Question: “I am 78 years old and I have $185,000 in my 401(k). I take a $1,800 withdrawal each month, though I believe my RMD minimum is approximately $1,300 per month. I receive $132 from a small pension and an additional $2,328 from another pension. I collect $2,800 a month from Social Security and have no state tax in New Hampshire. My Medicare is $165 each month and my supplemental insurance is $235 per month. My mortgage, tax and insurance is $1,173, making my total output on necessities including utilities, cable, water about $2,100, which includes tax and interest on the mortgage. My food, gas and entertainment spending varies but I’m not a big traveler.
I’m wondering if there are other things I should be doing to ensure a lasting retirement. I’m content with my lifestyle and I have two years of an emergency fund, but I don’t know how much money I might need for unexpected costs down the line. What kind of financial adviser would be best suited to help me plan for the rest of my life?”
Answer: At 78, you’re in a solid spot overall, but there are a few things pros noticed that you could improve. And yes, a financial adviser is likely a good idea for you; you can use this free tool to get matched with fiduciary financial advisers from our ad partner SmartAsset, as well as sites like CFP Board and NAPFA.
First, it seems like you’re either miscalculating your RMD or you’re assuming your 401(k) withdrawals are considered RMDs, says certified financial planner Cody Garrett at Measure Twice Financial. Not every withdrawal counts as an RMD, so even though you’re taking $1,800 per month, the plan might calculate your RMD separately and your actual RMD could be higher or lower. Additionally, RMDs are calculated annually, so the monthly figure is your own estimate.
“You have a 401(k) worth $185,000 but you mention taking a $1,800 RMD with a $1,300 minimum. This RMD assumption is too high. Based on the uniform life table, the distribution period is 22 for age 78, meaning the IRS assumes you’ll spread your account over 22 more years. Your RMD may be closer to $9,000 for the entire year and you’re withdrawing more than necessary,” says Garrett.
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Assuming traditional 401(k) distributions of $1,800 per month, Garrett calculates that with your combined pension income of $2,460 per month and Social Security retirement benefits of $2,800 per month, you have a guaranteed income of $5,260 per month, or $63,120 per year before your 401(k) distributions.
Including the 401(k) distribution, Garrett says the income tax liability is approximately $7,300 at an 8.6% effective tax rate based on the information provided and assuming the two pensions are fully taxable. “Your 401(k) distribution pushed your income over the $75,000 AGI threshold for the new enhanced deduction for seniors, which reduces the deduction by 6% per dollar between $75,000 and $175,000,” says Garrett. This means your after-tax income is about $77,000, which covers your necessities of $25,200 plus a significant cushion of over $50,000 for other expenses, he says.
The bigger focus for you now is guarding against the risks that tend to show up later in life, especially healthcare and possible long-term care needs, says Phillip Battin, president at Ambassador Wealth Management. “Retirees often underestimate how unpredictable later-life expenses can be. Even if your spending is steady now, things like home repairs, medical surprises or long-term care can pop up. It’s worth having a plan for those unexpected costs, whether that’s a dedicated savings bucket, turning part of your assets into guaranteed income or looking into insurance,” says Battin.
Furthermore, “even with Medicare and a supplemental plan, things like dental work, home repairs, extended caregiving or assisted living can add up quickly. Having a plan for how you’d handle a large one-time expense or a period of increased care is key,” says certified financial planner Stephen Vecchione at Stater Advisors.
What type of adviser might be right for you?
Depending on what a lasting retirement means for you and whether you’re worried about running out of money or having a long-term care event will all determine what type of adviser you should work with. “For all of the possibilities, you should consult with someone who can model scenarios and show you the impact on your financial situation. One important item you don’t mention is the impact of inflation [which will cause] your expenses to go up every year, meaning your income will need to rise as well just to keep pace,” says Georgia Bruggeman at Meridian Financial Advisors.
You would likely benefit from hiring an advice-only financial planner, at least to start. “This financial adviser can help you review your income, spending, insurance needs, tax opportunities and investment management in greater detail, including calculating accurate RMDs,” says Garrett.
Given your level of assets and your time horizon, working with someone on an hourly or project-basis can be more economical than engaging in an assets under management relationship. Hourly advisers often charge between $200 and $500 per hour while project-based advisers charge $1,500 to $7,500 per project. Comparatively, advisers using the AUM model charge an industry average of 1% AUM. Since your assets are relatively low — by an adviser’s standard — you’re likely better off paying for help only when you need it.
You may also wish to discuss your portfolio makeup and whether there are improvements or changes to be made with an adviser. “How is your 401(k) invested? Is it appropriate for your age and risk tolerance? Are the investment choices high quality and do they cover most asset classes? Do you have a will, power of attorney and healthcare proxy?” asks Bruggeman.
Battin says a suitable choice for guidance would be a fee-only fiduciary planner who specializes in retirement income. “A certified financial planner will be knowledgeable about all of these topics and more. CFPs must complete 30 hours of continuing education every two years to remain current on tax, retirement and estate law. You can find a CFP by visiting www.letsmakeaplan.org and searching by ZIP code for a planner near you, or go to the National Association of Personal Financial Advisors (NAPFA) to search for financial planners,” says Bruggeman.
What’s more, Battin says you can look for someone with a Retirement Income Certified Professional designation who charges hourly or flat fees rather than commissions. You can also use this free tool to get matched with fiduciary advisers, from our ad partner SmartAsset.
You’ve already done a lot of the right things, and fortunately, your income sources give you flexibility. “A qualified retirement adviser can help map out the what-ifs, ensure your money supports you for the rest of your life and give you peace of mind moving forward,” says Vecchione.
Have an issue with your financial planner or looking for a new one? Email questions or concerns to picks@marketwatch.com.
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