Ready For Retirement
Ready For Retirement
How Much Can We Expect to Spend in Retirement with a $4M Portfolio?
In this episode, we walk through a retirement planning scenario involving a couple in their early 60s with a $4 million investment portfolio. Their financial plan reveals something surprising: they may not need to wait until 65 to retire. Instead, thoughtful planning opens the door to retiring earlier—without compromising the lifestyle they value.
What we cover:
• A breakdown of how a $4 million portfolio can support early retirement
• Income sources, spending needs, and sustainable withdrawal strategies
• The impact of delaying Social Security to age 70 on long-term portfolio health
• How adjusting travel or discretionary expenses affects financial longevity
• Why the right financial plan is less about hitting a number—and more about designing a life
Whether you're working toward financial independence or already approaching retirement, this episode offers insight into how personalized planning can unlock real flexibility—regardless of your portfolio size.
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Imagine you're 60 years old and you have a little more than $4 million in your retirement portfolio. You're probably feeling like you're on track for a good retirement, but you might be asking yourself how much can you actually spend once you get there and what can you do to maximize this portfolio that you've worked so hard for over the course of your lifetime? That's the exact situation that Tommy and Monica find themselves in today. We're going to go through their plan because Tommy and Monica have been so focused on saving, on working on putting money away, they've forgotten to think about what do we actually want this to do for us? What can retirement look like if we take the right steps today to get there? So let's go through their financial plan together to show you where they are, what their goals are, what strategies exist, so that you can see how they're optimizing this and might be able to do the same for your portfolio. Now, whether you have $4 million in your portfolio, way more, way less, the principles that we're going to talk about today are what I want you to focus on, Not the numbers, but the principles and the framework. So let's jump into Tommy and Monica's plan. As you can see here, tommy is 61,. Monica is 62. They have $4 million in their portfolio. They have their joint investment account. They have 401ks IRAs and then a Roth IRA for Monica. They also have property, so they have their property that they own. $925,000 is the value. The annual property taxes are $7,000. And they have a mortgage that they're continuing to pay down on that property. So this is a snapshot of where they are today. What they're wondering, though, is are we on track and yes, it might seem like this is a big number they have in their portfolio? Of course they're on track, but until you've actually gone through the planning process, until you've actually worked through what do you want to do with this money and when do you want to be done working, it's sometimes difficult to know exactly what this money can do for you. So let's do that for Tommy and for Monica right now.
Speaker 1:Here's the goals that they've explained, or here's the goals that they've laid out. They want to be done by 65. There's nothing magical about that number. In fact, they don't actually love what they're doing for work today. They just always thought they're supposed to work until 65. It's what their parents did. It's what the people they work with are doing. It seems odd to be done before that age because everyone else around them is working until 65.
Speaker 1:When they do retire, they want to be able to spend $12,000 per month. So this is after taxes. This is money that's in their bank account for groceries, for utilities, for entertainment, for living the life that they want to live. On top of that, they want to be able to travel. They want to have an extra $40,000 per year to travel. That's not going to be for every single year after they retire, but for the first 10 years. So retire at 65 and until they're 75, they want an extra amount to travel. Annual health care costs so if they retire they will be at Medicare age already if they retire at 65. But what we're planning for is Part B and Part D premiums. They will have those expenses and an additional $4,000 per year of out-of-pocket expenses for the both of them at age 65.
Speaker 1:Next, home improvement. They love where they live and they want to make sure they have an extra $20,000 per year budgeted in either for renovation or home improvements, home maintenance things to make sure they can continue to preserve this home that they really love and really want to stay in for as long as they can. And then finally, a new car. They want to allocate $60,000 every five years. So maybe this is every 10 years for each of them, but every five years one of them is getting a new vehicle and that cost is $60,000. Their question is can we make this happen? They know they're saving, they know they're putting money away, they know they think they're on a good track. But what they're wondering is what can that actually do for them? How can they translate the success they've had financially, the savings they put away, into the retirement that they want to maintain? The next thing we want to understand is what is their income?
Speaker 1:Tommy works in tech and his salary is $182,000 per year. Monica is an attorney. She's making two hundred and fifteen thousand dollars per year. They both have bonuses above this, but those bonuses aren't guaranteed, so we're not going to assume that they're going to happen every year that they keep working. We're just reflecting their base salaries. Then they both have Social Security Tommy's benefit at his full retirement age. So if you were to collect at sixty, seven would be four thousand per month. But he's planning to collect at age 70, which means he'll get three years of delayed retirement credits, which means he'll actually get 24% more than this on a monthly basis if he waits until 70. Monica, at 70, will do the same. Her full retirement age benefit is $3,900 per month, but if she waits three more years 68, 69, 70, she'll get an 8% increase on that every single year. That is called delayed retirement credits. And then they also expect an inheritance. They're expecting, in about five years, to receive about $600,000 from Monica's parents, who are getting older, and they think that when they sell Monica's parents' home, they would end up with about $600,000.
Speaker 1:So these are some of the income sources that they will have, and what they really wanted help doing is not knowing. Are we okay? Are we going to have enough to spend something in retirement? They were beyond that. They were wondering what can we do with all this? When you factor in social security and inheritance and our home and our 401ks and our investment accounts, what can this actually create for us? So think of this as some of the resources that can help create and the goals is what we actually want that to look like. This is the tangible impact of what we're doing Now savings they are both saving. They're both maxing their 401k between now and retirement.
Speaker 1:So, with all this in mind. Let's now look at what can this all do for them? And what I always like to do is go through the retirement cash flows first. Before looking at investment allocation, before looking at tax strategy, before looking at some of these other things to optimize, let's first have a clear understanding of where are Tommy and Monica in relation to their goals. So this is their retirement cash flows, and what this is gonna show you is, every single year, what income can they expect? Income, as you can see, is gonna start out as salary. They'll have salaries for the next few years until they fully retire, and then there's a gap. There's no outside income sources because there's no salary anymore. They will have social security once they turn 70. And you see, those benefits are pretty strong, very strong social security benefits, but there's a gap of a few years between the time they retire and social security kicking in, that they actually won't have anything coming in. So that's one income source. Another flow right here. This is their inheritance. We're expecting a $600,000 inheritance when Monica's parents pass and her proceeds from the sale of their home. That's something that we're going to expect in 2030. So those are income sources coming in, but that's only half the equation.
Speaker 1:The other half, arguably the more important half, is what do we want that to do for us? What are the expenses that we're going to have? Not just because these things are expenses, but because these expenses allow us to do the things we actually want to do. So if we look at that specifically, starting when they retire, here are their living expenses of 162,000 per year. Where that comes from is they said that they wanna spend $12,000 per month. That's $144,000 per year, but that isn't today's dollars. We need to assume that inflation is continuing to grow. So by the time that they actually retire, it would take $162,000 per year to buy the same basket of goods and services that today they could purchase with $144,000 per year or $12,000 per month. So that's what this number is. This number here allows them to maintain their monthly lifestyle that they want to maintain.
Speaker 1:Now, in addition to that, they also have housing expenses. As you can see here. Here's a projected mortgage principal and interest payment. Now that goes away at some point. They're projected to have their mortgage paid off by the age of 70. If some of these bonuses come in, they'd actually probably have this paid off by the time that they retire. We're playing it a little bit safe and a little bit conservative, assuming no bonuses. Assuming it a little bit safe and a little bit conservative, assuming no bonuses, assuming this isn't actually paid off by the time that they retire. So they would have a full mortgage payment up until the age of 70. And after that the principal and interest portion goes away. But their property taxes, their insurance, that remains, and so you can see how their total housing expense is going to change year by year.
Speaker 1:Now, by the way, if you want to be able to plug your numbers into something like this, you can get access to this very same software. It's in the Retirement Planning Academy. Link is in the notes below, but you can run this with your own numbers in the same way that we're doing this for Tommy and for Monica. So those were their expenses. Now, beyond that, they have other goals, the other goals starting when they retire. Every five years they need to purchase a vehicle, or they want to purchase a vehicle. They have a vacation goal, not every year throughout retirement, but for the first 10 years of retirement. You can see that goes away after.
Speaker 1:And then property. This property is their home maintenance and renovation expenses. They want to have an extra $20,000 per year in today's dollars to make sure they can keep their home in the condition they want it to, to make sure they're doing the things with their home. So that's all of that. And then, finally, the tax payment. What's the expected amount that we need to pay in taxes to have enough leftover for these goals, for these expenses, so on and so forth. So why do we go through all that? We go through all that, every single number, from the day they retired till the day that we expect that they pass away.
Speaker 1:We want to know what income do you have coming in? What expenses are you going to have? We really need to model this out, because what this shows us is this shows us, tommy and Monica, now we can get a very clear picture of what your portfolio needs to do for you, meaning this isn't just some $4 million portfolio or whatever it happens to be in your case. We don't need to know the number. We need to know what's required from that portfolio. How does that portfolio supplement social security, other income sources and allow you to do everything that you want to do? Supplement social security, other income sources and allow you to do everything that you want to do. That's what this number gives us. This net flows shows us what does your portfolio need to do. How much are we taking out of it every single year to supplement social security and allow you to live your life?
Speaker 1:So you can see this first full year of retirement here, their total outflows are $400,000. Again, as a reminder, this is a combination of their tax payment plus their goals, plus their core expenses. That all adds up to $400,000. They have zero in income flows, no social security, no salary. Aka, that full $400,000 needs to be fully pulled from their portfolio. The following year they have $600,000 of inheritance. That $600,000 compared to their total outflows, you can see some of that would be spent. The remainder would be saved, would be something that's actually building their portfolio.
Speaker 1:Then, the following year, you can see, year by year, what their actual net flow is, what their actual portfolio liability is, and that number is very important. This isn't important from an absolute sense. There's not a good or bad number here but what we want to do is compare this number to their total portfolio value. So what does this represent as a withdrawal rate? Well, the final thing we need to do is we need to understand what is their portfolio expected to look like by the time that they retire. Well, if we go through this and we go through their total portfolio today, their planned savings, their total, match an average portfolio return here. Now, this is in no way a guarantee Every single year you're going to see a positive portfolio return, because we're simply looking at averages. The reality is, in many years that number will be a lot higher. In many years that number will be a lot lower. We're simply starting with an average in this projection. But if we look at this, if they get these average returns, their $4 million portfolio today, by the time they're both fully retired, is closer to to 5.4 million. So what we can do is we want to compare. How do these net cash flows, what does this represent of their portfolio balance as a withdrawal rate, and that's going to tell us what the expected withdrawal rate is. So here that is on this page.
Speaker 1:Here this withdrawal rate of their portfolio. You see that first year it's almost 7%, taking 400,000 out, and that's before social security has started. So there's a lot of pressure on their portfolio. The following year there's no withdrawal rate. That's simply because the inheritance comes in and they have a net positive flow to their portfolio more money coming in and income than they're spending. But once things start to normalize, that withdrawal rate's in the 5% for a couple of years. Then it's down to 4%, then it drops again to less than 3%. And the reason it drops less than 3% is at this point Tommy and Monica both have social security coming in. They both have strong social security benefits. So every dollar coming from social security is one fewer dollar that needs to come from their portfolio. That explains why this withdrawal rate is so low.
Speaker 1:So if we look at this across the board of assuming these withdrawal rates from their plan all the way across their retirement, you can see that here they are today. They're continuing to work until the age of 65. Their portfolio balance is expected to reach about $5.4 million or so under these assumptions. Again, these assumptions are not guarantees. It's just an average rate of return that we're going to start with. After that point you can see their portfolio levels off a little bit as they start spending it for the first few years and then it starts to pick up again as social security kicks in and less pressures on our portfolio because social security income is coming in and their portfolio continues growing.
Speaker 1:One thing that's difficult here is this is looking at dollars in nominal terms. Yes, $14, $15 million is a lot of money at that point, but let's actually look at that in today's dollars. Today's dollars allows us to see what does that actually feel like today? What does that represent today? And what you can see is it means their portfolio is staying about the same in terms of its real value throughout their retirement. Okay, so all that's great, but so what? What is this actually telling us? What are the actual changes that Tommy and Monica can make?
Speaker 1:Well, really, the goal of financial planning is to give you a very clear sense of where you're headed in your baseline plan Before you actually make any changes. What are you on track for? And, as we see, tommy and Monica are on track for a very healthy retirement, a high probability of success, the ability to do a lot of things, but this doesn't mean this is what their plan should be. I mentioned that Tommy's in tech and Monica's an attorney Two very stressful jobs, jobs that are not necessarily sure they want to do until 65. If you recall, I mentioned they're working until 65 because they almost feel this sense of you're supposed to. Everyone else is doing it. So why not?
Speaker 1:But once we start to look at this, we want to explore options. What if we don't just take your plan for what it already is? What if, or what would this look like if we don't just take your plan for what it already is? What if or what would this look like if we were to retire earlier, monica? What if you were to retire at 62? And tell me what if you were to do the same? Let's say do it, let's just explore what would the impact on your plan be? The impact would, of course, be fewer dollars, because that's fewer years of saving, it's fewer years of compound growth, it's more years of drawing down your portfolio, but you're in a position where that's not something that is off the table. This was very reassuring for Tommy and Monica to know. It's very reassuring to know that you could potentially do this much sooner than age 65. If you're starting to feel a little burned out, it's good to know that you're a few bad days away from being able to tell your boss, being able to tell your company, that you are out. So that was incredibly reassuring to them.
Speaker 1:Now they would like to see this number a little bit larger, not necessarily because I thought it needed to be, because keep in mind probability of success 80%. What happens in that 20% of cases Well, that's 20% of cases where they quote unquote fail. They still have a home worth seven figures. They still have two social security benefits coming in. The combination of those two benefits in the first year, when they're both 70, is about $150,000 per year. So even failure in this case is not the end of the world, because of their strong social security benefits and because of the equity they have in their home. However, if they want to see what are some changes they could make to drive this number back up higher, I want to show them that. So I said what if you simply took $1,000 per month of that $12,000 and you said we're going to back that out, we're going to cut expenses by $1,000 per month in retirement, you've made up a pretty significant chunk of that drop that you experienced from 95 to 88%. So that was, of course, very reassuring for them to see that there's relatively small things they could do to get back to this confidence zone that I didn't necessarily think they needed to be in, but it at least was reassuring to them to see that they could be Again as a reminder. If you want to see what this is like for you, check this out in the Retirement Planning Academy. You can get access to the same software and also subscribe, if you've not already done so. We go through lots of these case studies and I want to make sure that you don't miss them.
Speaker 1:The next thing here is what if they do want to work until 65? Sometimes just knowing that you can retire is enough of a mood booster. It's enough of an energizer to say you know, I will keep working because I know I don't need this job anymore to meet my needs. I could retire anytime I want because I'm now financially independent. So what if, because of that, they almost have this new lease on life, this new lease on work, to say, you know what? I'm going to keep going, but I'm not going to let myself feel the intense pressure and feel the intense stress if I need to have this income so that gets them through to 65.
Speaker 1:Well, if they're going to do that, we're going to go back to the base case here. We don't necessarily need for their probability of success to be 95%. We don't need for them to be passing If I go back to future dollars. We don't need for them to be passing away with $15 million, if you recall, in their portfolio. So we said what are some other things that we could look at doing? Well, one of them is you could increase your lifestyle.
Speaker 1:Do you want to travel more? What if this, instead of being $40,000 per year? What if this was $60,000 per year? What other amazing things could you do with another $20,000 per year in traveling? And, by the way, what's the cost of this? This cost is relatively insignificant. I don't want to say a million dollars is insignificant it's not at all. But when you see where they're going to be versus where they were going to be, it's not going to make that much of a dent in terms of their actual portfolio value or their livelihood. So that's something that I would encourage them to do.
Speaker 1:Maybe they don't want to travel more, but maybe they do want to increase this. What if they want to increase their normal monthly expenses? That's something that they can look at doing. If they end up doing that same thing, they're going to have less money, they're going to have fewer dollars at the end of the day, but they're still going to be in a position where they have enough to meet their needs over the course of their lifetime, their probability of success is certainly lower, but that would just be something that they need to monitor.
Speaker 1:So this was very telling for Monica and for Tommy. And whether you have $4 million in your portfolio a lot less, a lot more the key is when you actually have this projection, when you actually have this plan, you start to live with some degree of intentionality. You know the impact of working longer or shorter, you know the impact of saving more or less. You know the impact of how much you spend in retirement. All of these things start to be much more quantifiable, which allows you to live life with this degree of intentionality.
Speaker 1:Because, at the end of the day, for Tommy and Monica, it's not about their portfolio size, it's not about their social security income, it's not about their work. It's about what can those things support for them in terms of what they actually want their life to look like. Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Once again, I'm James Canole, founder of Root Financial, and if you're interested in seeing how we help our clients at Root Financial get the most out of life with their money, be sure to visit us at wwwrootfinancialpartnerscom.
