I’m 60 and Single with $750K Can I Retire With $60K per Year and What about Taxes? | Retirement Planning in 60’s

Troy Sharpe: You’re 60 years old, save $750,000, and you want to know, can I retire, and how do I reduce taxes? When do I take Social Security, and what is the overall impact of making all those decisions, not just on your security today, but on your security over a long period of time? We’ve listened to your feedback. In the comment section below, many of you have been asking if I can do one of these hypothetical case studies for a single individual, as opposed to a married couple.

Today’s case study will be focused on single individuals and some of the nuances are absolutely different and some of them are the same, especially if you’re retiring before Medicare age.

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Troy Sharpe: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), host of the Retirement Income Show, and also a certified tax specialist. Today’s video, we’re going to focus on healthcare because when you retire prior to Medicare age, that is a big, big consideration. We’re going to look at Social Security and we’re also going to look at taxes. Taxes are gonna play a big part in this overall plan for the single individual, because it takes less income before you start to bump into those higher tax brackets when you’re a single individual as opposed to a married filing jointly couple.

Now, first thing I want to do is just lay out the parameters here. Retiring at 60, or the question is, can I retire at 60? Passing away at age 90, $750,000 saved, very important to note though, $250,000 of this money is in what we call non-qualified accounts. Your retirement accounts, the IRA, the 401k, the technical term there is a qualified account.

If it’s not in an IRA or a 401K or a 403B, it is a non-qualified account. If you’ve listened to the radio show for some time, if you’ve watched these videos, you’ve probably heard me talk about how important it is to have a diversified tax bucket structure when it comes to where you can pull income from in retirement, extremely important. If you’re watching this at 50, 52, 55, and retirement is down the road, you don’t want all of your money inside that tax-infested retirement account normally.

Of course, there are variables there, when you’re going to retire, if you have other sources of income, there are absolutely variables, but as a general rule, we do want to diversify those tax buckets where we’re saving money. In this scenario, $250,000 is in non-qual, $500,000 is in qualified or retirement accounts.

We’re going to look at Roth conversions, we’re going to look at healthcare and we’re going to look at Social Security and, of course, the probabilities in some different scenarios of what is the outcome if, with these parameters, can you retire and how secure is your income? One of the first things I want to point out, on some of the comments on a couple of the previous videos that I’ve done, where can we spend a 100,000? Can we spend 80,000 and then reduce it 10 years into retirement? We call those a go-go, slow go, no go plan, where your go-go-go the first 5, 10, 15 years of retirement, then things slow down, and the no-go years you’re not really going anywhere except to the doctor.

When we talk about these numbers, they’re all inflation-adjusted. When I say can we spend $80,000 today and then reduce it to $60,000 in 10 years or whatever those numbers are, that’s $60,000 in 10 years, that’s in today’s purchasing power. In reality, in 10 years, it’s really $70,000, $75,000, $80,000 we’re going to have to pull out to have that same purchasing power that $60,000 does today. I just want to make that point clear.

This chart illustrates it. The spending goal for this single individual was $60,000 a year. That’s what we’re looking at now. This is inclusive of healthcare costs. This is everything. This is traveling, this everything.

With inflation, we’re looking at about 2.5% long-term inflation. We see very clearly here, the income need increasing, and then I’ve simply dropped it about 15 years out by $10,000 a year, but that’s 10,000 in today’s dollars. In the future, obviously, we’re not pulling out $50,000 because I’ve dropped the 60,000 spending goal by 10, we still need to pull out over $70,000 to have the same purchasing power that 50,000 has today.

This is the graphical representation of that income need. Now, one of the most important things that we would have to consider if someone was coming in and we had this conversation is we have to know about healthcare, because healthcare premiums could easily be $1,000 a month for someone who’s 60 years old. If they don’t have health insurance from work that carried over into retirement, or if they take income from the wrong buckets and therefore become disqualified from any type of subsidy. Healthcare insurance, as you all know, is very expensive here in the United States and it’s just the way things are. That’s only for premiums, not to mention out-of-pocket costs, like co-pays, deductibles, et cetera.

The first thing we would want to do when we’re trying to generate this income is we want to find out or help you determine not only where’s the best place to take your income from, from the IRA or the non-IRA, we also need to be looking at long term tax planning objectives such as Roth conversions. Now the question isn’t just where do we take our income from it? It’s should we be doing Roth conversions and what level should we be doing Roth conversions at while still having a reasonable healthcare cost that fits inside our budget?

Now, if we look here, I don’t talk specifics when it comes to Obamacare premiums and the cost of those because every state is a little bit different, but to break it down, we have IRA money, we have non-IRA money, non-qual, qualified. The question becomes at 60 years old, one, we’re not eligible for Social Security. If we’re going to retire and spend 60 grand, we need to figure out how much is coming from here? How much is coming from here, if any? And are we going to do any Roth conversions? Because in this hypothetical case study, supposed to be Roth.

In this hypothetical case study, this is the asset breakdown. This is the tax characterization of the buckets, just non-qual and IRA, there are no Roth, there is no Roth money. Depending on what health insurance, or excuse me, depending on your state, and what level income, your modified adjusted gross income, wherever that is, you can have a certain level of income before you no longer qualify for a subsidy, or at least you’re bearing the brunt of the cost for your health insurance premiums.

We want to identify what does that cost, what fits into your budget, and then we develop an income and a tax plan to accomplish that. What we want to do is we want to take some money out of here, but the question is how much, and we do want to be doing some conversions over here to the Roth, but we don’t want to do more conversions that causes our health insurance to jump up to $1,000 a month.

In order to figure this out, it is a personalized thing based on your state as I said, but let’s first take that out of consideration, I just want to isolate looking at Roth conversions for this particular case. This is going to be a tax analysis. This is just one simulation, one scenario out of thousands of possible different simulations with respect to investment returns. I want to point out a couple of things, this is targeting the 12% tax bracket.

We definitely can’t go much higher than the 12% tax bracket if we’re going to do conversions, and still try to qualify for that subsidy for healthcare insurance purposes. If we just look at a quick analysis here, targeting up to the 12% bracket leaves us with an estimated ending value of about 1.2 million. This is great. We retire with 750. We’ve taken Social Security and taken withdrawals from our portfolio and we still end up with 1.2 million. Obviously, it’s a good scenario.

This is about the 500 out of a thousand different simulations, so it’s the median. There are some simulations, of course, here where this person would run out of money. If you have 750, and you’re 60, I don’t want you to just think you’re going to be okay because this is one simulation. We will look at multiple but as far as the tax analysis goes, and the Roth conversion as well as the subsidy qualification, all of that is definite. That can be calculated for this year.

Comparing doing the conversions versus not doing the conversions, we see an estimated in this simulation almost a $300,000 increase in ending balances when you pass away. Total taxes paid estimated to be about 171 versus about 317. Let’s call that about $150,000 of this $300,000 gain is from taxes saved. The remainder would be interest earned on those taxes saved later in life when compared to interest lost on the money you’ll use to pay taxes today. That may be confusing but don’t worry about it.

Surface cursory analysis, this tells us that, yes, Roth conversions probably does make sense for this person, we’d want to do a deeper dive, of course, and look at different simulations, different scenarios, but on the surface, Roth conversions do make sense.

Targeting the 12% tax bracket for Roth conversions for this individual means we need to do about $53,000 of conversions. Now, if we were targeting the 12% tax bracket and you were a married filing jointly couple, you can have more conversions, higher number of conversions because the tax brackets are higher, but for this particular scenario, the question now becomes, can we do this conversion and do you still qualify for a subsidy? Well, we’d have to do a state calculation. Most likely not, or you might qualify for a subsidy but maybe your health insurance premiums are still 800 a month or 600 a month or 400 a month. What we want to do, this is part of the financial planning discussion.

Again, this only applies to people below the age of 65 when you’re retiring, and this same concept does apply whether you’re single or married. This something I really want to point out here is from a tax planning perspective, we need to be aware of, yes, Roth conversions can benefit us, but also we want to save the money because if all of a sudden we’re doing conversions and now your health insurance expenses are $12,000 more per year, well, it’s like a double whammy because we’re losing money in the portfolio because we’re writing a check to the IRS on the conversion, so we don’t have that money to earn interest, but also we are paying $12,000 a year more for health insurance.

Combined, that’s a lot of money that we’re giving up, and the tax difference down the road for this particular case, it’s not a huge difference, but all of that analysis would have to be done.

Now we’re going to look at Social Security and the base case that we’ve looked at so far is taking it at 67, full retirement age. I’m going to do a quick comparison here, but I do want to point out that if you take Social Security at 67 or 62 or 70, that absolutely impacts the amount of taxes you’ll pay over the course of your retirement, as well as the amount of ending balances you have.

Oftentimes the thought process is, we should take Social Security sooner if we retire so we don’t have to pull out of the investment accounts as much, but the truth of the matter is if you take Social Security sooner, just later in life, you’re going to be pulling more out of those investment accounts and the same fear and the same anxiety that you may have now about pulling from the investment accounts, you’re more than likely going to have that same fear and anxiety down the road. It’s just going to be compounded because you’re older and you have less time to recover from losses and mistakes or recessions, so just keep those thoughts in mind.

Okay, so doing a quick comparison here, taking it at 62 versus 67, we do assume that she, in this example, has worked her entire career and has full retirement age benefits. The maximum full retirement age benefit, which for her and her age is $3,391 per month. This just simply shows if she were to take it earlier, it turns on at 2,217 per month, but as you can tell, by the time she’s 67, if she simply deferred, it’s a thousand dollars more per month or 12,000 per year that she’ll be getting from Social Security, not from not having to take from the investment portfolio.

If we look at a crossover point here, so on a straight, when do I catch up as far as receive more money from Social Security by waiting until 67 instead of taking it at 62? In this particular example, the crossover point is right here at about 77 and 78 here, and if we look at the total amount of money received if she lives until 90, deferring till 67 is 195,000 more dollars that she will receive from Social Security than not.

If we do a quick comparison here of taking it at 67 versus 70, so if she had longevity and expected to live a very long time. Also from a healthcare planning perspective, typically when you’re single and you definitely have no one else to take care of you later in life from a healthcare perspective, typically from my experience, it’s more secure to have more income coming in because then you have and not depending on the stock market because with that income, you can afford a little bit better medical care if the investments don’t work out as planned and you start to dwindle because of increased medical expenses, longevity, whatever it may be.

Real quick. By the time it’s 70, she would have 3546 estimated from taking it at 67 versus 4397. The difference continues to grow as time goes on, though here it’s a thousand dollars a month difference, little more than a thousand per month difference. Crossover point here, again, it’s about age 80 to 81 right in that range there. This decision in the real world, how we would do that is it depends on how the markets are performing. If we get to 66, 67 and the markets are performing real well, depending on what the risk allocation was, we could take gains off the account and defer Social Security for another year. If we’re one year into a deep recession and there was an aggressive profile, so the portfolio was more heavily allocated towards stock and it’s looking at 30%, 40% decline, we’re probably going to want to take Social Security at that point, maybe live off the dividends and interest from the investment account. A lot of real-world scenarios can play on when we actually take Social Security.

The tax plan is also impacted here. If we were to look at the tax plan of her delaying Social Security until age 70 instead of 67, the total estimated taxes come in at around 100,000 to 115,000 versus 170,000.

Now, the reason for that is if we take Social Security sooner, we’re paying tax on that income, as opposed to if we defer it till age 70, of course, we’re not receiving that income, we’re not paying taxes. That gives us more room– Deferring Social Security until 70 gives us more room if we’re targeting, let’s say, the 12% bracket to do Roth conversions.

The Social Security decision, it does impact the tax plan, and all we ever have to do when we’re doing financial planning, all of this is good information to have but remember this, all we ever have to do is to make a decision for what we’re going to do this year and what path we’re heading down. We can absolutely change courses, chart a new one, but we just have to make decisions for this year.

I showed you earlier with the tax analysis, yes, in the one scenario doing conversions, there was one simulation they passed away with over a million dollars, not doing conversions it was about 900,000 or so. This is a thousand different simulations. In a thousand different simulations, the probability of success comes in at 74%. If you just looked at that one simulation and you said I’m 60 years old with 750 grand, can I retire, and you just see 1.2 million is the ending balance, you may think, “Yes, I’m good, I can absolutely retire.

We don’t want to just look at one simulation, we want to look at multiple simulations. 74 is not a horrible number, I personally probably would not feel comfortable with that, but it doesn’t mean it’s not doable. It actually means in 740 out of a thousand simulations, you pass away with money. It also assumes in 26% of the simulations, you die with no money. Now you would have Social Security and depending on when you elected that would be how much income you have, but if we look at the individual trials here, so this is the 500 simulation. This is the median simulation, and in this one 752,000, if you can see this here, this is the ending account balance in this one simulation.

If we break it down into quartiles here, first off in the 500, that is $752,000 in the account, but in today’s purchasing power because of inflation, it’s only worth about 386. If I increase this today’s dollars, 386, end of plan future dollars 752. These scenarios here and let’s call it the, well, it’s the 26% that the simulation fails, the 1,000 simulations fails, we’re running out of money.

You’re 25 down to 170,000 and one of these worse simulations we run out of money. 2051 and 2032 for this simulation. This is a really bad simulation but those types of things are possible, that’s why we run different simulations and try to make the best decision we can with the information that we have.

You’ll hear me say this consistently, staying connected to the plan is critical. This is why we require relationships with families. We don’t just do this transactionally because if we put a plan together, the economy’s going to change. The account values are going to change. The tax policy is going to change. You could have unexpected expenses, so your spending will change and not just in one year, of course, over time, we need to be connected.

If we start at 74% and you’re just tired of working, you say, you know what? I hate my boss, I hate the commute, I hate my job, I’m just sick of it. I’ll take 74% and let’s monitor it. When we review your account at six months and we’re doing a review of the plan and the investments, this would probably want a review maybe every four months or so. We’re just going to see, okay, where are you? Are you up to 76, 77, 78? Is it going the other way? If it’s going the other way, you’re probably spending too much. That would be the first correction.

If it keeps going the other way, then you really have no choice except to go back to work. Just understanding that because one simulation comes back good doesn’t mean that all of them will. Very important to keep in mind. In summation, if you are 60 and you have $750,000 saved and you want to spend $60,000 a year with reduction of 10,000 per year, on an inflation-adjusted value 15 years down the road, can you retire? You could. Theoretically, yes, but we would need to monitor it very, very closely.

Also, preparing for retirement, where you have your money stored, in IRAs or non IRAs. That is going to make a tremendous difference as far as what your healthcare premiums will be if you retire before Medicare kicks in. If all of your money is in those investment accounts and you need to pull out, let’s say 70,000, to be left with 60 to spend because of taxes, and then maybe you want to go onto a vacation or maybe you have an unexpected medical expense, or you want to help out maybe someone in your family or something along those lines, all of a sudden, now you can be up into 80, 85, 90,000 and that will have ramifications on your health insurance premiums.

Just keep in mind, we want to stay diversified not just with our portfolio but with our tax buckets in preparation leading up to retirement. Social Security matters, healthcare cost matters, this is not different if you’re single versus married. The big difference on the tax side is we can do conversions where we target a lesser tax bracket, or, excuse me, a lesser dollar amount because you’re single in that same tax bracket. Married filing jointly, you can go up to $100,000, for example, before you’re outside of that range of adjusted gross income.

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