Taking early retirement

After a 30-year career in the public school system, David*, a high school teacher of 55 decided to take early retirement. He and his wife Pamela*, who retired from her job at the same time, needed advice on managing this transition, including its implications for their pension income, taxes, retirement accounts, and elder care for their parents and themselves.

We discovered that, as a New York City teacher, David was entitled to approximately 80 percent of his final year's salary when we adjusted for taxes—a substantial savings that made his pension payments equal to his current take—home pay. In addition to his pension, David had accumulated $250,000 in a tax-deferred 403 (b) plan (the nonprofit version of a corporate 401 (k)). Pamela would also collect a pension and had built up an equal amount of equity in her tax-deferred 401 (k) plan. David and Pamela both were eligible for Social Security at age 62, and David had a part-time job that netted him another $10,000 a year.

We made arrangements to roll over David's 403 (b) plan and Pamela's 401 (k) plans into IRAs so their assets could continue to grow tax-deferred. The couple's ample pension income precluded the necessity of withdrawals from the IRAs for living expenses. It also allowed us to implement a long-term investment plan for them with a higher allocation to stocks—commensurate with the couple's fairly high tolerance for risk and longer time horizon. In addition, we suggested that David and Pamela use part of their pension income to start an account to fund such expenses as a new car or vacation, or to take care of an emergency.

Turning to elder care for David's parents, we looked into gifting and asset protection strategies in order to provide an orderly distribution of their estate as well as increase the likelihood that these assets would pass to David and Pamela rather than being exhausted for medical, nursing or home care. We also sat down with David and Pamela to discuss the benefits of long term care insurance for themselves.

Because they began putting money aside in their retirement plans from an early stage in their careers, David and Pamela were already on the path to an early retirement when we met them. We were happy that we could help them get the rest of the way there.

* Names and some details have been changed to protect client confidentiality.