“Due to military service, we have Tricare to cover costs above Medicare. We are both currently reasonably healthy.” (Photo subject is a model.) – Getty Images/iStockphoto
I am contemplating retiring at the end of the year. I’m married and will receive two monthly pension payments; $3,600 from military service and $1,500 from civil service. Our total projected monthly cost of living will be covered by these, making our $3,500 in joint Social Security income completely disposable for savings, travel, etc.
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I don’t have much savings, only about $140,000 between cash savings and a Thrift Savings Plan. Our take-home total each month will be just over $7,000 and, after taxes, medical, dental, vision expenses, and life insurance, our total cost of living will be around $4,000. My wife will be 65 in January, and I’ll hit that age 13 months later.
My wife of 20 years is a Japanese national and lives in the U.S. as a permanent resident. She has not worked in the U.S. and did not have enough work years in Japan to qualify for her Social Security. Her only income once I retire will be the spousal benefit from my Social Security. I will enroll my wife in survivor-benefit plans for my military pension and civil service annuity.
These, combined with the increase in Social Security, will give her about $5,000 per month if I predecease my wife, plus a one-time $240,000 life-insurance payment. She will also receive spousal benefits, based on my working record, while I am still alive. Due to my military service, we have Tricare to cover costs above Medicare.
We are both currently reasonably healthy. I think we’re good financially to retire. What is your advice?
My answer falls on a razor’s edge. Military service can take a lot more of a toll physically and mentally. You deserve this time.
I have a theory on your letter. You put a lot of hard work and due diligence into your military and civilian careers, and you are putting the same consideration into your decision about whether to retire. The answer, of course, is yes, you can support yourself and your wife in retirement, given your pension and Social Security benefits, which are based, I assume, on settling for less than your full Social Security income by claiming them before the age of 70. If you can retire and delay claiming your Social Security, all the better.
Ordinarily, I would urge people to hang on until they’re 70 before claiming Social Security, especially if they are healthy. The rise in the cost of living will eat into your income over 30 years. What’s more, you and/or your wife may require long-term care. But you and your wife have more than 40% of your total monthly income left over after all your essential expenses are paid. Your wife will benefit from Social Security spousal benefits while you are both living, and survivor benefits if you die before her.
Given that you have been married for 10 years, your wife would qualify for 50% of the value of your Social Security, even if she did not work and/or only worked for a limited time. She will get 100% of her Social Security benefit at full retirement age, which is 67 for anyone born in 1960 or after, and she would receive a lesser amount if she claimed at any time from the age of 62 until full retirement age. If she waits until 70, your wife would receive roughly 8% more per year.
Two years of expenses in cash are often recommended for retirees, but I’m waving an amber flag: You still may be leaving yourself a little stretched in case you need money for maintenance on your home or other unexpected expenses. Most retirees with IRAs and/or 401(k)s want to have a cash cushion to avoid drawing on their investment accounts in bear markets like those of 2000-2002 (tech bubble) and 2007-2009 (subprime mortgage crash).
You won’t be worrying about the ebbs and flows of the stock market like the millions of Americans nearing retirement age with a 401(k) or IRA, given that you have a guaranteed, fixed military and civil-service pension. That’s a huge weight off your minds, and should give you both confidence when you finally decide to hang up your work boots and enjoy having all your time together, which I hope includes travel and discovering new hobbies.
For those who will be drawing on investments, T. Rowe Price recommends retirees have a portfolio composed of 60% stocks and 40% bonds, which recovered from the aforementioned bear markets within two years. “The exact amount you want to have also depends on your risk tolerance and the amount you have saved,” it adds. “Another advantage of taking a balanced approach is that during a bear market stocks and bonds are rarely in decline at the same time.”
There’s a lot to be said about the benefits of a military pension on your investing strategy and peace of mind. “Having more guaranteed income means you won’t have to withdraw as much money from your investments,” according to First Command, a broker-dealer based in Fort Worth, Texas. “That may affect how you choose to allocate those funds, potentially allowing you to focus less on short-term liquidity and more on long-term growth.”
“Your military retirement income may also give you more options when it comes to constructing a budget,” it adds. “One approach to consider is using guaranteed sources of income — like a military pension and Social Security — to pay for your fixed expenses, and using the income generated by your investment portfolio to pay for discretionary expenses. The idea is simple: to match fixed expenses to fixed sources of income and variable expenses to variable sources.”
Of you and your wife’s three main sources of income — guaranteed (pensions), variable (investments) and one-off (inheritance or lump sum payment from a former employer) — your biggest source, happily, is guaranteed. That’s a nice place to be. “If your anticipated expenses significantly exceed your anticipated income,” First Command says, “it might be a sign that you need to make adjustments to your goals or push back your planned retirement date.”
But here’s a recap so you know what’s at stake by claiming Social Security early. You get 100% of your Social Security benefit at full retirement age, which is 67 for anyone born in 1960 or after, and you receive a lesser amount if you claim at any time from the age of 62 until full retirement age. If you wait until age 70, you receive roughly 8% more per year. Some advisers say it can work out roughly the same whether you start taking your benefits at 62 or at 70.
As you suggest, your wife, even if she has no work record or a low benefit entitlement on her own work record, is eligible to receive one-third to one-half of your Social Security benefit while you are both living, according to the Social Security Administration. Survivor benefits are more generous. “A widow is eligible for between 71% (at age 60) and 100% (at full retirement age) of what the spouse was getting before they died.” You can learn more here about such benefits.
The financial argument suggests people should delay their Social Security benefits as long as possible, especially if they are in good health, as you seem to be. Virtually all workers between 45 and 62 should wait until beyond 65 to collect Social Security, according to this working paper from researchers at Boston University and the Federal Reserve Bank of Atlanta. More than 90% of people should wait until they reach the age of 70, yet only 10% appear to do so, they added.
To put that in context for your retirement: Claiming Social Security early reduces household lifetime discretionary spending by $182,370 for the median worker nearing retirement, the paper concluded. “Optimizing would produce a 10.4% increase in typical workers’ lifetime spending,” the researchers wrote. “For one in four, the lifetime spending gain exceeds 17%. For one in 10, the gain exceeds 26%.” But not everyone has a $5,100 combined pension.
The longer you can wait, the better. There’s no great rush to retire tomorrow. That would seem to make a powerful case for waiting to claim your Social Security benefit, but that’s not necessarily true for everybody,” First Command adds. “For those with health issues, it may make more sense to claim their benefits early. And those who need Social Security to retire may place a higher value on being able to quit working while they are still relatively young.”
You both know your own lifestyle. If you feel 100% ready, go for it.
