63,600 a year, bringing your total to $176,400. If your withdrawals are controlled, taken with the advice of an accountant, and you avoid withdrawals during a market downturn, then you don’t need to follow the 4% rule.
In your favor: (1.) You don’t need to rely solely on your IRA. (2.) You have a large HSA with $300,000 to cover decades of healthcare tax-free. (3.) You have rental income that more or less offsets your housing costs. (4.) You can increase your cash flow by selling one of your homes. (5.) And you don’t have to worry about leaving money.
Your required minimum distributions (RMDs) should be your focus. You’re now on track, if you’re not careful, to glide into the 24% and/or 32% tax brackets, which could be even higher than you were during your working years. You also turn on potential Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges.
Your mission, should you choose to accept it, is to avoid falling off that tax cliff into the 32% bracket, and one way to do that is to start your Roth conversions ASAP (if/when your financial advisor greenlights such a strategy). A typical Roth conversion window is when you’re retired and before you claim your Social Security.
You have a nice feather in your cap: your $300,000 health savings account, which you can use strategically in your retirement years. The best part about HSA accounts? Withdrawals are tax-free and do not affect your Medicare IRMAA, your Social Security tax rate or your other taxable income.
And there’s wind in that feather, working in your favor: time. Under SECURE Act 2.0: Your first RMD for you and your spouse will be at age 75. This applies to traditional IRAs and 401(k)s and does not apply to Roth accounts, which are funded with after-tax dollars. At 75, your RMD is that age divided by 24.6, equal to 4.07% of your tax-deferred balance.
Other tasks for your “to do” list: Estimate your monthly expenses in retirement and stress test that against your income. Decide whether to claim your Social Security at 67 or wait until you’re 70 (and get about 8% more a year). Create a “tax map” with your accountant to estimate your brackets before and after your Social Security and RMDs.
Go ahead and retire, and put your accountant on speed dial.
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Previous columns by Quentin Fottrell:
‘He never asks for anything’: I’m 61 with a $1.5 million 401(k). My girlfriend says I do a lot for my son, 28. Is she right?
‘Am I the only unloved son?’ My mother gave me a ghost after my father died. Does he steal her money?
‘We all have financial problems’: After the Fed cuts rates, should my son buy a $600K house?
