23 Jan When can I afford to retire?

 Q. I’m 59, I don’t have a pension, but I have about $1.2 million in retirement accounts. I have $30,000 in cash for emergencies, and little debt. I earn $56,000 a year — my husband has passed away — and my expenses are about $50,000 a year after taxes. How can I decide when I can afford to retire?

A. Our first recommendation is to meet with a financial advisor who can review all the specifics of your plan. We don’t want to suggest something that could point you in the wrong direction in case you neglected to include an important piece of information.

But here are some ideas to consider, with an important look at taxes.

A single person age 59 who earns $56,000 per year would pay $7,325 in federal tax, $1,548 in New Jersey taxes and $4,284 in Social Security/Medicare taxes, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“This would leave you with an annual take home pay of $42,843, which is $7,157 less than your stated annual expense of $50,000,” he said. “Where does the additional $7,157 come from?”

Kiely made some assumptions. The full Social Security retirement age for someone who is currently 59 is 66 years and two months. Let’s assume you work until you are 66. If you have always earned $56,000 in today’s dollars, your age 66 Social Security benefit would be $1,768 per month or $21,218 annually, Kiely said. You would also be eligible for an age 66 benefit based on your deceased husband’s work record, so ask Social Security which benefit would be better.

Then your $50,000 in annual expenses will increase annually if inflation is 3 percent.

“When you retire, your annual living expenses will have grown to $59,703, plus income taxes of $7,815 for a total of $67,518,” Kiely said. “Of this amount, the first $21,218 will be covered by Social Security, leaving $46,300 to be covered by withdrawals from your retirement account.”

Your retirement accounts will actually increase in value each year during your retirement, even after you withdraw the needed funds to cover your living expenses, Kiely said.

So he re-ran the numbers, assuming you stopped working next year when you turned 60. If you did, your Social Security benefit would be $15,659 per year starting when you turned 62.

“One hundred percent of your living expenses would have to come out of your retirement account for the first two years,” he said. “You would begin receiving Social Security when you turned age 62. Your retirement accounts would still grow each year after withdrawing your living expenses, but not as quickly as they would if you worked until age 66.”

When you plan your retirement, you have to be sure to consider other financial changes, such as travel plans, downsizing and unexpected expenses, said Mary Pucciarelli, a financial advisor in Piscataway with MetLife Premier Client Group.

She said knowing exactly what your options will be for Social Security is important.

“As a surviving spouse, you can collect monthly benefits as early as age 60, though at a reduced amount of 70 percent of the amount you would receive if you waited until your full retirement age of 66,” she said. “Still, you can start collecting the reduced benefit at age 60 and at 66 receive the higher of your spousal benefit or your own benefit.”

But like Kiely said, where will the other money come from?

Pucciarelli suggests you consider a basic financial planning concept known as the Rule of 25, which assumes that the desired annual income for an individual, when multiplied by a factor of 25, yields the amount of assets required to generate income, assuming a 4 percent annualized withdrawal rate.

“In other words, to help you get a basic idea of how big your retirement nest egg will have to be, assuming you’re taking a 4 percent withdrawal out to live on, you can multiply your desired income — net of social security income — by 25,” she said.

In your case, your current annual income is $56,000. Assuming your annual Social Security benefit is $20,000, tour desired annual income is $26,000 and when multiplied by a factor of 25. That equals $650,000 in assets needed, she said.

“Bear in mind that this concept does not account for the potential impact in the reduction of purchasing power due to inflation and taxes, unexpected expenses and longevity,” she said.

That’s why working with a financial advisor might be a smart move.

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This story was first posted in January 2015.