I’m 60 with $1.5 Million. Can I Retire?

You’re 60 years old with $1.5 million and you want to know, can you retire? How much can you spend? Will you run out of money? How do you pay less tax? And if something happens to you, will your spouse be okay? In today’s video, we’re going to look at a few different planning scenarios and the impact that making different decisions could have on your retirement, social security, taxes, and how much you should spend. So sit back, enjoy this video as we go through all the different planning decisions that are connected in retirement that you’ll have to make.

Asset breakdown and retirement income structure

Okay, a few baseline parameters here. So we have a husband and wife, both 60 years old, working now, but want to retire this year. Social Security, $3,000 a month for one spouse at full retirement age, which is 67, 2,200 a month for the other spouse. What happens if you take it early? What happens if you take it later or at full retirement age? The 1.5 million is broken down $1 million in John’s IRA, 400,000 in Jane’s IRA, and $100,000 in savings.

So the first thing you should recognize when you see this composition of assets is there’s a lot of money in the retirement accounts, which means there could be a potential tax problem either early in retirement or later on in retirement, depending on the withdrawal strategy that’s enacted in the social security timing. Taxes, social security, income, and the timing of all these decisions is what I hope you take away from this video, understanding that the impact of these decisions on your overall retirement can determine how long your money lasts.

Go-Go, Slow-Go, and No-Go years explained

The very first question that people often have whenever they come in to see us is, Troy, do I have enough? How much can I spend? And the income plans that we build a lot of times for our clients would look something like this. So we have a base living expense of $50,000. So that’s the need. That’s what you absolutely have to have to cover the essentials. But most people want more than the essentials in retirement. So we break this down into what we call the go-go years and the slow-go years. And of course we have healthcare that needs to be taken into consideration as well.

So the basic living expenses, $50,000. So those are permanent, they’re going to inflate over time and they do not end. Go-go years. So we have this set up. So the first 10 years of retirement, there’s an additional $50,000 of spending layered on top of the base income needs. So that’s $100,000 of income generation that needs to take place in the first 10 years of retirement.

Then we get to the slow go years. So this is age 70 to 80, another 10 years, and we’re going to reduce or eliminate the go-go year. So that goes away. The go-go years are done in this particular example. Slow go years, 25,000. So now this is layered on top of the 50. So that’s a hundred thousand of spending, exclusive of healthcare for the first 10 years of retirement. Then 75,000 of spending, all of this is inflation adjusted and I’m gonna show you this on the chart so you actually see how much this is in the future. 75,000 for the next 10 years, age 70 to 80.

And then after age 80, the slow go years go away, that additional spending, we just have the base living expenses which are inflated again with healthcare on top of that. So this is a common income plan that we’ll develop for clients. And the question you wanna know is, are my assets enough? How long will this last if I live to 85 or 90 or 95? What if my spouse outlives me? These are all the common questions that we have to have. And keep in mind, what we’re looking at today is nothing more than a snapshot in time. A successful retirement from our experience is the result of making good decision year after year after year. You compound good decisions, you increase the likelihood of success over time.

Today’s a hypothetical case study, but it’s meant to educate you on how the choices that you make, such as spending, how you invest the money, what taxes there are, and different choices you can make with Social Security, how all those interact, and the goal is to help you make better decisions with your retirement.

Just a quick visual of the assets here. We have Jane’s 401K with $400,000, John’s 401K with $1 million, and then a savings account with 100,000. So of the 1.5 million, 1.4 is in those tax-infested retirement accounts, 100,000 in savings, and what we call a non-qualified account.

One of the biggest misconceptions about Social Security is that you should always defer until age 70. That’s not always the case. For many of you, that is the right course of action. But for a lot of you, you should take it at full retirement age or possibly even sooner. So here, we’re gonna start looking at John’s Social Security and Jane’s Social Security being triggered at age 67, their full retirement age. But then we’re to look at how taking it at different times impacts their overall ability to generate income and their account balances.

What a 79% probability of success really means

We’ve laid out the age, we’ve laid out the assets, we’ve laid out the spending goals, and we’ve laid out the timing of social security. Now, let’s see what the probability of success is.

Okay, so 79%. This isn’t a horrible result and I’ve seen much worse and I’ve seen much better, but this is our baseline. So if we do nothing else, if we make no other changes and we just run the course, we’re looking at about 794 successes out of a thousand trials. What is a success? Success is you die with money. Failure is you run out of money before your life expectancy. So we do have life expectancy set here for the wife at age 94 and the husband at age 90.

Now, why do we choose those numbers? They’re completely flexible and up to you because everyone’s health and life expectancy, family history, it’s all different. But once you make it to age 65, the average life expectancy for a female is age 88 and the average life expectancy for a male is age 84. But we have tremendous advances of research and medical technology and they’re exploding some of the advances because of AI and the ability to run these intelligent models across multiple different simulations of treatments, their gathering information, they’re analyzing it, and we have much more ability to more quickly and accurately diagnose what’s going on.

This is today. And not only that, we’re able to test different treatment options in these simulated environments using artificial intelligence. And not only have life expectancy has been increasing for many years, but it’s expected that they will continue to increase fairly significantly and at a higher pace in the coming years because of AI. And so next time you have just a few minutes and you’re surfing around the web, I want you to just simply Google the impact that artificial intelligence is having on medical research, technology, and extending lives and just go down that rabbit hole and see what’s out there. You will be stunned at not only what they’re currently doing, but what we’re on the cusp of about to be able to accomplish.

Why average returns can mislead retirees

One key point to understand when we’re doing this Monte Carlo simulation, we’re not looking at an average rate of return. So all of these different lines represents a very differing sequence of returns. So plus 12 minus two plus six minus four plus nine plus eight plus 15 minus 12. So one of the factors that can lead to misleading outcomes, especially if you do this yourself in Excel is you just run a time value of money calculation where you show an average rate of return. I’ve seen this over the years with some of our most sophisticated engineer clients. They have their own spreadsheets. A lot of times they’re 20 pages deep and they’ve done tremendous analysis, but it’s all based on the assumption of averaging, let’s say 7 % a year.

In the real world, you’ll never average 7777, but that won’t be your realized returns. Let’s say you do average seven over a 20 year timeframe. There are literally thousands of different ways you could get to that average of 7%. You could be plus, plus, plus, plus, and then minus, minus, minus, minus all these different numbers, but the average act is seven. So the timing and the sequence that you realize returns, especially when you’re drawing income in retirement is one of the biggest determinants of how long your money will last. And I think more importantly, how secure you’ll feel during retirement. So takeaway is when we look at these different squiggly lines, these are all different sequences of returns. And this is something that we have very little control over. The timing of when we retire, the economic circumstances, what the stock market is doing. Are we retiring at the end of a bull market? Are we retiring at the end of a bear market? All of these different scenarios will impact the returns that you realize in the timing of those returns, which will ultimately determine how secure your ability to generate income is and how you feel. And that’s the big thing. We need to feel secure in order to spend money in retirement. We don’t want income anxiety.

Sequence of returns risk illustrated

Let me illustrate this point for you. So here we have a chart that simply shows a green line and a red line. The green line is just simply showing, I’m averaging about 5.87%. It’s just one of the simulations that have been extracted and it has varying sequences of returns. But when you average them out over time, it’s 5.87. So based on all the spending that we’ve looked at, the assets taking social security at 67, the longevity, their current age, here’s the green light. If we simply look at what happens in one hypothetical scenario of bad returns, so we have minus 24 % and minus almost 9 % the first couple of years, look at the difference in experience that those two years, the negative sequence in the beginning, has on the impact of portfolio balances and most importantly, how quickly this account runs out of money. So exact same circumstances, nothing has changed except the timing of returns. And here the red line, because we’re pulling money in the early years of retirement combined with these big losses, we see how quickly the portfolio value depletes.

Here on the Y axis, we have portfolio value, and on the X axis, we have 2030, 2035, 2040. So nothing is different in these two scenarios from an average rate of return standpoint, it’s just the sequence of returns is negative in this bad timing example where the red line runs out of money a little bit past 2040. But I want to focus not necessarily on running out of money. That’s bad. But how do we feel that first year of retirement, that second year of retirement, no more paychecks, the spending of money once those paychecks stop starts to become a little bit more difficult when you know that what you’re spending is not automatically being replaced. You have to generate that income on your own. So how are you feeling in this particular circumstance where the market is down in your portfolio.

You go from 1.5 million first year, about a million year two, you’re under a million. You’re probably going back to work or stopping spending or making some serious adjustments to your lifestyle. And that’s not what we want you to do in retirement. So big point here, just understand how the timing of returns combined with portfolio withdrawals and things that are beyond your control, such as direction of the market could not only impact your ability to generate income and have your assets last a long time, but how it could potentially make you feel.

Future dollars vs. today’s purchasing power

Here’s a breakdown of those simulations based on core tiles. So the top core tile and then everything in between. So first column to look at is future dollars versus current dollars. So this is an important concept. It has to do with the time value of money and inflation. So in the simulations where the green lines, we call them noodles or squiggly lines, were way at the top, those were really, really good simulations where you experienced very positive returns in the portfolio due to the market performing well. So that’s here in the 99th percentile. And in the red lines that were at the bottom or the noodles that you ran out of money, those are down here in somewhere between the first and the 25th percentile. So when we look at future dollars, that is how much money is actually in the portfolio. If you looked at your statement 25 years from now, it would say one of these numbers, okay?

In these particular hypothetical examples. Well, what does that mean in terms of how much you can spend? So in today’s dollars, what does 4 million in the future, if I look on my statement and it says I have $4 million, what does that actually mean? Right, we have to discount that to the present value, meaning what is that money worth today? It’s the equivalent value of money taken into consideration inflation. So in the future, it may show 4.2 million, but for what I need to understand that actually as far as purchasing power is concerned, it’s 1.8 million. Now here are the two kind of most likely outcomes between the 25th and the 75th. So this is not written in stone.

This just gives us a snapshot in time of what the most likely between the 25th and 75th percentile, kind of the median scenarios, am I looking at? Now, when I said earlier about compounding good decisions year after year after year, having visibility into how these decisions that you’re making are impacting your ability to generate income, taxes, the security of your family and portfolio, that’s how we give ourselves the best opportunity to be more up in this 50th percentile or 75th percentile by compounding good decisions year after year after year. But we can clearly see that there is a wide range of potential outcomes here based solely on this sequence of returns that you realize over time.

Visualizing Different Retirement Outcomes

Now here’s a cool module that I like to share with you because it helps to drive home this point a little bit further, but also help you visualize what your account balances may actually look like based on the timing of returns in the spending plan that we’ve laid out over time. So we’re starting right here in the median scenario, the 500th out of the 1000 simulations and the average return over time is 4.67, but it’s comprised of this sequence of returns. So we have good year, good year, basically flat, good, good, good, good, down negative 22. Okay, visually now we can see our portfolio has grown to two, now we’re down to 1.5 and that’s because we’re taking money out. We’re actually in the go-go years here, so we’re pulling money out. We’ve experienced some good years, but now we also have this bad year.

So all of sudden, we tighten up a little bit in that year. Are we going to be okay? What happens the next year? So just wanna visually kinda show you this. We’ll look at a couple other examples. As I go to the right, that’s a worse outcome, simulated worst outcome. So the average return went down. You can see clearly we don’t have as many positive years. And then we have some negative ones here, but still, you know, we’re probably feeling pretty comfortable here. I think most people, at least most of our clients, you know, if we aren’t spending down the portfolio because we’re earning enough interest to keep the balance stable and even growing, most people are gonna feel pretty good there. Let’s look at one more over here. Okay. So now we do have this simulation, we’re averaging a little bit higher than the previous simulation.

We’ve averaged a higher number, but we have less money. So here’s the 1.5 million threshold because of those losses in the first two years, we are down a little over a million. And then look at this, even though we have these big positives, 20 percent, good, good, good, you 30 percent, 32, our accounts are still going down in that scenario because we’re withdrawing money. So again, whenever we go through these, one of the big points that you can take home is if I’m living this and I start with 1.5 and I’m spending money and I’m young and I’m healthy and I’m in my go-go years. How am I feeling? How are you feeling when you see these account values when you open up your statement?

This is where having a plan, having visibility becomes very, very important because what we hate to see is a pullback in spending, a pullback in lifestyle, a pullback in enjoyment because there’s uncertainty or fear around do you have enough? How long will it last? We don’t know what the future holds, but if we can focus on making quality decisions year after year after year and maintaining visibility and then the ability to understand how different circumstances and choices that we make can impact us moving forward from that point, it helps us to feel a little bit more at ease, a little bit more comfortable because we have knowledge, we have control.

Healthcare costs before and after Medicare

Now I wanna show you what this GoGo and SlowGo income plan looks like while considering inflation and also medical expenses. So remember, this couple is retiring at age 60, 61, and they don’t have Medicare yet. So they have to pay out of pocket for private health insurance, plus any out of pocket medical expenses, copays, deductibles, et cetera. The baseline goal was 50,000 plus the go-go, another 50,000. So $100,000. But the average out of pocket medical costs for a 60 year old couple retiring prior to Medicare is about 30,000 in the country right now. So that brings us up to 130. So we see the costs increasing in the first few years until Medicare kicks in. Now once Medicare kicks in, now it’s just the GoGo spending plan that we originally planned plus smaller out of pocket medical costs.

So you have part B, part D, Medigap, and any maybe prescriptions, et cetera, that might not be covered. So we drop here to a little over 120. We finish our GoGo year spending. That gets us up to 140. And then the GoGo spend goes away and it drops down. Now we’re in the slow-go years. So what does that look like visually? Well, when we take into account inflation plus the reduced spending in the slow-go years and out-of-pocket medical costs, now we’re a little over 110. For reference, the slow-go period was 50,000 base plus 25 expenses. But this is 10 years into the future.

Now we’re not 60, now we’re 70. So the 75,000 that we plan for the slow-go years, because of inflation and out-of-pocket medical costs with Medicare, we’re already over 110,000. So again, just understand how inflation impacts those spending goals. So we have the slow-go years, and then the slow-go goes away, and now we’re just at our baseline income, that 50,000 inflated for 20 years plus expected out-of-pocket medical costs. And that puts us a little over 110. And then that goes on until life expectancy. This drop here is one spouse passing away. Typically you’re gonna spend a little bit less supporting one spouse versus two.

But I just wanna show you visually what this looks like and also kind of drive home the point of what inflation does. So when we’re thinking about, I wanna spend 100,000, well, 100,000 today is different in far as the quantity of dollars that we have to withdraw than 100,000 10 years from now or 15 or 20. We have to pull more out because inflation is going to do that to maintain that same purchasing power. We have to withdraw larger amounts. So don’t forget to take that into consideration.

Social Security timing at 62, 67, and 70

Now I want to show you visually what Social Security provides versus what needs to be withdrawn from the portfolio over time. Again, this assumes both spouses are taking Social Security at age 67. The blue is taking Social Security at full retirement age. The red is the shortfall to withdraw to meet the demands of the go-go, slow-go, no-go income plan that we’ve laid out previously in this video. So the shortfall in the beginning, it’s pretty big. We’re at 129,000. We have to pull this out. If we’re just looking at general rules of thumb, you would think, okay, that’s way too much money, Troy. It’s almost 10 percent of what I have to withdraw. Well, yes it is, but we need to take into consideration Social Security, take into consideration the fact that we’re gonna be spending less at these various points in the future. So Medicare kicks in, the go-go turns to slow-go, slow-go turns to no-go. So visually it helps, I think, to see what this actually looks like as far as if I take Social Security here, what type of shortfall do I need to make up so I can spend according to this plan?

Now we’re gonna look at the Social Security analysis and see how it changes this, but also how it impacts the probability of success. Here’s the base case that we’ve been going through this whole time, 67 both spouses, 36,000 for John, 26 for Jane, total lifetime benefit of 1.6 million dollars. Now we compare that to if you take it as soon as possible at age 62, your probability of success drops to 70 percent in this example, and the total lifetime benefits almost 300,000 dollars less. Now if we defer until age 70, probability of success increases to 83 percent. The cumulative amount of money that we’ll receive jumps to 1.8 million.

So this is what I mean by making good decisions year after year after year based on how circumstances develop. This is all a snapshot in time. It’s simply giving us information and the more information we have and understand how it impacts the other choices that we have to make, it puts us in that position to compound good decision after good decision.

Now I wanna show you what happens if we take Social Security at 62. So now I’ve changed it. The income chart is showing Social Security starting as soon as possible, both spouses age 62. We have less shortfall in the beginning years, but we have more withdrawals needed in these later years. So one of the things that happens when you take Social Security sooner is not only do you lock yourself into that lower lifetime income amount, but you also lock yourself into the requirement to withdraw more money later in retirement without knowing what your portfolio returns over time have been or will be.

Comparing early vs. delayed Social Security visually

Last thing I’m going to show you with Social Security is that age 70 decision. So we defer until age 70 now. Obviously the shortfall has increased in the beginning because we don’t have Social Security at 62 or 67. We wait until 70. But we see how much smaller the shortfall is in the backend of the plan. So these are relatively small shortfalls based on the income plan that we’ve laid out. Yes, it’s a little bit more stressful. Your portfolio would be expected to decline more in the beginning years. But for some of you, knowing what the backend of your plan looks like and how much or how few dollars you have to withdraw to achieve that standard of living that you’ve set as an objective can help you feel more comfortable spending that money in the beginning.

Last thing I wanna show you for this video is how these different pieces fit together on one big ledger. So we have the goals, the money used to fund all goals here. Because we’re taking Social Security at age 67 in our base case, the portfolio does decline in the beginning years. But we turn Social Security on at age 67. That’s about 72,000 a year. Then we see how much that is expected to increase over time based on a two and a half percent cost of living adjustment.

Required Minimum Distributions and tax risk

Then I want to focus on taxes here. So this is one of the big decisions that we have to make in retirement. Do you do Roth conversions or do you not? A lot of times the answer is a function of how much do you spend. One reason to do a Roth conversion is total wealth accumulation. Another is minimizing tax risk. You could have more wealth by not doing a Roth conversion, but you could introduce more tax risk. Are income taxes higher in the future? Is there some type of means testing around Social Security? Medicare premiums, there’s something called IRMAA, income-related monthly adjustment amount. The more income you have, the higher your Medicare premiums are. This is directly related to the amount of your required minimum distribution.

So there’s a domino effect between all of these different choices that you have to make. In this particular spending situation, taxes aren’t bad. So honestly here, I would probably not be recommending Roth conversion as a strategy for the client because the spending levels are such that our estimated account balances aren’t too high to where I would be concerned later about massive required distributions.

At age 78, it’s estimated that RMDs for John are 13,000 and Jane 45,000, so total 58,000. A 58,000 RMD is not catastrophic. I’m not worried about IRMAA. Now look at age 87, what RMDs are there? 20 and 66. Still not too concerning for me.

So that’s the tax situation for this particular plan. Not too concerning. And then here we just have visually what the inflated go-go years look like, then the slow-go years, healthcare, and your ending portfolio value.

So I hope you enjoyed this video. Any questions that you have or any comments that you’d like to make, please put them down below. We’re going to continue this series with several different hypothetical case studies, looking at different examples. So feel free to share those with us. And I thank you very much for tuning in and I look forward to seeing you in the next video.

➡️ If you’re nearing retirement and wondering whether your assets can support your desired lifestyle, this type of structured income analysis can provide clarity. We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at (877) 404-0177 or fill out this form for a free visit: https://click2retire.com/60-with-1-5-million