I’m 55 with $500K can I Retire At 62 Spending $6K per Month?

Troy Sharpe: You’re 55 years old, you’ve saved $500,000, and the question is, when can you retire? In today’s video, we’re going to look at a target retirement date of 62 years old spending $6,000 a month, and then we’re going to look at some different variables to see how different decisions could impact your probability of success with those assumptions.

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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner professional, Certified Tax Specialist, and also host of the Retirement Income Show. As I’ve been doing with these videos recently, I like to start with this chart because it’s a very clear visual depiction of what inflation does to our goal of wanting to spend $6,000 a month. To maintain that same purchasing power throughout retirement, it’s not just 6,000 a month that we need to plan on pulling out every month. Because of inflation, we need to anticipate pulling more and more money out. 6,000 a month is 72 grand.

In this particular scenario, they have $500,000 saved, but it’s all in retirement accounts. We actually need to pull out more than 72,000 to account for taxes, but as we go through time and we see it gets up in about 20 years here to over 120,000, so that’s $10,000 a month they need to pull out just to spend in today’s dollars, 6,000 a month. Hope you grasp that concept. It’s very important because we get a lot of comments that don’t necessarily reflect the understanding of the erosion of purchasing power due to inflation.

Of course, inflation is a hot topic right now with supply chain disruptions and people being paid to stay home as well as workers not taking jobs. We have a ton of inflation concerns, so it’s important to grasp this concept. Here are the parameters for the video. Husband and wife, 55 years old, both of them, he has 350,000 in the 401(k). She has 150,000. He’s contributing the maximum amount allowed by law into the 401(k), so $26,000, she’s putting $6,000 or about 10% of her salary. I have this right here, 80,000 and 60,000, so their total income is 140 grand.

They’re saving 32,000 a year inside the 401(k). Both have life expectancies of age 90. The first thing that we’re going to look at is what happens if they take Social Security at 62? This is a very common conversation we’ll have if someone wants to retire around 62. “Troy, should I go ahead and take Social Security? I’d rather preserve my assets, take Social Security than spend them down and let Social Security defer.”

We’re also going to look at what-if analysis, and what that does is that’s going to show us if the probability changes if they were to defer till 67, their Social Security benefits and draw down their assets in the meantime there. Also, I want to look at today a what-if scenario for different investment allocations and then tie that into what we call a bad timing risk, or a sequence of returns risk. What happens if they have a more aggressive portfolio versus a more conservative portfolio, and we have bad timing where the markets go down in the first couple of years of retirement.

One of the comments I received recently said, “Troy, why do you think the markets won’t perform as well over the next 10 years as they have over the past 10 years?” I don’t have a crystal ball, I don’t know for certain. I do know that the federal reserve has printed literally about $8 trillion over the past 10 years and put that into the financial system. On top of that, Congress has also spent trillions and trillions of dollars to support the economy, which ultimately helps to support the markets. My base assumption is that the next 10 years, the markets won’t average the same 14% to 15% that they have over the past 10 years.

If the fed starts to raise rates and tighten the balance sheet next year in 2022 and into 2023, as they’ve talked about doing, there is a decent chance we could have a pullback in the markets. We could have a period of stagnation for maybe 12 to 18 months where the market does a lot of this, but the two points are fairly equal. There’s some uncertainty moving forward. I want you to understand if you’re in this situation or any similar age and asset, net worth breakdown situation, I just want you to understand how different portfolios can impact the overall probability of success in regards to risk level.

This is why in our Oak Harvest Retirement Process process, investment management and risk management is step one. From there, we build an income plan, a tax plan, a health care plan, and an estate plan. It’s Oak Harvest Retirement Process. Very important though, to start with managing risk, once you cross over that line into the retirement phase.

We’re going to look at these as well as some cash flow charts and a few different things. Before we jump into the analysis, I just want to show you how much the accounts will grow to if you start with $500,000, you’re putting $32,000 a year in, and we’re trying to get to a million dollars because remember, we’re trying to retire at 62. We have seven years here. To get to a million, which is the future value here, starting with $500,000, putting $32,000 in, we simply need to average about 5.5% per year over the next seven years.

Let’s say we wanted to hit that million-dollar number in five years. We would need to average closer to about 10% per year. Again, our timing, how much income we need, the tax plan, all of that is dependent upon step one in our Oak Harvest Retirement Process process which is investment management and risk management. If we’re trying to retire at 60, and we figured that a million is a good number to get that done, we’re going to need a more aggressive portfolio. Then we need to talk to you about the downsides if we have bad timing, if the markets pull back. That’s a conversation that we have where we weigh the pros and cons, and ultimately you make the decision of what’s best for you and your family.

These are important parts of developing a full retirement plan to get you to retirement because the big questions that our Oak Harvest Retirement Process process answers is do you have enough? Can you retire? How long will your money last? How do you pay less tax? Most importantly, if something happens to you, will your family be okay? These are the beginning steps of starting to get those questions answered. Through ongoing discussions and having a relationship, we continue to provide answers, recommendations, and solutions to help you feel more comfortable about those choices.

Okay, we’re going to jump right into the Monte Carlo simulation. This is going to look at 1,000 different hypothetical retirements, where we have different returns in all of those years. We run 1,000 different simulations here. Based on all the parameters that we’ve looked at so far, just to give you a refresher here, you can pause the screen and look at these. Again, spending $6,000 a month is the goal. It comes in at about 84% success. That’s not bad. This is retiring at 62, 55 now.

This isn’t something where I would say, “No, you can’t do it, you have to keep working past 62.” I would say it does require monitoring and tracking as the years progress. How are the accounts doing? How much are you saving, any unexpected expenses, any change in your goals? When your accounts are linked up to a plan, and you’re working with someone over time to help you have these types of discussions and make not just good analysis, but that analysis leads to help you to make better decisions, you start to feel more confident as time goes on about when you can retire, how much income you can spend, what your tax situation is going to be like, and the big one, again, if anything happens to you, do you feel comfortable that your family will be taken care of?

The first variable that I want to look at is taking Social Security at a different time. One of the most common things that I’ll hear is, “Troy, if I retire at 62, I don’t want to touch my assets. I’d rather than grow, grow, grow, grow and take Social Security early because, one, it may not be there, it may be reduced, I don’t want to touch my assets,” whatever that reasoning may be. We hear that often.

I will tell you this though. Deferring Social Security will cause you to pull more of your assets earlier. I’ve sat with thousands of families over the course of my career. When I have these conversations with people in their 70s and 80s, no one ever says, “Troy, I’m really tired of all this extra income being deposited into my bank account monthly.” One of the most secure things you can have in retirement is a secure source of income being deposited every single month, whether that’s a pension, whether that’s from deferring your Social Security, or if you add an annuity into the mix, or maybe it’s rental real estate, whatever that is. Having a secure source of income, despite what your account balances are, I’ve just noticed throughout my career, that it adds a tremendous amount of peace and comfort to people’s overall lifestyle, their well-being, and just retirement in general.

First variable here, all I’ve done, we have the current scenario that we looked at that came in at 84. I’ve replicated it with no changes and then I’ve replicated it again, but I’ve changed the Social Security age. This has changed the Social Security age from 62 to 67. Here we go. The current age to file, 62, in both of these scenarios. Here, I’ve changed it to 67. The difference in income, $37,776 versus $26,443. What this means, and I’ll show you in a chart, that’s five years where Social Security is deferring. To get the income needed, we’re taking out of our retirement accounts. That can be scary because those accounts will go down.

Now, keep in mind, they’re 55 today, but they don’t want to retire until 62. They’re saving all that money in the 401(k). They’re not retiring with $500,000. They’re going to retire with closer to $1 million if they continue to make those contributions to their retirement accounts. That may make you feel a little bit more comfortable, deferring Social Security, but this is a personal decision. This is a personal analysis.

This is not a cookie-cutter-type recommendation. There’s not much that really irks me more than when I go online, I read articles or I hear other people on TV or various places giving you cookie-cutter advice about your Social Security. It’s simply not a cookie-cutter decision. For some of you, it absolutely will make sense to take it at 62. For others, the right thing to do will be to defer all the way to 70. For a lot of you, one spouse should take it at this age and the other spouse should take it at this age. Your risk tolerance comes into play. Of course, your longevity, your tax situation, how much you have in retirement accounts, impacts your required minimum distributions, which impacts your income later in life, and therefore your taxes as well. All of these things, it’s like dominoes. You tip one over making a decision, it impacts everything else. These things need to be taken into consideration when you’re making a Social Security decision, especially at 62 versus 67.

You can see, deferring to 67, living till 90 increases the probability of success from 84 to 94. I want to look at some charts here. Now we’re going to look at a cash flow chart. Some very interesting points here to keep in mind. First off, we said this family wanted to spend $6,000 a month. That’s $72,000 a year, 6 times 12. You see here in 2028, the total goal is $84,000. “Troy, if they want to spend 72, why are they pulling out 84?” It’s because it’s in today’s dollars. This is inflation. They don’t need to pull out 6,000 a month. They need to pull out 84, which is the equivalent of pulling out 72,000 today. It’s a time value of money.

Taxes. We have to take into consideration taxes because all of this family’s money is inside the retirement account. This is also something common that we see. Please, if you’re in this situation, do whatever you can to also save money outside of your retirement accounts. We want tax diversification in our buckets. Not just 401(k). We’d love to see some Roth. We’d love to see some non-IRA savings. This gives us flexible income choices because once you get to retirement and we’re building that income plan and that tax plan, when we have choices of where we can take income from, that means we can control what goes on your 1040, the tax return. When we plan it out over time, we can have a strategy that keeps taxes down as the goal, while also increasing the income that you receive over time.

91,000 is totally what we need to pull out. This is looking at an average rate of return scenario. I want to look at a bad timing next. The first thing we’re going to look at is deferring Social Security until 67 here. The retired 62, which is 2028, take Social Security deferred to 67. We’re going to come back and look at that 62. We need to pull more money out because of inflation. We’re pulling about 91,000 out when you look at taxes as well. The portfolio in this instance has grown to about 1,036,000 at retirement. Here’s what I want to point out. When we defer Social Security to here, we have to live off the portfolio in the meantime. It drops from about 1,036,000 to about 800,000, but then again, we have a significant amount of more money. Look at this. 49 and 36, $85,000 a year of guaranteed lifetime income from social simply by deferring it to 67.

Coming back now to taking Social Security at 62. Jane’s 22,855, his is 30,000. That’s $53,000. That is a tremendous amount of less guaranteed lifetime income. The question for you may be, do you feel more secure having income being deposited to your accounts every single month at a much higher rate, but having a little bit less savings, or do you feel more comfortable with more savings and a lower income? It’s just one of the conversations to have. If we look here at the portfolio balance, because we’re taking Social Security, we’re not having to take from retirement accounts. That can grow because in this example, assuming we’re taking essentially the investment earnings, we’re still able to grow a little bit. We still need to make some withdrawals because Social Security doesn’t cover everything. When we look at an average rate of return scenario, we are earning enough interest to cover that income deficit. I just want to point that out and now I want to switch to a bad timing example because this is a rosy scenario. I don’t really like average rates of return, but I want to just get home the point of the difference between higher account balances versus lower Social Security income and vice versa. Now coming back here, we’re going to look at a bad timing, same chart, but now this is deferring Social Security 3649 at age 67, still have the same needs.

If we look at the investment earnings here in the first year, the accounts are worth 1,000,036, but the market goes down. This is not a huge decline. It’s about a 20% decline. If you’ve been investing long enough, you’ve lived through plenty of 20% decline. You know this is completely reasonable, but the sequence of returns, we suffer the loss and we have this deficit because we need more income because we’ve deferred Social Security. Any value of 751, next year, we have another loss, but only 48,609. This is a pretty scary number right here. You’re two years into retirement. Your million dollars has turned into 609.

Then we start to have some positive years. We see the accounts starting to build back up. This is a great example of what our intentions are when it comes to retirement planning may not actually be what we do. In this scenario, if we were intending on deferring Social Security out here until 67, but we go through a market decline in the beginning years, for whatever reason, we may change course. We may go ahead and take Social Security and let the accounts rebound. You can always- if we get a rebound that’s quick, we can always pay back Social Security within that first year, continue to defer it, and go from there. Just wanted to show you on the bad timing here, if we defer Social Security, what it can do in conjunction with a sequence of returns risk to the overall account balances over time.

Now I want to look at the same bad timing scenario, but looking at taking Social Security early. We’ve taken Social Security early. We have a big loss in these first two years. In this simulation, the loss is actually a little bit bigger, but look at our ending values here. Many of you are going to feel more comfortable with these ending values at this level as opposed to the other one. This is how, again, when we’re planning to go in one particular direction, market circumstances, developments in life, whatever may happen, it can cause us to change our retirement strategy. There is a solution to this possibly.

If we know we’re going to defer Social Security longer, we should probably consider reducing risks to mitigate any sequence of return probability or impact negative impact. We still have the same two what-ifs here. Nothing’s changed in this scenario. Here’s what I’ve done, same thing, we’re taking Social Security at full retirement age, but I want to change the portfolio. I want to go much more conservative here. Before retirement, we’re going to go a little bit more conservative than this example. The average rate of return drops from an expected 5.78 to 5.03. Then we’re going to go fairly conservative here in retirement to 4.69. We see the standard deviation versus the old portfolio versus this one; 12.6 versus 7.5. There’s a 95% probability that your portfolio returns will be within two standard deviations of your constructed portfolio.

95% probability, statistically speaking, we’re not going to lose more than about 15% with this portfolio, but this one puts us up to the 25% range when we’re looking at statistical analysis of your portfolio. We do the calculation. We went more conservative on the portfolio because we are intending to delay Social Security a bit longer, comes up to 97%. Not only is the probability increased, but if we look at the bad timing, here’s the bad timing. If you can see this, this portfolio, the bad timing is 20%. This is negative 13%. This is going to much more, I would say profoundly change the overall risk-return profile as well as the amount of comfort you have and give you more guaranteed lifetime income.

Now, is this strategy right for you? It may or may not be, I don’t know. We don’t know anything about you right now, but this is just a good example of the types of conversations and the types of analysis, and the nooks and crannies we need to look behind to help develop a customized retirement plan. Again, Oak Harvest Retirement Process starts with risk management and investments for a reason because that is the foundation of our plan. From there, we can start to generate income or develop an income strategy. We can have a tax plan and then look at health care, and, of course, estate planning. If we look at the bad trials chart again, because we’ve reduced risk in the portfolio, we’re still deferring Social Security, so we have a solid amount of guaranteed lifetime income, and then the investment earnings drops from- I believe it was around 200,000 last time to 120,000. 120,000 still stinks, okay? But if the market is down, let’s say, 20 to 30% in this scenario, maybe 35% or 40%, and we only go down 120, which is, let’s call it about 12%, we can live with that. That is a manageable downturn in the beginning years of retirement.

The risk management plan in conjunction with the income plan, Social Security, those two work together. It’s like peanut butter and jelly. You add a tax plate on top of that, now we’re cooking, now we have a plan in place. As you can see, this is not a 15-minute plan, though. I see a lot of people out there advertising, you can have a 10-minute retirement plan or a 15-minute retirement plan. I guess you can, but the outcome is going to be such that you’re going to probably realize you only put 10 or 15 minutes into the plan, so you can’t be mad at that point of what you get.

Looks pretty good here. The account balances. Beginning value, ending value here. They still go down. This is still actually not a comfortable feeling, I’m sure, for many of you, but again, big losses in the beginning, but once we get to here, most of the income needs are being taken care of from Social Security so those accounts can sit there and grow. Some mix in between all of these strategies may be the right one for you. We don’t know, but this is why the conversation needs to be had.

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