Dear MarketWatch,
I am a 53-year-old guy, recently divorced.
I have no debt. However, I will need to buy my brother out of a family residence within five years. I will probably take out a loan, depending on interest rates.
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I will need about $80,000 to $90,000 per year to live on to be very comfortable. I can live on less, without a doubt.
I have about $1 million in a Vanguard money-market fund and another $1 million split between 45% bonds — in various bond funds like First Eagle High Yield Municipal Fund FEHIX, municipal bonds and the Vanguard Total Bond Market exchange-traded fund BND — and 55% stocks, such as the Vanguard Total Stock Market ETF VTI and the Vanguard S&P 500 ETF VOO.
My questions are:
1. Can I retire on my investments now, at 53, if I get the allocations aligned correctly?
2. What are your recommendations for percentages of stocks and bonds?
3. Are there any other considerations, opportunities or risks that you think I should factor in to achieve my early retirement dream?
Ready to Retire
Dear Ready,
Retiring at your age is a dream for many people — so much so that there’s an entire movement built around it called FIRE — short for “financial independence, retire early.”
Can you retire now? I’m not your financial planner, so I don’t have all the important details in front of me, but it wouldn’t be wrong to say that people have done it at your age with far less.
You don’t say how much money you will need to borrow in order to buy your brother out of the family home. Whether it’s $100,000 or $250,000 or more, you will obviously need to factor that into your budget and retirement plans.
You have saved a lot of money for your future, and some people might say, of course you can call it quits now. Whether you should isn’t quite as clear-cut, however. The answer depends on many factors, some of which you cannot control.
First and foremost is healthcare. If you retire at 53 and you’re divorced, it is very likely you would have to pay for private health insurance until you are eligible for Medicare at age 65 — that’s 12 years from now.
Health insurance can be quite expensive, although there are tiers you can choose from on the marketplace. Your choice may also depend on your medical needs or the doctors and healthcare facilities you want within your network.
I would consider taking a look at the plans and prices in your area so you can get an idea of what it could cost you every month to pay for health insurance on your own.
Another consideration is Social Security. Your benefits are based on a formula that incorporates your highest 30 years of earnings. If you retire now, you’re looking at earnings going back to age 23. You probably started making more money later in your career, and earnings tend to increase or at least plateau in your 50s and beyond.
Your benefit is also affected by when you claim — whether you do so at age 62; at full retirement age, which is 67 for you; or at 70. When you get to your 60s, if you’re starting to worry about your finances, you may decide to claim early, but that permanently reduces what you will receive.
Of course, there are other factors to consider in your Social Security decision, but it’s important to be aware of how when you claim affects your benefits.
As for your asset allocation, there’s no one-size-fits-all approach. While many people use the 60/40 ratio of stocks to bonds, you should choose your investments to meet your individual goals and needs.
You need your money to last a long, long time. People are living longer, and it isn’t unheard of for someone retiring at age 65 to have a retirement that lasts 20 or 30 years or more. You’d be tacking more than a decade on to that.
Take, for example, that money-market account. That’s a safer vehicle than a typical investment portfolio, but it won’t give you the growth you may want or need for the future.
Adjusting your asset allocation
Typically, portfolios geared for the extra-long haul can be more aggressive, with a larger share of equities, but you have to balance that strategy with your comfort — and have the diligence to monitor your portfolio and to rebalance it to maintain the proper asset allocation, and to adjust those allocations as you get closer to retirement.
I will say — and this will come as no shock to you or anyone else — that it is always better to have more income than less, so if you’re not totally against working, having a part-time job or a consulting gig, depending on your field, could really help you out, both now and in the future.
In the present, the more income you have coming in, the less you need to rely on your investment portfolio, so that it can be left untouched — and thus, can work even harder for you. You may even be able to save more money. And if the job comes with benefits, like a retirement account or health insurance, all the better.
I suggest you look a bit more into the FIRE movement, which could help you make sense of the asset allocation, investment strategies and income plans that are best for you.
Often, people who pursue FIRE are more interested in the financial independence part than the retirement part, and many earn money in some way, such as through a passion project, a part-time gig or passive income from a website.
You’re already in a great situation: You have a sizable nest egg and you are able to make these financial decisions. Now you just have to tweak your circumstances to set yourself up for the rest of your life.
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