A financial life: Jack and Diane struggle with spending in retirement

In my previous post, I asked if Diane should officially retire early. (If this is your first introduction to our series, start reading here.)

Here’s how you voted in the poll, as of November 14, 2019:

  • 65.3%: Stay at her job. She’s in good health and can keep working. Might as well keep earning a paycheck.
  • 24.4%: “Test the waters.” Diane could take a break from her job and see if retirement suits her.
  • 6.3%: Retire. She’s put in her time and it’s time.
  • 4%: Other.

My recommendation

This decision is a very personal one. It comes down to how Diane thinks she’ll like retirement (e.g., is she mentally ready to not go to work every day?) and if they have enough money saved. My advice to Diane, knowing that she loves her job and that they still need more money saved to retire comfortably and buy their vacation home, would be to consider working for a few more years.

While Jack isn’t working, I’d also advise them to consider converting some of their rollover IRAs to Roth IRAs. Right now, all their retirement accounts are funded with pre-tax money, so when they reach age 70½, they’ll have to start taking required minimum distributions (RMDs) and pay taxes on that money. But Roth accounts still grow tax-free and don’t have RMD requirements for the original account owners, which could help them in their goal to leave money for their son Evan.

While Jack and Diane would have to pay taxes on any amount converted, since Jack isn’t working, they could take advantage of their lower income levels and slowly start making conversions. I’d also encourage Jack and Diane to speak with their tax advisor to fully understand the tax implications of converting their accounts to Roth IRAs.

Diane doesn’t retire yet

Ultimately, Diane took my advice and kept on working. She took some time off (mostly paid since she had accrued vacation time), and while she enjoyed her time away from work, she decided she missed the feeling of accomplishment—not to mention she and Jack realized that a few more years of a steady paycheck would help them reach their retirement goals.

Plus, Jack and Diane had medical coverage until they qualified for Medicare because she’d worked longer. As their advisor, I’d be able to give them a personal projection for their future health care spending so they could feel good about their decisions.

Jack and Diane are hesitant to draw down their portfolio

It’s now 8 years later. Jack just turned 67, his full retirement age for Social Security. Diane’s 68 and also fully retired, a few years later than their original plan.

But now they’re facing a dilemma we tend to see with Vanguard clients: They worked hard to save for retirement, and now they’re hesitant to spend from their portfolio, beyond the income it generates.

They’re getting their full Social Security payments and a small pension from Jack’s teaching job, but it’s not quite enough to cover their monthly expenses, because they finally bought a vacation home by the lake! They got a deal from a motivated seller on a smaller house that needed cosmetic work, but otherwise was livable. And while this purchase put some stress on their finances, it allowed them to achieve a goal that was very important to them.

That leads us to our poll question: How should Jack and Diane treat the money in their portfolio?

Feel free to leave a comment below, especially if you’re familiar with this dilemma. Read the final post in this series  


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