Ready For Retirement
Ready For Retirement
How Much Can I Spend In Retirement with a $2 Million Portfolio?
A retirement story that challenges everything you thought you knew about what’s possible in your golden years.
Meet Michael and Lisa: a couple in their early sixties with $2 million saved who are worried about running out of money too soon. Their initial plan looked bleak, but three simple adjustments reshaped their retirement outlook without working longer or cutting back on their lifestyle dreams.
The shift came from questioning assumptions. Instead of projecting first-year expenses forever, they recognized that travel-heavy budgets don’t last into their 80s and 90s. Pair that insight with a portfolio tailored to their situation, not arbitrary rules, and a smart Roth conversion strategy, and their success probability jumped from 32% to 74%.
The real takeaway isn’t just the numbers. These strategies are accessible to anyone. Retirement planning works best when expenses evolve with time, portfolios reflect personal circumstances, and taxes are managed proactively.
Your retirement might be closer than you think. Let's explore how the right adjustments can turn uncertainty into confidence.
-
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.
Create Your Custom Strategy ⬇️
Imagine you're 62 years old with a couple million dollars in your portfolio. You're probably starting to wonder if you can retire and, if so, how much might you be able to spend when you do? That's the exact situation today's couple find themselves in. We're going to take a look at their plan to see what are the things they need to be mindful of, what are the common roadblocks in front of them, and then what are the specific action items they can take to make the most of what they've worked so hard for. Take to make the most of what they've worked so hard for. And as we go through these numbers, please keep this in mind it does not matter if you actually have $2 million in your portfolio, much more or much less. These strategies, the framework that we're going to work through, is what you need to understand if you want to make the most of your retirement strategy. So let's take a look, and before we do, here's the before and after, with a few very basic changes that this couple made. This is what their portfolio looked like, and what we're going to show is how. This is what their new strategy looks like, their new portfolio projection looks like. Not because they're working longer, not because they're doing some crazy thing that's going to actually impact their bottom line, but because they're avoiding some common pitfalls and making a couple of strategic changes that will make all the difference in their retirement strategy. So with that in mind, with that outcome in mind, let's take a look at where they are today and show you the three things they need to be mindful of, the three things you probably need to be mindful of if you're in this situation, so that you can make the most of this.
Speaker 0:So here's an overview of Michael and Lisa and, as we go through this, this is for educational purposes only. This is not a guarantee. None of this is intended to be advice. Just to illustrate how a couple of these concepts work in practice. Michael and Lisa have a couple million dollars you can see between their joint account, 401ks, iras, roth IRAs. Then they also have their property. Their property is $800,000, $900,000 or so of equity in it. Now, unless they sell that property, of course, that's not going to change in any type of retirement income, but still something we want to factor in for plain purposes.
Speaker 0:Their initial goal, their first goal, is to retire at the age of 65. So, number one can we do it? And then number two how much can we spend? If we do, as we start to work through how much can they spend? We need to start with an understanding or an expectation of how much might you want to spend. And 14,000 is the number that they gave, and where that really comes from is $10,000 per month. Keep in mind, this is after taxes but $10,000 per month for them to be able to maintain their lifestyle, and then an additional 4,000 per month, 48,000 per year they want to spend on travel. So these were their numbers.
Speaker 0:Now, keep that in mind, because there's a very important change we're gonna make here that doesn't actually impact their lifestyle, but it's gonna dramatically change the projection of what's possible. So $14,000 per month, and on top of that, we're going to assume that they have funds that they need to set aside for healthcare. So they're both going to be continuing to work. They have coverage through their current plans until Medicare age, but once they do retire at 65, they'll be on Medicare. So their Medicare Part B and Part D premiums. And then, in addition to that, we're planning for $4,000 per year for each of them of out-of-pocket expenses.
Speaker 0:Today they have income. That income, of course, is going to go away when they're done working, but they will have social security. Both of them intend to collect at age 70. You can see that here in the software. Between now and retirement, they're both going to continue putting 10% per year into their 401ks. They have a little bit of a match. But what we want to Can they do this? Do they have enough money not just to last for the first few years of retirement but to last all the way throughout retirement? And then, once we know the answer to that, how can we optimize that and give them some strategic action steps to take to make the most of all this? So this is always what I like to do when helping someone to understand if they can retire.
Speaker 0:The lifeblood of anybody's retirement plan isn't their tax strategy, not their estate strategy, not even how they're invested. It's what will their cash flows look like. So this cash flows page, what we're looking at, is all the various income sources Michael and Lisa will have from now throughout retirement and all the various expenses they will have now throughout their retirement. Now, I'll mention this a couple of times, but if you want access to the same software, you can get so in the Retirement Planning Academy link. Link is in the show notes below. But if you want to follow along as we do this, planning Academy link Link is in the show notes below. But if you want to follow along as we do this, you are more than welcome to do so through that software as we go through this.
Speaker 0:This is just a breakdown of what will their income source be for the next three years Salary you can see Michael's salary, lisa's salary that's going to cover their needs for the next three years. Then that goes away. Once salary goes away, social security kicks in, but not right away. As you can see here. There's going to be a bunch of zeros until Social Security starts at the age of 70. So, going back to summary, here's their total income flows and what we want to compare that to is what will their expenses be? Their expenses are broken down into a few categories. One this is just that basic living expense $14,000 per month. That starts at $168,000 per year, but inflation is going to happen. So how do we ensure that number keeps up with inflation? Well, we index it by 3% every single year, using that as our assumption.
Speaker 0:Next is housing. Housing is on top of this, and the reason we separate housing, as you can see here is because at some point that mortgage is going to be paid off, which means our property taxes, their insurance, that will continue forever. But the principal and interest stops at the age of 70. So that's no longer an expense we need to factor into their plan. And then, on top of that, we also have healthcare. We're shown zero for healthcare and that's simply because they're covered through work between now and age 65. But after that, here's what their expenses will be Taxes and plan savings.
Speaker 0:But really what we want to know here is, if we look at net flows, this takes their total expenses, it subtracts any income sources and the income flows and says this is the amount you need to pull from your portfolio. So you're one of retirement. As you can see, if their total expenses are $252,000, they have no social security, no salary they need to pull $252,000 from their portfolio. If we fast forward a few years, once they have paid off the mortgage, once social security is kicked in, you can start to see how this number really changes pretty dramatically. But that's what that is showing us. Now here's what we want to do with that. We don't just want to know how much you've taken out of your portfolio. We want to know can your portfolio sustain that for the rest of your life?
Speaker 0:And if we keep in mind, go back to what those numbers were, they were taken out about a quarter million dollars in the first few years of retirement. Quarter million dollars divided by their portfolio value, it's a pretty high withdrawal rate. Today they have a couple million dollars in their portfolio by the time they retire, somewhere in the neighborhood of maybe low to two millions. It's about 10% per year they're taken out and rising. So what does that mean? Well, it means the next couple of years, the next few years, they keep adding to their portfolio, but then they retire and they pretty quickly start to draw their portfolio down. Not a successful outcome. So the immediate response to can I retire is no, and the secondary response of how much could I spend? That response would be well, less than we're looking at right now.
Speaker 0:But that's before we make a couple of key changes. The first is this when we look at our retirement monthly expenses of $14,000 per month, this is a common mistake I see most people make. They look at all of their expenses that first year of retirement and they just use that number on a go-forward basis. But if I look at that number, I look at 14,000 per month and I ask Michael and Lisa how much of that or how much of that is travel? That's about 4,000 per month, 50,000 or so per year. I then ask how many years do you think you'll actually do that for? At age 90, are you still spending 50,000 per year on travel, like you are at age 65? And the answer is, of course not. We're probably going to travel more so the first 10 years of retirement and really after that we don't see ourselves traveling all that often. Maybe little trips here and there, but not to the extent that we will the first decade. So I say, well, what if we simply do this? What if we change this? What if we say the 10,000 per month on a go-forward basis is your monthly expenses and travel. What if we separate that out but we only include this for 10 years? If we do that, what impact will that make? So that's one change we're going to make Now. Practically speaking, that is reducing how much they're going to spend compared to the original scenario, but it's a more accurate representation. They weren't really going to spend as much all those years.
Speaker 0:The second thing you can see right here, what's the retirement allocation? This says moderate right here. Moderate in this case is assuming a 60-40 portfolio. So many people go into retirement and think I'm 65, I'm retired, I need a 60-40 allocation in my portfolio. Sometimes that is the case. Many times it is not. There's a far better, more intentional way of doing that, based upon what are your actual needs from your portfolio. How will that change over time and, most importantly, what's your risk capacity versus what's your risk tolerance. So that's a topic for a different day. But when you start to understand that, you start to understand that moderate portfolio, at least for Michael and Lisa, might not be the most appropriate.
Speaker 0:So what if I change this to growth? Now, quick note here I could change this to anything. Just because I change this to something does not mean it's guaranteed to happen. So I just want to acknowledge that Just because you assume something's going to happen doesn't guarantee it's going to. But what this is looking at is a moderate portfolio. Under these assumptions, it's going to grow at about 7% or so per year. A growth portfolio defined here it's a 70-30 portfolio is going to grow at about 7.5% per year. Guarantee, no, but practically speaking, if we look at history as our guide. Is it unreasonable to expect that you would get a little bit better performance if you have a little bit more in stocks? No, that's not unreasonable to expect. So that's the assumption we're going to make here.
Speaker 0:And then, finally, tax strategy. If you recall, when you look at the breakdown of Michael and Lisa's assets, a lot was in pre-tax accounts, a lot was in taxable accounts. That is a perfect opportunity to implement a Roth conversion strategy. In those first few years of retirement, start to systematically shift some pre-tax assets to Roth assets and in doing so, you get more of your money into tax-free or Roth accounts. Now I'm not going to show you the full modeling out on the back end, but what we did is we said what if, every single year, they converted up to the 12% bracket? So in a year they were under the 12% tax bracket, maybe even under the 10% bracket. Convert enough of their pre-tax accounts to Roth accounts to get them to max out that full 12% bracket. So if they do all of these things? So keep in mind, nothing dramatically changed here. They didn't have to work longer. They didn't have to work longer. They didn't have to save more. They didn't have to make any serious sacrifices to their retirement lifestyle. Yes, we better accounted for the fact that they're not going to be spending $14,000 per month indefinitely, just the first few years of retirement. But in doing so, you can start to see that this scenario analysis, this portfolio projection, started like this. Now it looks far more like this If you go to the probability of success here. The probability of success for Michael and Lisa started at 32%, now up to 74% Now.
Speaker 0:This is why retirement planning is so important. Retirement planning isn't just saying start with your assumptions and see what the output is. It's saying start with the assumptions, see where that gets you, and then what are the little things we can tweak and change along the way. What if we took this a step further and said Michael, lisa, do you think you're going to be in your home forever? They say no, at some point we're going to downsize. What does downsizing look like In this case? I modeled out. What if they downsize in 15 years and they buy something in today's dollars worth about $700,000,? Well, when you start to model all this out, their new projection took them from looking something like this you can't retire, you need to work longer, you need to save more. You need to make some serious cuts to look in something like this, we're saying not only can you retire, but the amount you can spend might actually be more than you initially thought that you could.
Speaker 0:So, as we look at this plan for Michael and Lisa, what can we take away from this? Your numbers are going to be different than their numbers, but the framework, the takeaways, are this Number one have an accurate accounting of what your expenses will actually be, not just day one, but how many of those expenses will change over time. Will the mortgage be paid off? Will your travel expenses go down? Will expenses go up over time because of medical bills or long-term care? That needs to be modeled properly for you to have an accurate sense of how much are you actually going to need to support throughout your retirement. Number two is your portfolio allocation the right allocation for you, or is it based upon some rule of thumb, someone else's idea of what your portfolio allocation should be? Little shifts, little allocation changes maybe don't seem like a big deal, but when those are compounded over years and decades, it can have a huge impact on what's possible for your retirement.
Speaker 0:And number three do not neglect tax strategy. If you're neglecting tax strategy, you may be leaving tens or hundreds of thousands of dollars, or even more, on the table, which, practically speaking, means there's less left over for you to actually spend and enjoy in your retirement. So, if you don't have the plan, get access to something. Work with a financial advisor. If you want to work with someone, we do this all day, every day, for our clients. Reach out to us here at Root Financial.
Speaker 0:You can go to our website Link is in the show notes below to schedule a time to talk with someone here. Or if you're not ready to talk to a financial advisor, that's okay too, but get access to a planning software and get access to a framework. You can get this one, if this looks attractive to you, using the link below for the Retirement Planning Academy. But at the end of the day, there's too much to be left on the table if you're not planning proactively for your retirement. And then, finally, for those of you that don't have a financial plan in place, but maybe justifying it as, as long as I keep saving and working and growing my portfolio, that will cover my lack of an actual financial strategy. Well, take a look at this video right here. In this video, I lay out five reasons that might be time for you to retire right now, because, as much as you're focused on the financial side of things, there's a tremendous cost to your actual strategy by continuing to work even after you no longer need to.
