Michael and Gary Crawford, a 60-something couple in Bothell, have been together since they met at Boeing in the 1980s. But lately Michael’s been wondering if their 401(k) savings and pensions from their careers there will adequately fund life in their 80s — and 90s, or beyond.
“I don’t want to wind up like my mother. She didn’t think she’d live beyond 65 so she didn’t save enough, and then she lived to 73,” Michael said. “I was in charge of her estate. And what I learned is that you’ve got to believe you’ll live forever.”
Michael, 60, and Gary, 68, both retired in their late 50s, and today jointly have assets worth more than $1 million between their 401(k) plans, emergency savings and their home valued at $250,000. They also both receive pensions. They live comfortably on roughly $80,000 from their combined pensions ($48,000), and Gary’s Social Security benefits of about $17,000. (Michael will be eligible to collect Social Security at 62.)
With no debt other than about $5,000 annually for their mortgage (they have about $80,000 remaining to pay), about $11,000 for property and other taxes, and $5,000 for Gary’s medical plan, they have plenty of budget left to travel, spend time with grown children and a close niece, and attend to personal interests — Michael’s pursuit of a Master Gardener designation and Gary’s latest Mustang restoration.
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But is that enough? Gary wasn’t as worried about the future as his wife was, but he agreed to join her in seeking a professional opinion about their assets. The couple completed an online survey to participate in a free financial makeover from a member of the Puget Sound Chapter of the Financial Planning Association. They were paired with Jennifer Anker, a certified financial planner with TIAA-CREF in Bellevue.
“The Crawfords define financial success in terms of being sure they won’t run out of money,” Anker said. “The good news is that they won’t.”
That said, Anker noted, based on the couple’s expressed risk tolerance they have the potential to achieve slightly higher returns on their investments through a more diversified portfolio; their current mix projects 3.3 percent annual returns but shifting it could lead to projected 5.7 percent returns.
Separate from the issue of returns, Anker suggested that they diversify their portfolio for another reason: Their combined 401(k) assets are currently 76 percent invested in a single stable value mutual fund and 24 percent invested in Boeing stock (or 76 percent fixed investments and 24 percent equities), which she’d like to see divided more broadly.
Anker recommends they reallocate their 401(k) toward a portfolio composed of 25 percent guaranteed assets, 42 percent equities (including more than one company’s stock), 7 percent real-estate investments (in the form of REITs or mutual funds containing real-estate assets), and 26 percent fixed investments.
Making the most of Social Security
Anker agreed with the couple’s plan for Michael to wait on taking Social Security payments. Social Security is available when a senior turns 62, but the longer a person waits — 70 is the maximum — to begin drawing on it, the larger the payments will be.
However, there is a benefit available to Michael aside from her own Social Security plan: At 66 she is eligible to receive payments equivalent to about 50 percent of Gary’s Social Security income, a spousal benefit available to her that can provide another source of income until she begins taking her own Social Security at 70.
“Social Security strategies are typically news to my clients,” says Anker.
Another way Michael can optimize her portfolio is to move a portion of her 401(k) investments into a Roth IRA account, Anker says. Because Michael made some of her 401(k) investments on an after-tax basis (as in a Roth), she is eligible to move those funds from her 401 (k) into a Roth.
“This is an uncommon opportunity,” Anker said. “This will reduce future tax burdens, especially if she waits at least five years before beginning (Roth) withdrawals.”
Michael can access her remaining 401(k) funds in the meantime, and then turn to the Roth funds later — much later, if she wants. Unlike a 401(k) account, a Roth IRA does not require account holders to begin withdrawals at or by a particular age, so it’s a good vehicle for continuing to accumulate wealth or growing funds to leave to heirs.
Kind of amazing
Anker noticed that the couple did miss out on a few benefits they could’ve made available to one another. For instance, neither designated spousal survival benefits on their pension plans, meaning that when one spouse dies the survivor won’t receive the maximum-available income or benefit available had the designation been made. For that reason, she encouraged the couple to double-check their beneficiaries on other accounts and make sure that these choices reflect intentions they’ve each outlined in estate plans.
She also suggested they revisit estate plans to identify advanced medical directives and who will serve as power of attorney in the event of medical or other incapacity.
The Crawfords, especially Michael, said Anker’s analysis and modeling of how long their assets will last was reassuring — they can continue to live comfortably and have assets to share with heirs. They plan to meet with Anker again to talk about the portfolio-diversification measures she recommended, especially surrounding real estate. But all in all, they’re relieved that a professional approved their retirement picture.
“She told us we could spend more money if we want,” Michael said. “It was kind of amazing.”
Gary said the outcome wasn’t a total surprise to him. But there was another reward — reminding Michael that even without spreadsheets and financial modeling his hunch that they had saved enough was correct.
“I get to tell her ‘I told you so,’ ” Gary said. “We’re fine.”