Dear MarketWatch,
I’m 67 and late in the game. I’m estimating an income of $3,500 to $3,700 per month from Social Security, and around $750 a month from a pension.
I’d like to shore up my Social Security as much as possible. I have $100,000 and I want to retire in three years. My peers have 10 to 20 times more set aside for retirement, maybe more.
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In your professional opinion, what would be the best use of this $100,000?
I’m thinking about annuities, but what I’ve read is not good.
Late Bloomer
Dear Late Bloomer,
Your position may not be as precarious as you fear.
There’s a lot you can do with $100,000, but you probably don’t want to lock it up into anything. Broadly speaking, annuities are an insurance product that give investors guaranteed income. Annuities aren’t inherently bad, but they can have high fees, complicated terms and their reputation has been tarnished because of heavy sales tactics that sometimes push people into investments that aren’t right for them.
However, regulation has improved and the financial services industry and the government are paving the way to make them more accessible. Still, annuities may not be the right move for you. Some advisers steer clear of annuities for retirees when it would require tying up most of their liquid assets into that sort of product. Once you buy that type of product, you can’t take the money out like you could in an investment portfolio or money-market fund.
You will have $4,000 a month combined from Social Security and your pension. If your expenses are below $4,000 a month in retirement, you wouldn’t be living as tight as you think. You could even put some more money away into a savings account while you’re retired — imagine that! And if you’re on the cusp of $4,000 a month, then you could draw down your savings at the most minimal level to offset those expenses.
The financial services industry uses the 4% rule as a benchmark for how you can withdraw from your retirement savings over the span of 30 years. If you didn’t add anything else to that $100,000, you’d take $4,000 out for the first year of retirement (which breaks down to about $333 a month). In the following years, you’d have to adjust for inflation (and of course the amount of money you need from year to year might fluctuate).
As far as the $100,000 goes, strike a balance between letting it grow, but not investing in anything too risky. A regular savings account wouldn’t give you protection from inflation, but a high-yield savings account or money in Treasury bills could help. You could also construct a balanced investment portfolio, but consult a financial planner who would make sure it isn’t too conservative or too aggressive, either of which would not be good.
There’s no magical product to make up for the years you did not save, but that does not mean you can’t make some smart moves now. For instance, you said you intend to retire in three years, so during that time and assuming you stick to that timeline, try to prioritize your savings as much as you can. If you have a 401(k) or 403(b) at your job, enroll in it and try to put away as much as possible through pre-tax paycheck deductions.
Alternatively, you can use an IRA, which doesn’t have as high of a contribution limit as the 401(k), but is an investment account you can put money in so long as it’s earned income. You can also choose a traditional or Roth IRA account, the former of which is contributed with pre-tax dollars and the latter of which is after-tax. Having both types (in the form of employer-sponsored retirement accounts or an IRA) will help diversify your retirement income.
Focus on your own plan — and not on how much others have saved.
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