I’m 50 with $500k: Am I On Track for Retirement? A Real Case Study

You’re in your 50s, you have around $500,000 saved, and retirement is starting to become more front and center on your mind. You probably have some questions. When can you retire? How much income can you spend when you retire? How much should you be saving now? Where should you be saving that money? How should the money be invested? Those are just a few of the questions that you possibly have juggling around in your head that you don’t have answers to. Today, I’m gonna help you to start to connect some of these dots so you’re in a better position to make good decisions about your future.

The bison vs. cow analogy

So in the mid-east, the storms typically crest over the mountains coming from the west and moving east. You have bison and you have cows on the plains. When the bison hear the storms coming in, they stop for a second, they sense a storm coming in over the mountains, and then they charge right to it. This minimizes the amount of pain and suffering that they endure. The cows on the other hand, they sense the storm is coming, they stop, they look around, and they start running away from the storm. And ultimately what this does is it maximizes the time and suffering that they spend in the storm.

So if you’re in your 50s, are you going to be the bison or are you going to be the cow? Because the retirement storm in this metaphor is coming. Now you are going to have to retire. You’re going to have to have enough money saved to generate income that lasts your entire life. You have to start making decisions now that puts you in a better position later. We’re to look at the decisions that you will have to make that will directly impact the security of your future. Hopefully we can help you be more like the bison than the cow.

So we have a case study that we’re gonna go through and I know this may not be exactly you, but the goal here is to help you understand some of the decisions that you’ll have to make and then you can take your situation relative to the case study that I go through as far as ages, income, spending levels, and really just kind of start to learn because I can’t do this case study to match every single person watching, but some of the principles hopefully do convey across so you can apply them to your situation and at least learn a little bit.

Case study overview

So we’re gonna start with a married couple, 54 and 52, with about $205,000 of gross income. So this is before 401K contributions, before FICA tax withholding, before all of that stuff. So for this case study, John and Jane, they wanna retire at age 62. So that’s about 10 years for Jane, and that’s about eight years for John. Many people, whenever they have kids growing up, they’re not able to save as much for retirement.

So at this stage, you may be thinking, you know, I want to increase my savings for retirement. I want to make sure that we’re prepared. I want to make sure that we’re on the right track. So in this particular situation, we just have one spouse that’s been saving in the 401k because they have kids, right? But now the kids are older and into college and on their way to start their own lives. And John and Jane are getting serious about their own retirement. So we have about 400,000 total saved in the 401k, 50,000 for savings.

Time value of money explained

Now they want to spend when they retire at age 62 about $100,000 in today’s dollars. So this is an important concept because when you start talking about spending money in the future, you have to bring that back to today’s dollars. Because if I were to give you a dollar today or give the option of getting that dollar in 10 years, which one would you choose? Well, you’d probably choose the dollar today because you could invest that and it could grow and in 10 years it could be worth more. So a dollar today is worth more than a dollar in 10 years. This is called the time value of money. It’s a very basic concept in finance and something that’s very critical to understand how to plan for retirement income. So in today’s dollars, because today’s dollars are more valuable, if you want to spend $100,000 in the future, because future dollars are less valuable, you’re need more than $120,000 to be the equivalent of spending $100K today.

So we’re gonna look at what portfolio they’re currently in because your portfolio determines your expectation of return. So it’s very common when you get into your 50s and you’re approaching retirement that you may decide, you know what, I should pull back risk because I don’t wanna suffer any losses. Now I personally don’t believe that. I think you should at this point in time, especially when you’re starting to save more, it would probably behoove you to be a bit more aggressive, but we’re gonna look at something standard that we may see if somebody comes into the office and they’re, you know, five to 10 years away from retirement, it would be a 60-40 portfolio.

Portfolio assumptions and returns

So a general consensus for that portfolio moving forward over the next 10 years is somewhere around about 6 % rate of return. So one, couple things to note here. When you’re projecting out, if you have your spreadsheets or you’re using software, don’t be too aggressive in your assumptions. Don’t just assume 10 % returns. And if you do, provide yourself a sensitivity analysis where you’re looking at what happens if I average four or six or eight or 10, create a range of possible outcomes because that can influence your decisions as far as how you construct a portfolio.

But we’re going to look at more aggressive portfolios, more conservative portfolios, and see how that impacts the probability of success based on the spending level and the target retirement date. So how much are they saving for retirement and is it enough and how does that impact their probability of success? Should they save more? Should they save less? So as we said earlier, the kids are in college now, they’re out of the house and they want to be more serious about saving for retirement. So they’re upping the savings rate to 20 % of income.

When a Roth might make sense

John was making 125,000, but we see, I have all of it going into the pre-tax, none of it going into the Roth. So two different schools of thought here, but for you, the big takeaway is generally, if you think you’ll be paying a higher tax rate in the future, it may make sense to consider the Roth IRA or the Roth 401k because you’ll pay tax at your lower rate now and get it tax-free when rates may be higher in the future.

If you think your income rate, income tax rates are higher today than they will be in the future, it may make sense to put it into the pre-tax, get the tax deduction so you have more money to save and forego the Roth. So it’s a personal decision. It’s not just what’s mathematically correct, but it ties into your overall objectives in retirement. So, but for this case study, we’re just simply putting that money into the pre-tax because they wanna get serious about retirement. They wanna save as much as they can.

Probability of success (the “noodle chart”)

So instead of paying taxes on income, sending that money to the IRS, which you’d have to do if you put money into the Roth. They just want to sock as much money away as possible into the 401k and the pre-tax version gives you that best option. Okay, so now we have what I call the magic noodle button. So we’re gonna push this, we’re gonna see a lot of different noodles go everywhere, and it’s gonna give us a probability of success. Okay, so 58%, what does that mean? So out of a thousand simulations here, 58 % of them, this couple dies with money and about they die broke. So these are the noodles that I was referring to. So the green noodles are positive expectation scenarios. So on the Y axis, we have the total value of the portfolio. On the X axis, we have the length of time. So for life expectancy, I have the wife making it to 94, the husband until age 90. But a few things to point out here. So one, notice how big of a range of outcome there is.

So anywhere between, now this is really extreme, could die with 15 million or 12 and a half million, you know, we cut those out. Most of them fall between five million and zero. So the reason we have such a big range here, because the only thing that’s changing are the portfolio, is the portfolio performance. The reason we have such a huge range is because the amount of time this covers. A lot of different things can happen over that time.

Second thing to notice is how tightly bunched the good and the bad scenarios are in the first, let’s call it 10 years of retirement. There’s really no divergence until we start to get probably 2036, 37, 38, we start to see some divergence. know, take the outliers out, look at the bunch in the middle, maybe even 2038, 2040, okay? So that’s the second thing to notice. The third thing to understand is that unlike many things in life where you make a decision, you immediately see the consequences. In retirement, bad decisions oftentimes don’t show themselves as far as the outcome of that decision until five, six, seven, eight, nine, 10 years later. Every decision you make when it comes to retirement planning is either good or bad for your future. The more good decisions that you compound, the more likely you are to be in the green noodle range. The more bad decisions that you compound, the more likely you’re going to be in one of these red noodle ranges. But you probably will not realize this until it’s too late, or at least until you’ve dug a hole that’s very difficult to dig yourself out.

Adjusting savings and spending

Okay, so I’m gonna cheat a little here because we have this button that’s called Super Solve and it’s gonna say, what adjustments do I need to make? It’s a very simple assessment, but what adjustments do I need to make to get to around an 80 % probability of success? So I’m gonna come over here, hit the Super Solve button and we’re gonna go deeper than this, but I just wanna show you the most simple adjustment that would be made. Okay, so here’s our target value. This is everything that I went through. So retiring at age 62.

And this column is gonna be our solve result. So it says, okay, spending target was 100,000, reduce that a little bit to 98. So this 20,000, there’s a two year gap whenever one spouse is hired, one spouse is not. So this represents that two year period where we have a salary, we just need to pull an additional 20,000 from savings. And then when one spouse passes away, we need a little bit less income, so 80,000. Keep in mind, these are in today’s dollars. I’ll show you in a few minutes what they actually mean with the time value of money, how much you’ll have to pull out in the future to be able to purchase the same amount of goods and services that those dollars would buy today. So modest adjustments to the spending, only bringing down a little bit. Here it is, extra savings. You need to save about $15,000 per year more. So they were saving around 23, 24,000 to get to 80%. The first variable that the SuperSolve saved, SuperSolve solved for was spending.

So to no other changes to the portfolio, the retirement date, minimal changes to the spending, we need to save about $15,000 a year more. So that may be an option. But for some of you, that may not be an option. So what else could we do? Okay, so now we have what we call the what if worksheet. So this looks at what if I do this, what is the potential outcome? What if I do that? So we can create multiple different what if scenarios and then individually change variables per each scenario.

So I’m just gonna look at one scenario right now, or at least one alternative. And the only thing I’m gonna do is I’ve changed the portfolio. we have kind of more conservative, more aggressive portfolios. So from the current 60-40 mix to the equity growth, which is gonna have much higher average returns, but it’s gonna be a lot more volatile. And this is just before retirement. So we have the same portfolio after retirement. We’re gonna calculate this scenario and just see how a more aggressive portfolio with a higher rate of return impacts the overall probability of success. This is saving at the current level, not the additional 15,000 per year.

Okay, so honestly, it didn’t make that big of a difference. So between ages 54 and 52, both of them retiring at 62, increasing the rate of return from around 5.5 % to about 7.5 % really had a marginal impact on the probability of success. Okay, now I’m gonna reduce the spending, but keep that portfolio. So we have a higher rate of return, but now our base case was 100,000 a year, 90,000 is what I reduced the spending to. Let’s calculate that scenario. Okay, so reducing the future spending to 90,000 has brought us to that similar 80 % number where it’s 79, I think the super solve was around 81, without increasing the annual savings. So you see you have these different levers that you can pull.

Social Security timing decisions

Question is, which levers should you pull? Should you try to save more? Should you increase the portfolio risk? Should you decrease the portfolio risk? Should we plan on a reduced amount of spending in the future? We could also look at targeting different social security election dates because even though that doesn’t start until later, that impacts the probability of success long-term. As a matter of fact, let’s look at social security now. So I had it starting at 67. A lot of you may be thinking, well, Troy, If I’m going to retire at 62, why would I wait until 67? I don’t want to pull for my savings. I want to start social security. So let’s just see what happens. Okay. So right now we have the base case at 67. This one we have at 67. Let’s do as soon as possible. So both spouses turn it on as soon as possible. So 90,000 spending, a little bit more aggressive portfolio. This one at age 67 for social security came in at about 79%.

Let’s see where we come in here. Well, it drops to 70%. So one thing to understand about Social Security is, and most people get this wrong, even financial advisors get this wrong, do not, in my opinion, perform a simple break-even analysis that says, okay, if I take Social Security now versus later, how many years do I have to live before I catch up after I defer Social Security? That’s not the right question.

Yes, that has a modicum of value into the ultimate decision that you’ll make. But one, it forgets about time value of money, which we talked about earlier. The better question to ask is, where do you want the risk to live in your retirement with the benefit that Social Security provides? So it’s an income stream. If you take it early, there’s less money you have to pull out of the portfolio. But if you have a normal life expectancy, risk increases on the back end because you have less income and you have to pull more out of the portfolio.

Where risk lives in retirement

So the decision should be looked at, do I want the risk in the front end, the first few years of retirement where I’m pulling more money out of the portfolio, but I have a steady higher stream of guaranteed income from social security later? Or do I want to not take that risk in the front, have social security come in, but then I’m willing to accept a higher risk in my 70s and 80s because I have less income, which means I’ll have to pull more out of my portfolio, putting more stress on it when I made it needed for medical purposes, inflation, we don’t know what that will be in the future. So think about it that way. Whenever you choose to elect social security, all you’re doing is shifting where risk resides in your retirement. Either resides here or it resides there. Social security, that lever that you pull shifts where that risk as far as income versus portfolio withdrawals where it lies. As promised, we want to look at the time value of money. So we talked about in the beginning,

Inflation and future income needs

A dollar today is more valuable than a dollar in the future. This is called the time value of money. So if you want to spend $100,000 in today’s money, today’s value in the future, we have to do a calculation. So this chart simply shows us because I have that hundred thousand pretty evenly spread throughout retirement. There’s a two year period in the beginning where one spouse is still working where the number is a little different and a couple of years at the end of the plan where one spouse is projected to pass away before the other. But here’s what we’re looking at.

In 2038, so it’s 2026 now, so 12 years from now, we’re looking at in today’s value, $100,000 at about a 2.5 % inflation rate. We would actually need to withdraw 121,000 to buy the same amount of goods and services $100,000 would today. And this line, as you can see, shows you what inflation actually looks like.

So to maintain that same $100,000 of purchasing power throughout retirement, if we go through different points in time here, 2044, 140, 2051, 166, 2057, 193. So it requires more withdrawals from the portfolio just to have the same purchasing powers today. This is why you need your money to grow in retirement because if you’re pulling 100,000 out today and that’s 4 % of your total savings, let’s you have social security and other things to bake in here you need higher balances in retirement to keep up with inflation if you’re a set withdrawal percentage up. So more advanced probably than needed for this video. The big takeaway is just to understand the time value of money. This is kind of what it looks like. Hopefully provide some relative understanding of what inflation means for you and your retirement.

Key takeaways and next steps

Okay, so I could have went so many different ways here, talked about so many different levers that you can pull. I just wanted to communicate some basic concepts to help you understand what goes into retirement planning some of the decisions that you can make, and then some of the levers and some of the choices that you have that you can pull to determine how successful your retirement will be, or at least how you can position yourself to have a more successful retirement. So spending less in the future clearly had a bigger impact on the probability of success than simply increasing the risk. Taking Social Security earlier at 62 versus 67 changed the probability of success as well.

Not only that, but it shifted risk from where it resides in the plan from the beginning to the back end. So a lot of different levers. And one thing to definitely take away from this video is every decision you make interacts with some other component of your retirement. We didn’t even get into taxes. When you start distributing retirement income, you have to pay taxes. And which accounts you withdraw from not only impacts your tax rate today, it impacts it in the future, but it impacts how taxes interact with your social security, with your Medicare premiums, with your investment income possibly. There’s a whole set of interactions that exist within the tax code that push back when you withdraw retirement income. So we have a whole bunch of videos on that on this channel. Most of our videos on this channel are about retirement planning once you’ve gotten to that distribution phase. But I wanted to do something here for those of you in your 50s or maybe younger, maybe a little older, but approaching retirement. If you have levers to pull, hopefully this has helped you to have a greater understanding of the power that you control to make better decisions for your future.

➡️ If you’d like help applying these concepts to your own situation, our team at Oak Harvest is here to guide you. We focus on building personalized retirement income plans designed to improve clarity, tax efficiency, and long-term confidence. You can schedule a complimentary consultation to discuss where you are today and explore what steps may make sense moving forward. Call us at (877) 404-0177 or fill out this form for a free visit: https://click2retire.com/50-with-500k