Keegan and Taylor Rosen have been married for twelve years and together they have one son, Ben. Keegan, husband, age 42, has always had his mind set on retiring at age 67. He currently makes $162,000 a year and enjoys his job — for many reasons, some being the work-life balance, friendly and motivating group of coworkers and the genuine purpose that his career provides.
Taylor, his wife, also age 42, has been working from home for the last year and a half due to the COVID-19 pandemic. When away from her desk, she’s spent valuable time with her son Ben — helping him with homework, taking him to sports practices and enjoying many life-long memories. While Taylor has enjoyed her job, her employer has asked the company to return to the office full-time beginning October 1st.
Although Taylor previously expected to retire at age 67 alongside her husband, she and Keegan can’t help but wonder if the family would be able to sustain without her $95,000/year salary. Is it possible for Taylor to retire early? What would the implications be to the family’s financial goals?
The Great Resignation
People tend to quit their jobs after experiencing a “turnover shock,” or a life event that precipitates self-reflection about one’s job satisfaction. These life events can be positive, like a pregnancy, impending move or graduate school acceptance. They can also be negative, like a divorce, health diagnosis… or the effects of a global pandemic.
So it makes sense why masses of people are quitting their jobs in 2021. According to the Bureau of Labor Statistics, the number of job leavers increased by 164,000 to 942,000 in June. And, according to a report by personal finance website MagnifyMoney, about one in three workers are thinking about quitting their job, while almost 60% are rethinking their career. Some are calling this period of time “The Great Resignation.”
Why are people quitting their jobs? While there are a number of different reasons, most fall into one of these three categories.
- Remote work has changed minds (and hearts). Like Taylor Rosen, many people want to spend more time with their family at home, but their current job is returning to in-office work.
- Work is no longer just about paying bills. Perhaps what’s important to them in life has changed.
- The fear of returning to an unsafe workplace. People may not want to return to in-person work for health-specific reasons, especially those who have small children or immunocompromised family members.
Many of our clients are in the same situation as the Rosens, wondering if they or their spouse can quit their job. We’ve always helped pre-retirees answer these questions, but now we’re seeing it more commonly with people in their 50s, 40s and even 30s. We’re here to help, but let’s get this out of the way first.
Here’s What Not to Do:
- Just wing it. While emotions may be running high, it’s important to understand the logistics before signing a resignation letter. We can help you do an analysis of the financial impact before making the decision to retire early.
- Put it off. Many people dream of retiring early but shrug off the decision thinking there’s no way it’d be possible. Don’t revisit this feeling in 5-10 years from now, all you have to do is some leg work to find out.
The numbers are the numbers. We’ll be able to quickly determine which of these three scenarios you’d fit into.
- Quitting your job (or your spouse doing so) and retiring early is financially doable.
- Quitting your job (or your spouse doing so) and retiring early is not financially doable.
- Quitting your job (or your spouse doing so) and retiring early is possible with a bit more planning.
How to Analyze the Financial Impact
Using the Rosen family as an example, let’s see if Taylor is able to retire next year.
Here’s a look at their current situation:
Keegan currently makes $162,000 per year and Taylor makes $95,000 per year. Both expect their salaries to increase with inflation, 2.56%, each year. The Rosen’s expect their living expenses to continue to be $100,000 per year and expect inflation to grow that number annually. Keegan has $16,000 worth of student loans. This year, he will pay $5,148. Every month they are putting their extra cash, $5,428 per month, into their savings account. They are unsure if this is the best option, given that savings accounts earn little interest. They also have a joint investment account with a combined $63,273 that they are not currently contributing to. They expect all of their investment accounts to grow at 6.33% per year.
Keegan is contributing the maximum amount, $6,000, into his IRA and expects to continue maxing out his contributions until he retires. He currently has $71,100 in his account. Taylor has a 401k with a value of $129,640. She is contributing the maximum amount, $19,500 each year, and receives an employer matching contribution of 4% of her salary.
A summary of their assets and liabilities is depicted in their balance sheet below.
Along with saving for their retirement, they also would like to fund their son’s college education. They have already established a 529 account for Ben. The current value of the 529 is $38,000. They are not currently funding the account, but would like to know how much they should contribute to 100% cover Ben’s costs. If the Rosen’s make no changes to their current course of action, we can expect that the cost of Ben’s education will be 55% underfunded.
Now, here’s a look at the scenario of Taylor retiring next year:
Next year, Taylor will no longer have a salary. Changes the Rosen’s anticipate making as Taylor’s retirement approaches include: Allocating their extra cash each month towards their Joint Investment account instead of their savings account where they are earning little interest. Keegan and Taylor plan to begin contributing $20,000 each year into Ben’s 529 account in order to fully fund their son’s education expenses. Also, after assessing the couples risk tolerance, it is determined that they are comfortable with allocating their retirement and investment accounts towards a more aggressive portfolio that has an expected annual return of 7.15% rather than the current 6.33% expected return.
As mentioned above, in order to 100% fund the cost of Ben’s education, Keegan and Taylor will need to contribute $20,000 per year until Ben starts college in 2039. Along with making contributions, they are comfortable allocating towards a more aggressive portfolio with an expected annual return of 8.96%, rather than the current expected annual return of 6.33%. This is based on their risk tolerance and the fact that Ben has 11 years until he is expected to begin college. By taking these actions, we can assume that Ben’s education expenses will be 100% funded by the time he begins college.
By implementing what is described in the preceding paragraphs, the Rosen’s can expect to have $6,793,537 left at the end of their life expectancy. The maximum amount they can spend each year while still adequately funding their retirement is $133,000. These details are summarized in the maximum retirement spending report below.
Another way to assess this scenario is through Monte Carlo analysis. This analysis takes the plan and runs 1,000 trials of it through different market conditions. In the below chart, the 1,000 trials get ranked each year from worst to best based on total portfolio assets and then the depicted percentiles are pulled out and plotted individually. From this analysis, we can see that the probability of success is 94%. This means that in 940 of the 1,000 simulations, assets never dipped below $0.
Knowing where every dollar is going can be tough to calculate. If you are nervous about making the decision, test it out. And if you need help, schedule a consultation with our financial advisors.
There’s never an endless amount of money coming in, but with prioritization, one spouse retiring early is possible — despite what you may have thought before running the numbers.