Can I Retire at 64 with $800K in Savings? I want to Spend $6K / Month & $15K per Year Travel Budget

In today’s hypothetical case study, we are going to look at a 64 year old couple that saved $800,000 and they’re both ready to retire. We’re going to look at can they spend $6,000 a month with a 15,000 dollar per year traveling budget?

And we’re going to look at Social Security when they should collect it, how that impacts their retirement, as well as different investment portfolios. Most of you want to be more conservative in retirement, so I’m going to show you the impact of being conservative versus being more aggressive in retirement and how it affects their account balances, their security and their income in retirement. Hi, I’m Troy Sharp, CEO of Oak Harvest Financial Group, certified financial planner, professional host of the Retirement Income Show, and Ramsey Trusted Smartvestor Pro. Before we get into this actual case, looking at the numbers, I want to go through the parameters with you.

OK. 64 and 64. $800,000 saved, but broken down $700,000 in retirement accounts in 100,000 in savings. If you watch this channel, if you listen to the radio show, you know how important it is to diversify your tax buckets leading into retirement.

This means don’t have all of your money inside that tax infested 401 K you want to diversify. Ideally, you have some savings outside of it. Plus money in a Roth IRA. Maybe we’re going to do some Roth conversions as well to further diversify once you retire or before you retire leading up to it.
Either way, not as diversified as I would like to see. But that’s the breakdown for this video. We’re going to plan for the husband to live to 90 and the wife to live to 94. They may not make it that long.

I am very much aware of that. But as a financial planner, as a retirement planner, it’s my duty to make sure that we’re going to plan for longer than they may live, as opposed to less than what they may live. And I do truly believe with the advancements in science and technology, many people underestimate their life expectancy. So 90 to 90 for the planned spending level is 6000 a month, with a 15,000 dollar a year traveling budget for ten years.

So if they’re retiring, this would be early January 2020 to right before they turn 65. They want to travel. They’re healthy, they want to spend about $15,000 a year adjusted for inflation, traveling the world, maybe getting an RV, traveling the country. Whatever it is, this is important to them. We want to make sure that they can keep up with inflation with their base spending goals, but also spend this extra $15,000 a year. No, and we’re going to play around with this number.

Could they spend $201,814? And the portfolio we’re going to look at is a 75/25 portfolio. So that stock bond, many people want you to be 60/40 in retirement. But the problem is bonds. If you have a large allocation to bonds in retirement, current yields are very, very, very tiny.

You’re making one to 2% if you have high quality bonds. In addition to that, as interest rates rise, bond values tend to go down. So if you allocate 40% of your money to bonds in this low interest rate environment where rates are expected to rise, you’re going to have 40% of your life savings earning next to nothing. And if you look at real rates of return, which includes inflation, you probably probably will be earning negative rates of return. So in this environment, as long as emotionally we can deal with the ups and downs of the market, a 75/25 portfolio is going to make sense for most people.

If not, we need to look at some alternatives for the equities or excuse me, we need to look at alternatives for the bonds because we need something that’s more effective than bonds in this environment. But that’s the parameters. OK, first, I want to start with the visual chart because I’m a visual learner and I know many of you are too. It’s very important to be able to see what spending $72,000 a year plus that travel budget what it looks like over time when you take into account inflation. So over here we have the dollar amount. And over here we have the time. So even though they want to spend 72 plus 15 to about 87,000 in the first year of retirement and continuing that travel budget for ten years because of inflation at the end of ten years, it’s up to about 110,000 that they actually will

be spending due to inflation. Now the traveling budget goes away, but the original 72,000 dollar spending goal, as you see the 90,000 level because of inflation, we don’t pull out 72,000. We need to pull out around 90,000 and spend that for inflation purposes, and that continues to grow over time. And then when the husband passes away, we have a reduced spending for one spouse. So visually, I just want to show that because invariably I get comments down below that says something about inflation and spending. So I like to cover that. OK, now we’re going to look at the Monte Carlo simulation, which looks at 1000 different retirements, which means 1000 different rates of return. We’re going to look at sequence of returns impact, and we’re also going to look at some individual trials because I know many of you, it’s important that you have money left behind for your kids or grandkids. If you’ve watched this for a long time, you know, I hate the average rate of return analysis in retirement. Why? Because the portfolio never returns 6% per year every single year. We need to be looking at what happens if it’s up ten -15, up 20 plus six -12. And then look at various different scenarios to identify an overall probability of success in a bunch of these different market periods. Comes in at 92%. This is a pretty good number. This means if you were coming in and this was your particular situation, I’d say, you know what? I feel pretty good about this. We need to monitor it. We need to keep you connected to your plan because you may spend more than you’re anticipating. As a matter of fact, that’s often what I see. It’s very common for people to spend more in the beginning years of retirement than they were anticipating.

So if you spend more and maybe the market’s down 10% next year, what does that do to this number? So the one thing I don’t want you to do is look at this number because you have similar circumstances and say, You know what? I watch this YouTube video, I am completely good to retire, Choi said. So, you know, that’s not the case. We need to keep you connected. This is why having a relationship is so important because this number will absolutely change as time goes on.

We’re going to stress test this case at the end of this video, and we’re going to look at what happens if inflation is higher. What happens if the market crashes? What happens if you have a long term care need later in life?
So this number is a snapshot in time. It means today based on all the variables that we’ve talked about and modeling into the future, looking at 1000 different rate of return scenarios, not lifestyle scenarios, that’s a very, very important distinction.
Inflation, it’s not modeling different inflation rates, health care expenses, it’s not modeling different health care expenses. It’s not modeling different longevity experiences. So this is a snapshot based on all the variables that we’ve input. The only variable that is not isolated is the rate of return that is experienced from the portfolio.
So keep that in mind. I always like to look at this chart because this shows us more a more granular look at the individual trials and the various rates of return. What we see here in this top bar graph is the rate of return experienced in multiple years.
Corresponding down here is the account balance in those same years to the rate of return the portfolio experiences. And then down here we have the 99th, 75th, 50th, 25th and first percentile. The account balances in years five through 25 the end of plan future dollars, but then discounted to the present value current dollars.

What does that mean? For those of you who are not financial people or engineers, it simply means that in the future, if you have 2.89000000 in your account, it’s only worth about 1.4 million in today’s value. So it will only buy you about 1.4 million.

And today’s goods and services, it’s important to keep that in mind if we have $1,000,000 today in $1000000 in 30 years. The million dollars today is worth a lot more than 1,000,000 in 30 years. This is called the time value of money. So this first year, we get a big drop of 20% portfolio from 800,000 drops to 6.33. That’s scary. That’s absolutely scary. You probably may not retire if that happens to you, but it’s important to have a little bit of a buffer.

This is why when we’re doing income planning and tax planning, we want to have a buffer for those first few years in case the market goes down, because one of the biggest risks is that sequence of returns risk, and that is very clearly demonstrated right here.

Just want to look at a couple of different scenarios. So this is a poorer performance. I want to point out that we still have a negative in the beginning. We have one more moderate negative right there, but mostly positive until we get out here looking at the value of the account feeling pretty good at retirement, we’re staying level accounts start to increase level out, increase again, increase again and they start to go down because of these negative years out here. What’s interesting about these negative years? These also coincide to when we’re most likely to have some type of health care expense, so we need to have a health care plan as well.

OK, I mentioned a stress test and I want to go through that now. So what this shows us here is if we experienced a bear market with this portfolio, remember, it’s 7525. If we experienced a bear market similar to 27 through 29 that portfolio, you would expect to lose about 36% and all of a sudden to accomplish the goals, it drops to about 53% probability. So this is why when you retire is so important. This assumes in the beginning of retirement, this would be an absolutely horrible situation for for almost anyone retiring. So I just want to point out the vulnerability of the portfolio in the beginning years of retirement.

Now, if we had a plan and this was a concern of yours, we’re going to look at having a certain amount of income for those first few years to protect against something like this happening, not having those assets exposed to it.

The market’s only been down three years in a row, three different times in history the Great Depression, World War two and then the dot com bubble bursting. So the market’s never been down four consecutive years doesn’t mean it can’t happen, and it probably will happen at some point in the future.

But it’s important to know that the beginning years of retirement you are most vulnerable to bear markets extended bear markets of two to three years that really can jeopardize the overall security. one of the things I’m a big proponent of is a dynamic spending plan and retirement.

This flexibility or having a dynamic spending goal, which means taking more or less depending on how the portfolio’s performing, is another way we can help to protect against sequence of returns. Risk the antiquated 4% rule where you put 60% in stocks, 40% in bonds take 4% a year and adjusted for inflation. I say antiquated because it was developed in the seventies and eighties, when interest rates on your government bonds are high quality corporate bonds, we’re paying 789 1011 12%. That theory no longer holds water, in my opinion and today’s low interest rate environment. So having a dynamic spending plan and retirement can allow us to adapt to various market returns, economic conditions, inflation scenarios very, very critical to to have this concept of a dynamic spending plan available in your mind for retirement. That’s what I want to look at right now. We’ve went through the bear market stress test. Now I don’t want to say, OK, let’s say the market continues to do as anticipated in this portfolio and say, You know what?

What if we want to spend $29,000 a year on that travel budget? It’s still coming in at 81%. So what does this mean? Well, for the first couple of years, as long as the market is doing well and your is performing well, I have no problem taking this out because it’s a dynamic spending plan.

We may reduce it or eliminate it, even possibly in future years if the market’s down. But we know right now, hey, 81% is not a bad number. It means 810 out of 1000 simulations. We’re still going to be OK.

Those are pretty good at. There’s additional planning, of course, that can be done to protect the back end. But I can’t cover everything in these videos, and that’s very important to point out here. The goal of these videos is simply to get you thinking about all the various aspects of retirement and all the decisions you have to

make and how they impact everything else. I can’t cover everything in these videos. A lot of times in the comments. Someone will say, Troy, you forgot about this or you forgot about this, or you forgot about that. No, I didn’t forget about it. I want to keep these videos to about ten to 15 minutes, but they always end up being about 25 to 30 because when I get going on a topic, there’s so much to cover when we’re putting plans together for clients.

It’s literally 20 to 30 hours of work for multiple people to cover all of these different aspects and have conversations with you about it. So in this particular scenario, I would be fine with this for the first couple of years, as long as we understood it’s a dynamic goal, which means it can change, and that is dependent upon how the investment portfolio is doing. And what we’ve done to secure other parts of the nest egg against market risk. 23,000 a year for ten years, if that makes you feel more comfortable. Excellent. Now I want to show you something interesting here because this is a ten year goal. If we increase the base living expenses to 84,000, it doesn’t look so good. All right. Taking a quick look at Social Security here. Remember, the original plan that we looked at with all of those variables came in at a 92% probability of success. Over here we see we’re taking Social Security as soon as they retire. That’s the one used in this scenario. 65 and 65, assuming it’s January of next year, they retire. Close out the year working his Social Security is about a little under 34,000.

Hers is 24. If they take it at full retirement age, which is about 66 and a half for this case study, it jumps to 37 and 26, almost 38 and 27 for them. But taking it at 7048 and 34.

Huge difference in annual income. It does increase the probability to 99% again having a dynamic plan, not just when it comes to spending, but also our Social Security election strategy. If the market is doing well, we can take those profits off the market account and that one keeps the risk in check. So as the equities grow, we don’t become overextended to market risk, but also it allows our Social Security to continue to defer. So if you have concerns about running out of money, and that is a big fear for three out of four retirees, and according to a recent study by Allianz, if you have concerns about health care

costs later in life, if you have longevity in your family, these are all reasons to really consider waiting until 70 to take Social Security. Not only will you start out with a much higher number, the cost of living adjustments, we just got a 5.9% cost of living adjustment.

If you’re concerned about big inflation, well, having a higher Social Security or deferring that out longer if we get higher cost of living adjustments in the future. That number is multiplied by your benefit. Multiplying 5.9 times 48,000 versus 33 will get you a higher cost of living adjustment in the future in terms of nominal dollars.

So again, the purpose of these videos is to get you thinking to help you understand these different decisions and how they impact you, not just today, but over time. So we would want to have a dynamic Social Security strategy if things were going really, really well. I’d say, you know what? Let’s defer Social Security for for a little bit longer to take, maybe take some of these profits off the table or maybe not. Maybe we run some analysis, some calculations. We look at different scenarios.

All right. Wrap this video up. I want to look at three different stress tests. This is an important part of retirement planning because we want to know how future variables can impact the probability of success given the decisions we’re making today.

This gets us more information and allows you to make better decisions as it pertains to your personal needs and circumstances. So inflation, what happens if you have a health care situation? And also what happens if you have lower returns in your portfolio than anticipated, either because the stock market struggles, you get too conservative.

Maybe it could be any number of things. Also out of those three scenarios health care need inflation or low investment returns. Which one do you think will have the greatest impact on the probability of success for your retirement?

All right. So back to the base scenario, nothing has changed from the variables that we’ve been kind of moving around. We’re back to the very best case scenario. I want to look at inflation first because I know inflation is front and center for many of your minds, because right now we are experiencing greater than normal or greater

than expected inflation in this country, primarily due to the supply chain disruptions across the global economic system. Many of these supply chain disruptions are because we have 10 million job openings in this country. People simply aren’t going to work or aren’t wanting to work for various reasons.

We have people who are not able to work because of COVID restrictions or certain mandates in their country, in their state. So a lot of things are contributing to this. But I want to understand base inflation that is over the next 30 years of their retirement.

So it is one of those things where it’s hard to model because in the real world, we may have high inflation for five years or ten years and it may come back. We can individually calculate those types of impacts by doing time value of money problems, but in the software, it’s going to assume over long periods of

time. So I want to just over long periods of time, increase it to 3%. Drops the probability from 92 to 78. Pretty big impact here. Historically, inflation, this country has been between three to three and a half percent.

So if we wanted to do what we call a sensitivity analysis, maybe we would go to the high end of that. Maybe we’d look at three and a half percent inflation that would drop to 64%. So again, keeping in mind the idea of a dynamic spending plan, not that static old antiquated 4% rule dynamic.

If inflation does get up like this, we need to be able to adjust our spending because most likely, we won’t be able to continue spending the levels that we were planning on spending. OK, now we want to look at investment returns, what happens if the stock market struggles or you get too conservative with your portfolio?

So the original assumption we were looking at about six and a half percent rate of return on average over time. But as we as we saw they were fluctuating, it wasn’t a flat six and a half six and half six and a half six and a half.

So when you did that math and added all those up, it was six and a half percent. So let’s say that drops by again. This is looking at an average here, let’s say drops by 1% and the portfolio averages five and a half percent.

OK, not that bad. 86% still, let’s say, drops by 2% still coming in at 80. So clearly, inflation is a bigger determinant of the probability of your success over low investment returns. Now you combine low investment returns with high inflation because you have a poor investment allocation or don’t take enough risk or possibly take too much risk

. And those down years your portfolio suffers, then you pull out of the market because you can’t take it. All of these things can contribute to all of these numbers changing. This is one of the biggest values of good retirement planning will provide to you is to have these conversations to stay connected, to help you feel more secure

and comfortable in the decisions that you’re making. So low returns, not as bad as inflation. OK, now we want to look at health care expenses because I know for many of you, health care is again very, very important in retirement. Medicare is increasing around seven to 8% per year. As far as your Part B premiums are concerned and a lot of your out-of-pocket costs are also increasing. It’s not uncommon to see inflation in the health care arena, far above inflation in the general economy. But when we talk about health care here, we’re talking more about long term care. So what happens for John? Let’s say at age 80, for lasting for three years needs $112,000 a year for long term care drops the portfolio to 71% probability of success. That’s a pretty big drop. That’s a big need. If you remember back to the beginning of the video when I looked at the one modeling situation and we had investment losses in the beginning or, excuse me, the end of the portfolio, that could be catastrophic. If we have too much risk or markets don’t cooperate, we go into a recession. At the same time, we need a long term care. We dropped this to 75,078, now 79%. The big concern, of course, is then what happens if Jane, let’s say at 89, needs care for four? Typically, women need long term care for longer periods than John. But we’ll look at three years here and let’s assume at that point it is 112,000 a year. Now we’re at 59%. So ultimately what that means is she’s it’s 590 of 1000 simulations.

She would be able to provide herself with health care coverage of this amount per year after John does with all the other variables that we’ve looked at. So this is where health care planning comes in. What are the strategies that we can use to transfer that risk of long term care possible need over to the insurance company? OK, so quick takeaways. They’re in pretty good shape. Again, it’s just a snapshot in time and staying connected to that plan, understanding how things change over time can impact the scenario, as well as all the variables down the road that can impact the scenario and having a customized plan built out for them to mitigate some of the

fears they may have or some of the weaknesses that that we covered today. Very important. If you want to reach out to us because you’d like to partner with us for retirement and have us put a plan together for you, become a client, that’s great.

You can give us a call. There’s always a number down below to schedule an appointment or reach out to us directly. If not, that’s OK as well. And if you’re looking for someone to help you, you want to make sure, first and foremost, that you trust them.

You want to make sure that there’s someone that is looking out for your best interest, but you also want to make sure that they specialize in retirement. Typically, people that are working with all age groups don’t have this type of experience or even capability when it comes to the tax analysis, the income planning, the estate planning all of those assets. So make sure you find someone who specializes in retirement and also, most importantly, that you can trust, as always, subscribe to the channel, hit the thumbs up, put a comment down below and if you hit that little bell icon, you’ll be notified whenever we release new content.