A 57-year-old individual, referred to as “Fiftysomething,” recently inherited funds and started maximizing contributions to their retirement accounts. They currently have approximately $8,000 in their 401(k) and $17,000 in their Roth IRA, with plans to contribute the maximum allowed annually to both. Fiftysomething is also using an inherited IRA to further fund their Roth IRA.
They currently earn $50,000 annually and live on $2,500 monthly, aiming for $3,500 monthly in retirement. A significant portion of their savings is held in a high-yield savings account with a 4% interest rate, totaling $85,000. They are hesitant to use a traditional financial planner due to fees and are considering using a robo-advisor, similar to their experience with Vanguard for their retirement accounts.
Fiftysomething expressed concerns about investing this money, preferring the guaranteed returns of the savings account. However, they recognize the need for market exposure to supplement retirement savings. The question of whether to invest the money all at once or gradually using dollar-cost averaging is a key concern.
Financial advice provided suggests continuing the current savings strategy. The advisor noted that maintaining consistent contributions, creating a retirement plan, and enjoying life are crucial. They also emphasized the importance of maximizing Social Security benefits by delaying claiming until age 70.
The advisor highlighted the importance of avoiding comparisons with average retirement savings balances. While acknowledging that Fiftysomething‘s current savings are below the average for their age group, they pointed out the individual’s plan to continue working until 70. The advisor recommended carefully examining their projected retirement expenses.
Given their apprehension about market volatility, a dollar-cost averaging strategy was recommended, gradually investing the $70,000 over 12-18 months. This approach could help mitigate risk and familiarize them with market fluctuations.
A projection was made showing that with a 6.5% annual return, the $70,000 investment, combined with their existing 401(k) and Roth IRA, could reach approximately $545,000 by age 70. Applying the 4% rule, this sum, combined with Social Security, could potentially meet their retirement needs, even exceeding them.
The advisor concluded by encouraging Fiftysomething to proceed with their plan, highlighting the potential for significant growth over the next 13 years. The advice emphasized consistent saving and investing, along with a realistic assessment of retirement expenses.
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