I Had $1.2 Million, Markets are down 20% Can I Retire?

The markets are down 20% and you notice the $1.2 Million you had from your retirement planning is beginning to struggle and you wonder, what do I do now? How do I keep my retirement income from flatlining? What should I do with my social security income? Just how do I keep my retirement planning in check during these turbulent times?! In this video, Troy Sharpe walks through a retirement planning scenarios and discusses different strategies to protect your retirement portfolio when markets are down 20%.

Working Towards Retirement:

You worked your whole life to reach this magical number that you thought would be enough to retire and then 2022 comes and the market bottom falls out. Do you still have enough money to retire? Should you consider spending less? Should you take Social Security sooner? What if you change the investment portfolio? What if you go back to work for one or two years? How do all of those decisions impact your probability of success in retirement?

All right, the hypothetical couple in today’s case study, they’re both 60 years old. This is their Social Security benefit individually and combined at age 67, their full retirement age, and they had about $1.2 million before the market bottom fell out. Maybe we’re too aggressive leading into retirement. Either way, they have a little more than $900,000 today, and they want to know, do I have enough? Can I still retire? How much should I spend in retirement? These are the discussions that we have every single day with clients here at Oak Harvest Financial Group, so I want to share this information with you so you can make better decisions with your retirement.

If this is the first time you’ve watched any of our videos, I want to introduce you to a term that we use to label the spending phases throughout retirement. We have the go-go years, which is when we’re younger and healthy and active and can travel and do more things with the family. We have a baseline of 70,000, and that 70,000 is planned on continuing to increase. That’s what we call a baseline level of spending that is our basic needs. Then in the go-go years, we have this extra 20,000 for the first 10 years of retirement stacked on top so we can travel more, so we can do the things that we like.

After the go-go years, we entered the slow-go years where we’re slowing down, we’re not spending as much, we don’t necessarily need this discretionary money on top of our baseline spending. The baseline spending will have increased, meaning the withdrawals that we’re taking out will become more and more because of inflation. Then the no-go years are where you’re not really going anywhere except maybe to the doctor and out to the mailbox to get your mail.

One more thing before we start here. We’re big believers in a dynamic spending plan. Just because we model this going into retirement on the first year, it doesn’t mean we’re going to stick to this necessarily, we may be able to pull out more than this, especially if we have a good year or two in the market. We also may need to tighten the belt. Our retirement success process is based on the belief that you should enjoy the money that you’ve accumulated throughout the course of your life but you also should stay connected to a plan, so you know where you are currently but also, you respect the amount of time that you still have in front of you over the course of the rest of your life.

In this particular case, they had 1.2, they’re down to 900,000. They want to spend $90,000 for the first 10 years of retirement and it’s 60, then the question becomes can I get to 67 when Social Security turns on, and I’m going to get $60,000 of that? Not to mention it’s 67. There’s only a few more go-go years left here, so the spending will reduce from age 70 and beyond in this hypothetical case study. How does this all come together? Now, I’m going to hit this magic button here and it’s going to model a thousand different simulations, good market returns, bad market returns, the sequence of those returns changing over a thousand different simulations.

We’re going to see what the probability of success is based on the parameters that we’ve input so far. 73%. That means that 730 out of a thousand simulations, this family passes away with money at the end. As I go through the sequence of different choices here, I’m going to come back every time and reset it to the base case. The base case is both spouses take Social Security at full retirement age, age 67, totaling $60,000 of lifetime income from Social Security, as well as the 70,000 of baseline spending and 20,000 annually for the first 10 years of retirement in those go-go years.

This scenario, we’ve reduced the amount of years for go-go spending from 10 down to five. We’ve increased the amount we spend during the first five years from 20,000 to 30,000. The overall probability of success has gone from 73% to 80%. In this simulation, they’re spending 150,000 in the first five years above their baseline spending needs as opposed to the first one where it was 200,000, but it was stretched out over 10 years. The reason there is because when we take a little bit less out of the portfolio, it has a compound effect over multiple years.
The market’s down, but you still want to retire, but you don’t want to pull any money out of your accounts because the market is down. You get the idea, “Hey, no problem.
We’ll just turn social security on earlier at age 62. This way, we keep more money in the portfolio and start living off Social Security sooner than we had originally planned.” Let’s see how that works out. Okay, 64%, probably didn’t have the impact that you were hoping for. Why did that not work?

Well, there’s a 30% reduction in Social Security income if you take it at age 62 as opposed to age 67. We are originally working with $60,000 of lifetime income from Social Security. 30% less is an $18,000 reduction. 18,000 per year over a 30-year period from 60 to 90 is $540,000. That’s more than a half million that you will not have in guaranteed lifetime income, but instead, you’ll have to be withdrawing from the portfolio later in life.

 

 

That causes the portfolio to decline fairly rapidly in those later years. I know you don’t want to do this, but we’re going to look at what happens if you retire one year later. Increases from the base case of 73% probability to 82%. That’s the combination of factors that takes place if you work one or two more years. First, you’ll have more income and more savings. Second, you’ll take less money out of your portfolio, and third, your money doesn’t have to last as long.

A lot of times if someone comes to see us after going through a situation, they tend to be a little bit shell-shocked. One of the first questions they’ll ask is, should I get more defensive? Should I be more conservative in my portfolio? Because, obviously, in the base case here, if they lost over $200,000 right before retirement, 20%, they were probably a bit too aggressive the year prior to retirement. Now they may want to get more conservative.

Let’s see what happens if the portfolio gets more conservative now. This is a very interesting simulation because it’s not just about the probability number. Look at the trajectory of account balances here. On the Y-axis, it’s labeled by account value. On the X-axis here, it is out by year. What we see is by getting conservative in the portfolio after the market crash and after the portfolio has gone down in value, we don’t give ourselves the opportunity to rebound. It’s oftentimes what people do, is they get defensive, the emotions take control, we get scared, and then we say, “Hey, I want to protect myself.”

It’s natural human behavior, but lot of times it’s the absolute wrong thing to do. This illustrates it quite well because even though, in a lot of these simulations, it comes back up, in many of these simulations, when it starts going down the red, it stays down. What happens is we make ourself more vulnerable to what we call sequence of returns risk. The proper time to make adjustments isn’t after the fact, it’s before things happen. Now we don’t have a crystal ball necessarily, this is why we need to be connected to a financial plan so when we model these types of situations and we like to show you, hey, this is a possible outcome if you don’t do this because this is where you currently are.

Now, if we would’ve went through a proper risk analysis, identifying the amount of money that you want to spend, the go-go years, the slow-go years, the baseline, understanding how the portfolio it’s constructed, the impact of some of these scenarios based on different decisions that we could make, we could have made some adjustments, got that portfolio a bit more conservative prior to retirement, and at the same time identified a comfortable level of spending. Even though this is a static snapshot, it gives us a good idea of a starting place.

When we do this year after year after year, we can adjust, we can make changes based on how the market performs, what you’re actually spending, what medical costs are, if your goals or needs or life may change. I’ve reversed it back to 1.2 million with the portfolio being conservative, all the baseline information, staying the same, just to show what would’ve happened if we would’ve made this decision prior to the market crashing.

This person was at 99% probability of success, but because the market downturn in having an inappropriate allocation based on their spending level, longevity, and everything, we’ve went through Social Security, they went from 99% to 73%. I don’t want to see this happen to you. Be aware, please, of how all of these different decisions interact with one another and how they impact your security in retirement.