I’m 60 years old with $1.5 Million in my IRA but I had $2 million before the stock market crash, can I still retire? Do I have enough for a stable monthly retirement income? How do I protect my retirement savings during this bear market? In this video, Troy Sharpe discusses whether you can still retire if your portfolio has been affected during the stock market crash.
60 with 1.5 Million:
Troy Sharpe: You’re 60 years old, with 1.5 million inside your IRA. It used to be 2 million before the recent stock market crashed. You probably want to know, can you still retire? Do you have to make any adjustments to your portfolio, to your spending? What does it look like now the market has come down so much? We’re going to explore those adjustments and see if we can still get you retired in this upcoming year.
Troy Sharpe: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, host of the Retirement Income Show, and also a certified tax specialist. I’ve had a lot of our advisors come up to me recently and say, “Troy, we’re sitting with a lot of prospective clients that have the same questions.” You probably have the same question as well. Do you have enough? Can you still retire? If something happens to you, will your family be okay? These are all the questions that we normally have in retirement, but they are magnified in a market downturn like we’ve currently went through.
Hey guys, brief interruption here. If you want to support the channel, if you appreciate the content we put out, feel free to share this video with a friend or family member that you think could benefit. Of course, always subscribe, comment, and hit that thumbs up button if you like the content. Today’s case study, we’re going to look at James. James is 60 years old. He has 1.5 million inside his retirement account, but it used to be 2 million before the recent market downturn. James wants to know, “Hey, can I still retire in this upcoming year?”
We’re going to look at some of these parameters, go through some potential solutions, adjustments. The goal here is to convey what it looks like to go through this analysis or what type of things should you be thinking about. What type of impact does making certain adjustments have on the probability of success? As always, we’re trying to educate you here, but if you want help, if you have questions, feel free to reach out to us. James is single. That’s an inside joke here on the YouTube channel. I get a lot of comments asking, “Troy, could you please do one for a single person? Why are all the videos you do for married couples?”
James is 60 years old and he’s single. As I said, he has 1.5 million in the retirement account, but it used to be 2. His social security is around $3,000 a month at full retirement age 67, which is near the maximum social security you can have at that age. James is a pretty aggressive investor. I’ve run across this a lot of times in my career, but especially after the most recent bull run where the stock market did really, really well over the past several years. One of the areas where we see it a lot in Houston, where it’s been damaging to people is when you’re overly allocated to oil and gas stocks.
Oil and gas stocks over the past 10 years have not really performed well. Now in 2022, in a period of high inflation, they have performed well, but historically we can even go back 20 years and they really haven’t performed well relative to the overall market, but what we see a lot of times also is the over allocation to Amazon, and and Facebook, or Meta or Google and Apple, the tech companies. We’re going to look at someone today who was overly allocated to the tech companies because they felt, hey, they’re going to continue to grow and grow and grow and grow.
No matter how you’re invested, if you have exposure to the equity markets, your portfolio most likely is down this year. If you have exposure to bonds, your portfolio was also down because stocks and bonds have had a really bad year so far. What we want to look at today is James, who is down about 25% and his spending goal is $100,000 a year. 80,000 is the baseline spending that we typically build out for clients here to identify what does that baseline need increasing with inflation over time. Then we have the go-go years where the first 10 years, the goal here is to spend an additional 20,000, which gets us to 100 grand retirement income spending the first 10 years of retirement.
Now, when James had $2 million before the stock market downturn, he was thinking, “Okay, 100,000, a little bit more than that 4% rule.” As you know we’re big believers in dynamic spending plans here at Oak Harvest. With social security turning on down the road, he’s probably feeling pretty good. “I have $2 million and this spending, it’s not too far away from that 4% rule plus social security. Doing pretty good.” Now because he had an overly aggressive exposure to equities and the stock market has come down, his portfolio now is 1.5 million and he’s that much closer to retirement. James wanted to retire in January.
Right now it’s November. Okay, before we get into some of the analysis here, 1.5 million inside the retirement account. Now, what is wrong with having 1.5 million inside the retirement account? Those of you that have followed this channel for years, heard me talk about tax planning. You know if James was a client leading up to retirement or had been a client with us for years preceding this point, we would have diversified those contributions into maybe a Roth IRA or into some non IRA assets. Whenever you have all that money inside the IRA, it’s a ticking tax time bomb. It is a tax infested account. Every single dollar that you take out is subject to income taxes.
Now, because of the higher spending goal, it does mitigate the long term risk to an extent because when you pull a lot of money out of the retirement account to live on in the early stages of retirement or even throughout retirement, it doesn’t leave large balances in there to accumulate and create massive tax problems down the road, because of required minimum distributions. Still, I wanted to ask that question, just pointed out because as you know, we’re big proponents of diversifying our tax buckets in retirement or leading up to retirement, so we have flexible choices when it comes to where do we withdraw from when we actually do get to retirement?
That way we can control what goes on the tax return and have a tax plan that helps us pay less tax over the course of time. James doesn’t really have 1.5 million total assets. He has a junior partner inside that account, Uncle Sam. I just wanted to point that out in case you are in that scenario where you can start thinking about diversifying your tax buckets as you lead into retirement to be better prepared. We have James living until age 90 here, so wants to retire at 61, live until 90, spend a 100,000, 20,000 of that is the go-go spend in the first 10 years of retirement.
Social Security is $3,000 a month at FRA or full retirement age. What does it look like at $1.5 million? It’s coming in at 60% right now. 60%, this is a Monte Carlo analysis. One thing I don’t want you to do, and I’m going to show you why, is just assume the average rate of return. What Monte Carlo does is it says, okay, what happens in one simulation if it’s plus 5%, minus 15%, plus 20, minus 12, plus 10, plus 6, plus 9, plus 30, minus 15. We’re looking at all these randomly generated sequence of return combinations.
60% means if James retires as anticipated, spends everything we’ve talked about in about 600 out of 1,000 simulations he dies with money. The other 400 are these red lines down here. He does not die with money. All the squiggly lines here is essentially the distribution of potential scenarios. The first thing the software is going to do now when we go to the recommended scenario is just look at the risk tolerance, look at the spending and what it’s trying to do is to if you want to spend this goal, what adjustments can we make in order to get the probability as high as possible? It’s not looking at making other adjustments though.
If we come over here to the recommended scenario, this is based on risk tolerance, this is based on the current level of spending. The software is trying to get you to spend that level of income. No matter what we do, if we reduce exposure to equities, we’re not going to get that much higher. 66%, that’s still not a comfortable retirement. What do you do? Do you work a little bit longer? Do you adjust your spending? Do you adjust the portfolio and work a little bit longer and adjust your spending? This is where the discussion comes in. This is where the financial planning takes place, the analysis of various scenarios.
This is a conversation that we have together in order to identify which routes should we take that are most comfortable and suitable for your particular situation. We’re going to come down here. We could go to the what if. You’ve seen the videos where we do the what if analysis. That’s something that’s usually done in conjunction with what I’m about to show you now. I’ve not shown the super solve option before. If you can see over here, the initial solve target is about 82%. We’re trying to say, what do we have to do to get from 66% in the recommended scenario, [unintelligible 00:08:29] just simply reduce the exposure to equities to 83%. The first thing it’s just looking at is spending.
If we want to get to 83% here, we’re going to have to reduce the spending from 80,000 to 71 for the baseline, in the go-go years, reduce it from 20 to 11,563. That’s a total of 82,000 in the go-go years, dropping to 71,000 in the slow-go years, or after that first 10 years of retirement. Now, this is an excellent time to point out, you can see this is just one snapshot in time, an analysis of this very moment. The real value in this type of planning and these types of conversations is having this discussion a couple of times a year, every year for many, many years into the future so we can always stay connected, because your accounts are going to grow at different levels. You’re actually going to spend a different amount than what you plan most likely.
I just want to point out this is the real value in a retirement planning relationship is having these types of discussions and going through this analysis. What if you’re willing to work a little bit longer? You say, “You know what, Troy? I really don’t want to reduce my spending goals. I’m willing to work another one year or two year.” We’re going to adjust the willingness to do some of these things and see how that impacts some of your choices. We have this edit willingness button right here, so I’m going to click it. How willing are you to reduce your goal amounts? We’ll say slightly willing. We’ll leave it there. That’s the spending goal.
How willing are you to retire later? It’s initially programmed at not at all but let’s say we’re somewhat willing. Then are you willing to save more? Yes, we’ll say very willing to save more there, of course, but we want to maybe reduce spending goals but we’re somewhat willing to retire a little bit later. You know what? We don’t want 82%. We wouldn’t feel comfortable at that target solved percentage. We want to get up to 90%. To get up to 90%, we’re going to retire. The first choice is to retire three years later. Now, I know many of you see that and you say, “Troy, there’s no way I can go three more years.” It’s a conversation.
We go back, we input the variables, we start to look at other options, other alternatives. The spending here reduced from 80,000 to 72, 20 to 12. Now we’re at 84.5 total spending during that first 10 years. with about a $15,000-$16,000 reduction or a 20% decrease in the retirement spending goal. Probably none of these options is appealing. If just at the beginning of this year you thought you were pretty good to go to retire, and now all of a sudden because you were overly exposed to equities and the market has come down and you see the impact that it’s had on your plan, these are probably not appealing options.
One thing we can look at is say, “You know what? Maybe I don’t necessarily need to be at 90. Let’s look at 85 and Troy, I’m definitely not willing to work any longer but I’m willing to spend or reduce the spending a little bit, because I hear you talk all the time about dynamic spending.” In years where the market does really well, we could spend a little bit more in years like this, “Hey, I can tighten the belt. I can pull things back a little bit.” We’re trying to get to 85. We’ve made those adjustments. Now retiring at 61 looks viable, but we are going to reduce the spending from 80 to 70 on the baseline, and during the go-go years 10,000 per year. That would be our target spending goal for that first year of retirement.
Now a lot could happen over the next 12 months as James has realized over the past 12 months. This is a target, this is a goal, it’s where we’re currently at. Having this continuous conversation and always being connected to the plan and the impact of the choices that we’re making, this is how I find that people gain peace of mind when they retire. They’re on that cusp because the market has come down, or their spending goals are a bit high, or a lot of times we’re emotional beings and we’re fearful, we’re scared, we’re uncertain about what the future holds.
Being connected to a plan and having these types of conversations is something that I have found throughout the course of my career bring some peace of mind to retirement. Now I mentioned earlier why the Monte Carlo was so important than the average rate of return exercise. We have a lot of engineering clients. Probably half of our client base are engineers, from Exxon, from Chevron, from all the oil and gas companies. A lot of times they’ll come in with a spreadsheet and they will have extrapolated out, “Well Troy, if I average 6% or 8%-“ it’ll be a little fillable space and a spreadsheet to where they can adjust the average rate of return.
I want to show the difference here. If we use average return method versus the Monte Carlo method- and again the Monte Carlo method is we’re looking at various annual returns to show the possible impact of sequence risk. Here when we use the average rate of return super soft to have $100,000 safety margin so this is the value at the end of the plan, it’s saying, you know what? We only need to reduce spending by $469 on the baseline, 439 or 1% total reduction in spending, nothing else is changing. It’s saying, “Yes, retire at 61, you’re in good shape here,” and that’s because when you look at average rate of returns, it simply doesn’t take into account the sequence of returns.
If you haven’t watched the videos on sequence of returns, if that’s a foreign concept to you, you should not retire without understanding this very, very important concept. The last thing I want to bring this back to is why step one of the retirement success plan is so important, because if James had come in a year or two, three years before retirement and we went through this analysis, even if he was a client in the beginning of the year when we did the annual review.
If James said, “Hey, retirement’s still on track. I’m wanting to retire in January of next year. Where are we at, what are we doing, do we need to do anything in order to ensure I don’t have to keep working?” Well, we would have done this risk analysis, we would have went through this discussion, and the recommendation most likely would’ve been, “Hey, you’re taking too much risk here. We really need to diversify because we could show you–“ Back then at 2 million if we had reduced the equity exposure, the probability of success would’ve been tremendously great- or tremendously higher, and the downturn in the market would not have impacted his ability to retire.
Step one of the retirement success plan is risk management, and that’s building a portfolio, constructing a portfolio that’s designed around your goals, not designed around some modern portfolio theory asset allocation.
Those academic theories are important, but the fact of the matter is, in retirement, it’s much, much different than the accumulation phase. Your asset allocation first and foremost should be focused on your spending goals and the other retirement goals you have in retirement, not academic theory. Hopefully, this video really conveys why that step one in the retirement success planning process is so important.
We have to manage risk. We have to create an allocation that can get you retired but more importantly, keep you retired. If you like the video, please share it with a friend or family member, someone you think that could benefit, possibly a coworker who’s thinking about retiring in a year, and of course, comment down below, hit that thumbs up, and subscribe to the channel so you can stay connected to us, and we can keep you more connected to your money.