A 57-year-old individual, referred to as Fiftysomething, recently inherited funds and significantly boosted their retirement savings. They currently contribute the maximum to their 401(k) and Roth IRA, with approximately $8,000 in their 401(k) and $17,000 in their Roth IRA. They plan to continue this aggressive savings strategy. They are utilizing a $50,000 inherited IRA to further fund their Roth IRA over 10 years.
Their current annual income is $50,000, with monthly expenses around $2,500. They anticipate needing at least $3,500 monthly in retirement and plan to work until age 70, maximizing their Social Security benefits. The individual also holds $85,000 in a high-yield savings account earning 4% interest.
This significant sum in their savings account presents a dilemma. Several financial planners have suggested investing this money in a taxable brokerage account, but the individual is reluctant due to fees. They are comfortable using a robo-advisor, similar to their Vanguard IRA management. They also have $5,000 in emergency savings, aiming to increase it to $15,000.
The individual is unsure about moving their savings into the market, preferring the guaranteed returns of their high-interest savings account. However, they acknowledge the need for market exposure to supplement their retirement savings. Their main question centers on the optimal investment strategy – a lump-sum investment or dollar-cost averaging.
Financial advice offered suggests maintaining their current savings plan and continuing to work until age 70. Their current savings, including the high-yield account, total approximately $110,000. The expert notes that maximizing Social Security benefits by delaying receipt until 70, coupled with continued employment, will significantly enhance their retirement prospects.
The average Social Security income for retirees is around $2,000. Considering their expenses and continued work, they may not need to withdraw the full 4% annually from their investments. The advice cautions against comparing their financial situation to others, as individual circumstances vary widely.
Given the investor’s apprehension about market volatility, a dollar-cost averaging strategy is recommended. This approach involves consistently investing a fixed amount at regular intervals, mitigating the risk of a single large investment during a market downturn. The expert also points out that the 4% return on their savings account barely keeps pace with inflation, recommending a target of at least 7%.
A gradual investment of the $70,000 over 12-18 months using a robo-advisor is suggested. This phased approach allows for adjustments based on market conditions, potentially doubling monthly investments during market corrections. It also helps acclimate the investor to market fluctuations.
With a projected 6.5% annual return, the $70,000 could grow to approximately $160,000 in 13 years. Combining this with projected growth in their 401(k) and Roth IRA, their total retirement savings could reach around $545,000 by age 70.
Using the 4% rule, their retirement savings could last for 30 years, potentially exceeding $800,000 by their mid-90s, assuming the 6.5% return surpasses withdrawals. This, combined with Social Security, is likely to meet their retirement goals.
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