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Finance Lab: Can this caregiver retire at age 62?


Like many women her age, Grace Lim cares for an aging parent.

But Lim, 59, also has another relative under her watch — a sister who is near her age but can’t work because of a disability. The three live together, and Lim has done well as the sole breadwinner in the household for the past several years. Now that she is thinking about retirement, she wonders if the steps she has taken — paying off the mortgage, maxing out her retirement contributions, buying long-term care insurance — will be enough.

After all, she would like to stop working in the next couple of years while her mother and her sister are still in good health. That would free up more time for the three of them to spend together at home or tending their plot in a community garden. It would also make Lim available in case her mom and her sister need more care.

“I just want to be with family,” says Lim, who works at an information technology help desk in Fairfax County. “Plus I’m not a spring chicken.”

We shared details about Lim’s finances with two retirement experts who offered some insight about what she is doing well and offered suggestions for changes she can make to stretch her savings.

The big picture. 

Lim has lived with her sister, 58, and her mother, 82, for about 10 years now, and she expects they will live together in retirement, too. Between her income of about $50,000 and the Social Security benefits her mother is receiving, they can more than cover their roughly $2,200 in monthly expenses.

Despite taking a pay cut this year because of a job change, Lim says she is able to contribute the yearly maximum $17,500 into her 401(k), along with the catch-up contribution of $5,500 the IRS allows for those 50 and up. (Starting next year, those limits will increase to $18,000 and $6,000, respectively.) That puts her in a rare category: Only about 12 percent of plan participants maxed out retirement contributions in 2013, according to Vanguard. Aside from retirement savings, Lim also has a substantial emergency fund that would cover about two years’ worth of living expenses.

The family has little debt. The mortgage on their two-bedroom apartment is paid off — though they must pay $500 in monthly condo fees and about $380 a month in property taxes. They don’t have car loans or credit card bills. “Grace should be commended for her frugal living,” says Jean Setzfand, vice president of financial security at AARP.

The questions.

While Lim is a big saver, she is worried that she is being too conservative with those savings, making it harder for her money to see her through retirement. Optimizing those savings is important because Lim would prefer to retire soon, at 62, if she can, instead of waiting until she reaches full retirement age.

But if she goes that route, Lim will have to reassess her insurance coverage. She currently gets her insurance through work, with the exception of a long-term care policy she bought for herself. Leaving her job will require her to buy separate health insurance until she is old enough to qualify for Medicare. She would also have to decide if she should buy a new life insurance policy to cover her family, or if her savings will be enough to take care of them.

Also, Lim is concerned about whether she’ll be able to keep up with rising condominium fees on a fixed income. She figures it may be more cost effective for them to move into a retirement home together a few years down the line.

Changes to be made.

When it comes to her investments, Lim’s instincts may be correct, says Marty Reid, a certified financial planner in Lincolnton, N.C. Because her money is mostly in cash and short-term bonds, Lim’s savings are growing by less than 1 percent each year. But she has also piled up enough in savings that even a modest increase in the return would go a long way, Reid says.

Lim has about 12 percent of her portfolio in stocks and the rest is in bonds, short-term Treasury bills, cash and certificates of deposit. That mostly cash approach puts her at risk of losing money to inflation, Reid says. Taking a more diversified approach may help her generate income in retirement and draw out her savings, he says. “It would increase her potential for long-term growth,” he says.

Someone Lim’s age who isn’t planning to draw down on the savings for at least four years might consider a conservative portfolio that would still provide some income. For instance, she can invest about 30 percent of the portfolio in stocks, Reid says, with 20 percent of that going to large-cap growth and value stocks, 7 percent in international stocks and 2 percent in mid-cap stocks. The rest of the portfolio could look something like this: 35 percent in intermediate bonds, 18 percent in short-term bonds, 7 percent in high-yield bonds and 6 percent in global bonds. Three percent could be stashed in cash and 2 percent invested in commodities like oil, gold or silver. (This would be separate from her emergency fund.)

Staying covered.

Lim gets her health care and life insurance through her job, which means that when she stops working, the coverage would end, too, Reid points out. But she can avoid a lapse in coverage, even if she retires early, the experts say.

For instance, if Lim retires at 62, before she can qualify for Medicare, she would have the option of shopping for health insurance through the insurance exchanges created by the Affordable Care Act, Setzfand say. Lim could also compare plans with an insurance broker. Her mother would continue to be covered by Medicare. And Lim’s sister, who does not have health insurance, may qualify for additional public benefits after she turns 60, Setzfand says. On BenefitsCheckUp, a Web site by the National Council on Aging, or at one of the council’s local offices, Lim may find programs to help pay for her sister’s food, medication or doctor’s visits — needs that are modest now but could grow over time.

As for life insurance, Lim would have to decide if she should buy another policy after leaving her job, Reid says. On the one hand, the policy might help Lim feel like her family will be okay financially if she dies before they do. But she might not need it, especially if she waits until she is at least 65 to stop working, he adds. Lim’s savings may be enough to support her family, he says, adding that she may want to talk with an estate planning attorney about the best way to leave those savings to her mother and sister. If she buys another insurance policy, a 10-year policy may be the most cost-effective, he says.

Making it last.

Lim should keep in mind that the $1,200 she expects to collect from Social Security if she retires at 62, combined with the $600 her mother is collecting now, would fall short of the $2,200 she needs to cover monthly expenses, Setzfand says. That means she would need to start drawing down her savings right away.

Pushing back her retirement by a few years would increase her income, lower her monthly expenses and allow her to save for a few more years, Setzfand and Reid point out. For instance, if she delayed collecting Social Security benefits until age 66, Lim’s monthly benefits could grow by about $400 or more, eventually allowing her to cover most of her expenses and to save for an additional four years, Setzfand says.

One option is for Lim to stop working at 62 as planned, but to put off collecting Social Security benefits, Reid says. While this would require Lim to spend more out of her savings during her first years in retirement, she would benefit from a larger Social Security benefit later on.

Retirees who start taking Social Security at 62 receive a benefit that is 25 percent smaller than it would be if they waited until full retirement age. Every year they work beyond that until age 70, their benefits grow by an additional 8 percent (or up to 32 percent more). But that decision will come down to how Lim feels about her health and what her expenses are when she is ready to stop working, Reid says.

Delaying retirement could also lower Lim’s health-care expenses, Reid says. He estimates Lim could spend about $700 a month on health insurance if she buys a plan through the exchanges until she reaches age 65 and can get on Medicare, but the final rate could be different based on her age, where she lives and what insurance companies are offering then. At 65, she could transition to Medicare, at which point she might spend an estimated $500 a month.

The bottom line.

In the end, Lim’s chances of running out of money will depend on how much she earns or loses on her investments and how much her expenses vary from year to year. That means that with a few changes and trade-offs, she may well be able to retire at 62, Reid says.

For instance, it would help if Lim sees an average annual return of about 4 percent on her savings, after making a few changes to her portfolio, Reid says. It would also help Lim if she can keep her living expenses in retirement to roughly $24,000 a year, slightly less than what she is paying now on property taxes, food, health care, condo fees and other living costs, Reid says. (Those costs would grow slightly with inflation, he says.)

That may very well be possible. Lim says she may sell her condominium in the next several years and move into senior housing with her mother and her sister if the monthly costs are lower than her current living expenses. The proceeds of the sale could then be used to pad her savings. And Lim is toying with the idea of earning some extra cash by taking on a part-time job in retirement, depending on how her mother and sister are doing.

The bottom line, Reid says: “She has sufficient assets to retire at 62, but waiting until age 65 might bolster her financial security.”

In Finance Lab, we pair frustrated readers with financial advisers. Want to participate? Tell us your story.

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