Email question: Should I tap retirement savings for pre-retirement needs?

Hi Pete,

I'm 63.5 and want to delay taking Social Security till I'm 66. I'm still working but need to supplement my income to cover my lifestyle. I have 2 paid for homes ( one a vaca) but am running short of liquid funds. Does it make sense to tap my IRA 's vs. taking SS to bridge the gap to age 66? I would need to pull out about 35k per year.

I have about $ 650k in real estate, and 625 in IRA 's.

Thx. Joe.

Hey Joe, I really wish I had more information because this question is concerning. But I'll do my best to answer it with what information I'm given.

What I'm struggling to understand is what you mean by "running short of liquid funds." This could mean two different things, it could mean your lifestyle is causing you to be $3,000 short each month or it could mean you have temporary expenses that are causing you to need $35,000 per year for a short-term period of time (paying for college for your kid for example). The latter is a preferable option, but my guess is it's the first.

This is a major issue. You are currently still working and since I don't know what you currently make I'm going to give a very safe guess that you are making at least $35,000 a year. You are searching for an additional $35,000 to supplement this. This is disturbing for a number of reasons but mostly because you are so close to actual retirement age. What's going to happen when you turn 66? This problem isn't going to magically fix itself.

Let's look ahead to the future. You have $625,000 in an IRA. I prefer around a 4% withdrawal rate so you are looking at about $25,000 a year plus Social Security. Since I don't know your current income I'll give a rough guess that Social Security will bring in $22,000 annually which is "only" $46,000 per year. This is all assuming you don't tap your retirement funds prior to age 66 which it sounds like you won't be able to avoid doing.

You could tap your retirement savings for the amount you need, but doing so will permanently reduce your retirement income by $280ish a month for your entire retirement. Maybe there are financial people who would attempt to encourage you that it will all work out, but I'm not one of those people. The only solution to this problem is to cut expenses with fervor. Which if you are looking for $35,000 a year, is about $3,000 a month. Like I said, I don't have all the information so it's possible you only need this $35,000 for one year and you'll be perfectly able to live on your retirement income, but my gut tells me this isn't so.

The thing about retirement people don't seem to get is that the consequences of overspending/over-withdrawing in the first few years of retirement are often not felt until 10 years down the road when there is little to be done about it. Make the most of the next three years by majorly cutting expenses. Your retirement hangs in the balance.

Joe, I also answered your question this week on The Pete the Planner Radio Show on 93 WIBC. Listen below to hear my answer to your question.