Ready For Retirement
Ready For Retirement
Watch Me Stress Test a $1 Million Retirement Plan
A seven-figure portfolio can feel like a green light for retirement—but the numbers don’t always tell the full story. In one case study, a couple with over $1 million saved faced a withdrawal rate close to 14% based on their desired lifestyle. That’s nearly three times higher than what’s typically considered sustainable.
This story is a reminder that retirement success isn’t just about hitting a number, it’s about how your money is structured to support your life.
A solid plan makes the difference between retiring with confidence and retiring with uncertainty.
Let’s help you build the kind of plan that lasts.
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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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Can you retire at 65 with a million dollars in your portfolio? Today I'm going to walk you through a case study of a couple in that exact situation. We're going to run the numbers, we're going to test different scenarios and ultimately, what we're going to do is see what do they need to do to retire with confidence, not just with hope. So if you're in that situation and if you've ever wondered if your savings are enough, this is a video you need to see. So let's jump right into this case study here. This is Jim and this is Sally and, as you can see, both of them are 65 years old. They want to retire now. We're going to get to what they want their retirement to look like in just a minute, but here's a brief overview of their situation. You can see they both have IRAs, they have a joint account and the combined value of their investments is just over a million dollars and beyond that. They have their primary home with a mortgage remaining of about $145,000 on it. You can see the payment on their mortgage is a little over $1,500 per month. That's just the principal and interest portion. Then, of course, they have property taxes as well on their primary home. So more on that later, but this is a snapshot of where they are. A total net worth about 2.1 million, split pretty evenly between liquid investment accounts and their primary home.
Speaker 1:When we look at their goals, what we see is they want to retire. Right now they're both 65. They're getting pretty tired. They want to move on and start living and start doing the things that they're so excited to do in retirement. We work through an exercise of how much is it going to cost to do all those different things and when we add up the different things whether it's just paying the bills today, things like utilities, things like groceries, things like fuel what does that cost? As well as what does it cost to live comfortably, to be able to go out and do fun things, to be able to travel, to be able to make retirement not just something where you're able to survive, but something where you're able to thrive, something where you're able to treat this as a blank canvas and you're able to design the life you want to live for the rest of your life.
Speaker 1:So these are those numbers and what that looked like. We budgeted $6,500 per month. So this is after taxes. This is how much do they need coming into their bank account every month for utilities. This is for groceries, this is for clothes. This is for the monthly basics. What this does not include is property taxes. We're going to account for that separately, and this does not include their monthly mortgage payment. We're also going to include that separately, and I'll show you why in just a second.
Speaker 1:Beyond that, though, there's also going to be healthcare costs. So they're working today, and their coverage is provided through their employers. They're not going to have any pre-Medicare healthcare costs because they're both 65 already, but what we are doing is, when they retire, we're estimating what their Medicare Part B and Part D premiums will be based upon their adjusted gross income, and we're assuming an additional $3,600 per year for each of them of out-of-pocket costs. So those are their healthcare costs. And then, finally, they want to budget an extra $2,000 per month, or $24,000 per year, to travel. They shared some really fun travel goals with me, and as we worked this out, we knew that they weren't going to be traveling forever, but we did want them to be able to have this amount for the first 10 years upon retiring. So, from 65 to 75, on top of their normal expenses, which are right here, could we allocate an additional $24,000 per year to take the types of trips that they wanted to take. So these are their goals. This is essentially what we're aiming for. This is what success looks like for them, and then what we wanted to do is understand what income sources will they have to meet some of those goals. They both have their salaries today, technically, but they're just retiring, so those salaries are about to go away. So we have these here listed, but we're not planning on any additional income, unless, of course, we determine that Jim and Sally need to keep working.
Speaker 1:What we do have is Sally's social security. She was planning to collect at age 67, which is her full retirement age. She would receive $2,300 per month if she collected at that age Jim's social security benefit. He was planning to defer until age 70. His benefit at age 70, because he would then have three years or so of delayed retirement credits, his benefit would increase over what it otherwise would have been at age 67, and his monthly benefit would be $3,900 per month. So those are two income sources that will kick in, not immediately upon retirement, but a couple years into retirement for Sally's benefit and five years into retirement for Jim's benefit Savings.
Speaker 1:We're not planning on them saving any additional amounts to 401ks or IRAs or Roth IRAs, because we are assuming they're retiring right now, so we're not gonna save anything else. And ultimately, what we want to see is are they on track? Can they do this? So you've probably seen me go through this before. If you're subscribed to this channel and if you're not subscribed, make sure that you do so, because we run these same case studies for people with a few hundred thousand dollars to people several million dollars, and what planning points exist at each stage of the way or each step of the way. So make sure you subscribe if you've not done so already.
Speaker 1:And this is always where we like to start. So this is the cash flow section of their plan. This cash flow section is the lifeblood of anybody's retirement strategy. It helps us to understand what are the expenses that we're going to have in retirement. Let's project those out and adjust it for inflation over time, and then what income sources will we have coming in? What will the cash inflows be to meet those cash outflows? So on this left-hand side, this is our cash inflows.
Speaker 1:Typically, what you might see here is salaries. You might see rental income if they have a rental property. You might see pension, you might see social security. These are the income sources people have coming in if we exclude any income from their investments. So what we're going to see here for Jim and Sally is no more salary, because we're assuming that they retire and they will have social security, but not right away. You can see here there's two years of zero because Sally's not going to collect until age 67 and Jim's not going to collect until age 70. So here's what those numbers are, and those numbers are adjusted for inflation each year and we can see what their total social security benefit will be in this far right-hand column. That's only half the equation. That shows what income flows they'll have or what income sources they'll have.
Speaker 1:What we needed to do is compare that to what will their expenses be. So their expenses you can see right here Everything from living expenses which, if you recall, we assumed $6,500 per month, but that's in today's dollars. $6,500 per month is $78,000 per year. If we adjust that for inflation every single year, what that's doing is us telling Jim and Sally here's the increasing dollar amount every single year. We need to plan to be able to generate so that you can take this lifestyle that today would cost $6,500 per month and keep that up even as inflation continues to go up. So that's what we're projecting for living expenses.
Speaker 1:But then there's housing. As I mentioned before, we're including their principal and interest payment. We're including their property taxes separately, and that's for a couple of reasons. Number one their mortgage payment, at least the principal interest portion of it that goes away at some point. So we're not just going to group that into their overall expenses and project that out forever. That would be exaggerating what their expenses will actually be. What we need to do is we need to separate those two so we can understand when is this mortgage payment going to be gone, so we no longer have to plan for that as another expense. We do the same with property taxes because, depending upon the county you're in, there might be a limit on how much property taxes can increase or how much we want to project it. Increasing doesn't always increase exactly with inflation. So this is their total housing payment and you can see it starts at about $26,000 per year and that's going to drop off in their early to mid-70s once the principal and interest portion of their mortgage is paid off. So if we then go back to expenses, the final one is healthcare. So healthcare here, this is that expense, of course, that you need to have coming in, and what we're going to do is break it down between what they're projected part B, premium B for Medicare, their part D premium plus their out-of-pocket expenses and we do that every single year, projecting out what will that look like. And that's all grouped under expenses.
Speaker 1:The next is goals. Now, goals could be a whole bunch of different things. This could be anything from I want to travel, and why are we planning for this separately? Well, we're planning for this separately because, again, this is not an expense that's going to last forever. So if we just group this $24,000 per year or this $2,000 per month into their overall expenses and, by the way, I see too many people doing this when they plan for their retirement their $6,500 per month of basic expenses now balloons to $8,500 per month. That's accurate for the first 10 years here, but what about in their later 70s and early 80s and beyond? They're not traveling as much, if at all. So to continue planning for that is to over-exaggerate the actual cost of retirement and you're going to have a skewed output. So we plan for this separately. Goals could be things like home purchase. It could be things like you want to pay for a wedding for a child, you want to fund a 529 plan for grandchildren, any of those one-time expenses, or maybe those expenses that aren't recurring every single year for the rest of your life. Those are great things to plan for and goals.
Speaker 1:I mentioned that because, if you want to walk through your own scenario, you can actually get access to the same software via the Retirement Planning Academy. Check out the link below. You can walk through this. You can plug in your own numbers and see the output for you. And then, finally, is tax payment here? So taxes are going to be an expense and you can see there's zero projected taxes. And that's because the way we're modeling this out for Jim and Sally, they're going to live on their brokerage account the first couple of years. That keeps their tax benefit down, and then they start living on their IRA funds after that and that's why their tax payment goes up here.
Speaker 1:But when we add all this up, what you get is a total outflows. Total outflows is us answering the question what are the total expenses that we need to project so that Jim and Sally can pay their taxes, pay for their goals, which in this case is travel, and then have enough left over to pay for healthcare, housing and core basic expenses, and do so for the rest of their retirement. So that's what we're showing here in the final piece. Really, what we're trying to back into here is what this number is going to look like. What are their net flows going to be? The net flows is telling us how much of this, how much of this expense that we're going to incur, needs to be funded from our retirement portfolio. Because, keep in mind, some of those expenses, depending on your situation, will be funded by social security, rental income, pension, part-time work, all these various potential income sources. This is saying what role does your portfolio play in this? And so this net flow here you can see, is our projection of what we think their portfolio is going to need to do.
Speaker 1:Now you can take a look at this and say, okay, if you have a million dollars and you're pulling out 140,000 per year and increasing, you can do some basic math to understand that's probably not going to be very sustainable. If we go to this page right here, you can see what that represents as an actual withdrawal rate If we want to plug that in the withdrawal rate starts in the 13 to 14% range and that withdrawal rate is going to continue going up. In other words, this probably is not, almost certainly is not going to be, a very sustainable plan for Jim and Sally, at least not yet. So we're going to explore different options. We're going to explore some fairly simple things that they can do to improve their odds of success. But if you have a withdrawal rate in the teens, that's not a recipe for success. We ideally want to have that somewhere in the four to 5% range as a general rule of thumb, as a starting point. It's not a universal law. There's a whole bunch of different things that can impact that, but as a basic rule of thumb, something that starts, there is a great place to start.
Speaker 1:So if we look at this, here's the outcome of this. Jim and Sally, if you were to retire today, here's your million dollars or so you're going to spend right through that. Why is that? Well, you're spending 13, 14, 15% per year of your portfolio. If you're getting by the way, we're projecting an average return of 6.5% here for Jim and for Sally. Not a guarantee, simply saying we need to project something so we can project this out here. But if they are to grow at 6.5% and if they are to be drawing 13, 14, 15%, the math just works out that you're going to spend that portfolio down. And they still have Social Security. They still have equity full equity in a million-plus dollar home at this point, but they don't have any other liquid savings at this point to continue, allowing them to do what they want to do. So this is where the planning comes in.
Speaker 1:Anytime someone does their first retirement projection, don't get too attached to what the outcome actually looks like. Very rarely is it the perfect outcome. Typically, we either need to do something to make it work In other words, do we cut spending, do we work longer, do we save more? We need this to work or, in many cases, in many cases with clients we work with, they've actually saved so much and it's difficult for them to spend. So some of our encouragement is to actually say how can we spend more? How can we give more? How can we do more with what you have? Because if you don't, this is just going to continue growing, this being your portfolio, and there's an opportunity cost to never actually using it.
Speaker 1:But for Jim and Sally that wasn't the case For Jim and Sally. The case was how do we preserve this, how do we save this to make sure that you don't go into retirement with this as an outcome? That is very likely. So there's a few things we could do. The first thing was well, the simple option is do you work longer? They didn't really want to do this, as I mentioned, they're tired, they're ready for retirement, they want to do something else, but this is not an outcome that's acceptable here. So we look at this and say well, what if you work three extra years? Working three extra years? Now that's no small feat. I'm not saying that it's as simple as just continuing to do this, but if they were to do that, all of a sudden their projections look very different. Their probability of success goes from 13% in that initial scenario, which is definitely not something you want to go into retirement with the probability of success at that rate up to closer to 70% here, which there's no universal. This is the right number, but a number that we would feel much more comfortable with, at least as compared to 13%. So that was an option. Now, real quickly, we're going to table that, because that's not the ideal option for Jim or Sally. So let's go back here and go back to what if they only work until age 65.
Speaker 1:As I mentioned, if you want to run these projections on your own with your own numbers, get access to this in the Retirement Planning Academy. Link is in the show notes below. The next thing that they could do is if they don't want to work longer. There would have to be something pretty dramatic of can we cut some expenses? The first thing that we did is said what if you didn't take any of these trips? I don't like this option. But what if you didn't take any trips? Would that alone be the thing that would allow you to be able to retire right now and be okay? Maybe possibly you see that there's, technically, dollars left at the end of this projection, but if we want to see what's the likelihood of success here, it's still only about 50-50. So, yes, if you cut out the vacations, that might be one thing. You probably need to also reduce monthly expenses in this case. So if I drop that from $,500 per month to 6,200 per month, what we see is we get a probability of success that's starting to inch closer towards what we'd feel more comfortable with. Their projection is starting to look a bit better Now.
Speaker 1:These aren't great solutions. Cutting out travel, cutting your budget, working three years longer when you're already pretty burned out these aren't ideal, but it was just giving Jim and Sally some perspective of it is helpful to know what are your options If you're at the point where you can't work any longer. What could you spend today if you were to retire? Retirement's all about trade-offs. Or if you do not want to sacrifice, how much you're spending? How much longer do you need to work to make this happen?
Speaker 1:Now, sometimes people look at this and say, well, what about the right tax strategy? What about the right investment strategy? Can that solve the gap? Can that solve the problem for us? And the answer is typically no. Meaning if I go here and if I plug all these numbers back in to get back to the base case. So this is right where we started from and we refresh this here. This is going to where we started for Jim and for Sally, and where we started was not a great place If all we did was said, well, let's implement the right tax strategy. And, by the way, I went on the back end and programmed a Roth conversion strategy that's projected to save them a good amount of money in taxes If they were to run that. That's going to help them a little bit, but not much, meaning their probability of success goes from 13% to 16%. In other words, the right tax strategy is very important, but it's more of a way to optimize a plan that already works to squeeze even more out of it. It's not going to typically be the thing that takes you from no chance of success to all of a sudden, now you can retire. So keep that in mind. You need to have that. But that's not a foundational thing as much as it's an optimization thing.
Speaker 1:They also want to know well, what if we invest differently? They said well, what if you did? What if we could assume that you're going to get a growth rate closer to 9%? Not a guarantee, but just illustrating to them. What would the actual impact of that be on your projection, on your plan? Even if you could do that, what they're going to see is sure it stretches your portfolio a little bit, but that gets you one extra year, maybe two extra years of living expenses. Your portfolio a little bit, but that gets you one extra year, maybe two extra years of living expenses. It's not really moving the needle.
Speaker 1:So I illustrate that, because sometimes people think that magically, an investment strategy can save them or a tax strategy can save them. Those are two critical components to a plan, but typically those are things designed to optimize, protect, preserve, do better once you already have the foundational plan in place. So, going back to the foundational plan, that is things like how long you work, how much you save, how much you spend in retirement and as we go through this, none of those things were truly appealing to Jim and to Sally. So here's where the third option came in for them. I put down here downsized home. They have about a million dollars of equity in their home. This is a home that they raised their family in. It's probably bigger than they need right now. Beautiful home. They have about a million dollars of equity in their home. This is a home that they raised their family in. It's probably bigger than they need right now. Beautiful home. But one thing that we explored is what if you did downsize? And what if you downsized this next year? And, by the way, what I'm looking at for downsizing is purchasing a $700,000 home. They're staying in Colorado, which is where they are right now.
Speaker 1:Property taxes go down, they pay off their mortgage and now they have a lump sum of money the difference between what they sell their home for, after broker fees, after taxes, and what they buy the new home for. There's a little bit of money they now get to invest to live on. So there's three benefits to this. Number one, that mortgage payment that they had, the $1,500 in change that they were going to have for the next several years. That goes away. Number two, the property taxes that they have, that tax bill that they have starting today for the rest of their life. That gets cut by a couple few thousand dollars every single year. So it's lowering their lifetime expenses. And then, finally, number three, there's a little bit of money. There's a couple hundred thousand dollars of money, of cash that they would then have after selling this property that they could invest to create more income for themselves. So there's this triple benefit of lower short to medium-term expenses in the form of getting rid of the mortgage, lower long-term expenses in terms of lowering the property taxes and higher portfolio assets to actually create income for them for the rest of their life.
Speaker 1:So when we look at this right here, if we were to illustrate this, so keep in mind. This is not working any longer. This is not cutting savings or cutting spending in retirement. They're still traveling. They're still spending that amount per month. That move, as you can see, dramatically changes what their potential outcome looks like. It changes their probability of success from 13% to almost 80% a pretty dramatic, a very dramatic increase. So what this is showing this isn't saying that your situation is going to be exactly like Jim and Sally's.
Speaker 1:What this is showing, though, is retirement is all about trade-offs. Some of those trade-offs are what are the things that we need to do today to cut back, to save more, to downsize, to be in a position to retire? Other times? Those trade-offs are we have more than enough to meet our needs? What do we do to spend more, to give more, to optimize more and have more quality of life given what we've done? This is the importance of planning. This is why you have a strategy. This is why, even if you don't know exactly what retirement is going to look like, get started creating a plan, see what the initial projection looks like, because then that gives you some real clarity on what are the things you can do to optimize this and make sure you're preparing for the retirement you dreamed of 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.
