We're 59 and Retired With $5.3 million. We Want to Spend $250,000 a Year Until Medicare and Social Security Start. Are We Nuts?

St Mark's Basilica, St Mark's Square, Venice, Italy.

Question: We are early retirees at 59, with $5.3 million saved. We need $250,000 a year from savings right now to do everything we want. That number will drop significantly once Medicare and Social Security kick in. Is this withdrawal plan safe for a few years, or will we risk our retirement security for a few years of fun?

Answer: Once you reach a certain level of wealth, it's natural to want to retire and enjoy life without the constraints of a job. And if you're a 59-year-old couple with $5.3 million saved, you may be in a perfectly good position to stop working and start living it up.

But retiring at 59 poses some challenges. For one thing, you're too young for Medicare, so you'll need to bridge what could be a costly healthcare gap until you turn 65.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

At 59, you're also too young for Social Security. And if you want your benefits without a reduction, you'll need to sit tight until age 67, which is your full retirement age. That means you may be fully reliant on your portfolio for eight years until those monthly checks begin.

In a situation like this, it's important to manage your spending carefully early on in retirement. But those early years are also when your health may be strongest. And if so, you may want to use that time to travel and do other things that are on the more expensive side.

You may be wondering if a $250,000 annual budget is safe for you, keeping in mind that your spending may drop at 65 once you can switch over to Medicare and you won't have to tap your portfolio as much once Social Security begins. The answer is, it may be a safe plan in theory, but you need some guardrails in place.

The plan generally works

You'd think pulling $250,000 a year from a $5.3 million portfolio would seem reasonable. But it's important to be mindful of your withdrawal rate.

"A $250,000 withdrawal on a $5.3 million portfolio comes out to just under 5%, which is relatively high for a long-term retirement plan, especially when taking in consideration inflation and taxation," says Osman Minkara, Founder and Managing Director of CIG Capital Advisors.

However, Minkara calls that rate "reasonable" due to it being temporary.

"What makes this situation different is that spending is expected to drop once Social Security and Medicare begin," he says. "If that reduction is meaningful and predictable, the portfolio is not being asked to sustain a 5% withdrawal rate indefinitely, which improves the outlook."

The average monthly Social Security benefit for retired workers today is $2,076.41, which amounts to roughly $25,000 a year. For a couple where both spouses worked, that translates to about $50,000 annually.

Given that you've managed to save $5.3 million by age 59, you may be eligible for even larger Social Security benefits, which could reduce portfolio strain significantly. But even $50,000 a year in Social Security means you only need $200,000 annually from portfolio withdrawals if you maintain that $250,000 annual budget. That's about a 3.8% withdrawal rate, which is much safer over the long term.

An early market downturn is the biggest risk

It's not uncommon to want to spend freely early in retirement. But Minkara warns that a market downturn early in your retirement could quickly derail your plans.

"The biggest risk here is not the withdrawal rate itself, but what happens if markets decline in the first few years," he explains. "High withdrawals combined with early losses can create lasting damage to the portfolio, even if markets recover later.”

Minkara says a good way to mitigate that risk, called "sequence of returns risk," is to separate short-term spending from long-term investments. He suggests setting aside a few years' worth of cash or diversifying with low-risk assets to avoid locking in major portfolio losses.

"This allows the rest of the portfolio to stay invested and recover through market cycles instead of being drawn down at the wrong time,” he explains.

"The big question is if your $250,000 budget is gross or net of taxes." — Evan Drury

Be mindful of taxes

If you and your spouse managed to accumulate $5.3 million, it means you may have been higher earners who are accustomed to a certain lifestyle. And if so, a $250,000 yearly budget may be necessary to help you maintain what you're used to.

But Evan Drury, Financial Advisor at Gateway Financial Partners, says the big question is whether your $250,000 budget is gross or net of taxes. And if $250,000 is what you need after taxes, the numbers don't work nearly as well.

"Assuming no other income is earned in the years you use this strategy, then you'd likely have to take out an additional 20% to cover the taxes you would pay for these distributions," Drury says.

All told, you may actually be looking at $300,000 in annual distributions, which is around a 5.6% withdrawal rate. In Drury's mind, that's "higher than any sustainable withdrawal rate."

Of course, you may have considered taxes in your plan. If your $250,000 budget accounts for taxes (meaning, you'll pay your share out of those $250,000 withdrawals), you're in better shape. Or, it may be that you have a Roth IRA or Roth 401(k) and therefore don't have to worry about paying taxes on withdrawals.

But all told, Drury says it's important to factor taxes into your annual budget. If you're withdrawing from a taxable account, he says, you may also be looking at capital gains taxes.

His advice? "Make a financial plan that considers all of this so you can see real assumptions with inflation and taxes built in, and then how your life looks under each scenario."

It's all about planning

Ultimately, Minkara says, "This strategy works if done for a specified period." But it's important to be mindful of market conditions even once your withdrawal rate drops as Social Security kicks in.

If you put the right guardrails in place early on and are willing to be flexible with spending as needed, there's a good chance your portfolio won't run out on you, even if you're tapping it somewhat aggressively for a good number of years.

Maurie Backman is a freelance contributor to Kiplinger. She has over a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. She has written for USA Today, U.S. News & World Report, and Bankrate. She studied creative writing and finance at Binghamton University and merged the two disciplines to help empower consumers to make smart financial planning decisions.