I’m 60 With $1 Million Dollars Can I Retire With $100K For The First 10 Years Then $75K Thereafter | Retirement Planning at 60

You’re 60 years old, you’ve done a great job and saved up $1,000,000…and the question is, can you retire and spend a $100,000 a year for the first 10 years of retirement and then bring that down to $75,000 a year? As you get a little bit older and probably aren’t doing the same activities that you did when you first retired.

Hi, I’m Troy Sharp’s CEO of Oak Harvest Financial Group, certified financial planner, professional and host of the retirement income show.

As I go through this video today, I’m also going to respond to some of the repeat comments that I hear and the main goal to this video is to just help provide perspective on what retirement planning actually is and some of the things that we need to be aware of and the mathematical calculations behind some of those assumptions.

So first thing we have to do is we have to set the parameters. Our sample couple here, Tim and Jane, both currently 60 years old, I have life expectancy set to 90. Now, we normally plan to 95, because if the plan can make it to 95 and you die at 88, you’re dying with money.

You have enough for health care expenses, but one of the comments that I get frequently is, Troy, nobody lives to 90, nobody lives to 95, nobody’s doing anything in their 80s. Well, first and foremost, as a retirement planner who’s worked with thousands of people over the course of his career, I can tell you, yes, people actually

do live to 90. It is not that uncommon, and with science, medicine, technology…I mean, there are diseases today that we’re killing people five years ago that are completely treatable. So I’m going to bring it down to 90 here, but one of the variables we’re going to play with is life expectancy. What happens in this same scenario at 85? What happens at 95? What if the spouses, maybe passes away, which is normal, at a different age?

Both of them are currently 60. Both of them are retired. Tim worked. Jane does not have a Social Security check. So, Tim, Social Security will be $3,000 a month at full retirement age. Jane will take spousal benefits.

Again, maybe you both worked, and that is common as well. This is probably the most common scenario that we see. But we’re going to look at variations of when to take Social Security. And we can even come back if we have time and maybe plug in to Social Security for both of them.

What we have here are the spending goals in retirement, so we call this a “Go Go,” “Slow Go” type spending plan. The “Go Go” years, of course, are when we’re younger and healthier and we’re recently retired. We have much more free time on our hands.

So, we anticipate we’re going to be doing more. But the truth is, once we get into our, maybe 70s, maybe 80s for you, depending on your health and activity level, things typically do slow down. Now, a large part of a retiree’s budget is house upkeep.

So you still have maintenance support, property taxes, insurance. You still have to eat. Health care costs become a larger and larger part of the budget. So even though maybe we’re not traveling everywhere or doing as much as when we were 60, we still have expenses and we still have to maintain a certain purchasing power over time.

So what we have is $75,000 as the base spending goal. Now, that will adjust with inflation as time goes on. But in the “Go Go” spending period, we have a recurring annual additional anticipated expense or spending goal of $25,000 a year for 10 years.

So for the first 10 years at $75K plus $25K. And then in that 11th year, the software is going to take away this “Go Go” spending goal and we’re going to be left with $75,000 as our spending target, but that will have been adjusted upwards because of inflation.

So we’ll look at it in graph format towards the back end of this video. One thing to be very, very aware of here, and this is a very common mistake when I get comments and people aren’t thinking about this.

This includes health care. Now, yes, you may possibly qualify for an Obamacare subsidy. Your health care expenses may be nothing. Your health care expenses may be $300 a month for both spouses. They may also be $2,000 a month.

The determining factor, once you’re retired of what you’ll pay for health insurance is what’s known as your modified adjusted gross income. Now, if you want to spend $100,000 a year in retirement for the first 10 years, you have to go into savings if you’re not working and you have to pull that money out.

Well, the question becomes, where do you have your retirement savings? Have you followed the conventional wisdom advice and put it all into your 401k? And this example, this $1,000,000, it’s broken down…$900,000 was in their 401k, which they rolled over to an individual retirement account upon retiring.

And $100,000 is in savings outside of the retirement accounts. So this is what we call non-qualified money. Retirement account money is considered qualified money. Now, some of you may be asking, why is this important? Well, to pull this $75,000 or excuse me, $100,000 out, we have to go into our retirement accounts.

If the composition of our dollars is so heavy to the qualified dollars and we take that money from there, that is going to increase our modified adjusted gross income and disqualify us for any significant Obamacare subsidy.

That means you have to go to the private marketplace and buy a private health insurance policy and pay the full load yourself, which for a 60 year old couple could easily be anywhere from $1,700 to $2,200 per month.

So, that ties into the spending goal here…this spending $100,000 in this example, this includes your health insurance costs as well as your out of pocket health costs. Now, at 65, Medicare turns on, and that’s a big, big cost that goes away.

But, if this person had done a better job, and, I don’t want to put the blame on that person, because the truth of the matter is, you’ve been told your entire life to put as much money into that retirement account as you can.

And also, the truth is that that may not necessarily be the best strategy, because once you look at retirement from the distribution phase like we do, and we’re doing income planning and tax planning and health care planning and estate planning, having all of your dollars inside those accounts is one of the most inflexible ways to enter into retirement.

You just don’t have choices of where you pull your income from. You have no control over what goes on to your tax return. And ultimately you’re at the whims of the federal government, because if taxes were to go up and you want to take more money out, you want to make a down payment on a second home, you want to buy a boat, you want to go on an extra trip, maybe once you retire, you have no choice…you have to go into this account and pull it out and pay taxes at whatever rate that tax environment is at that time.

I would much rather see a much more well-balanced allocation of dollars across the different tax characteristics within these accounts, meaning I’d rather see 500K and 500K or, at least 600K, 700K and and the rest are over here. Having a Roth IRA would be very, very beneficial here as well, but that’s the account we really want to let grow for the longest amount of time, because down the road, if taxes are higher or at least once we get to that point, we can start pulling out from there and then our Social Security and that income, most of it will be one hundred percent tax free.

If there was more money over here, we could strategically take money from each account during the years 60 to 65 to make sure that annually we were qualifying for that Obamacare subsidy to keep health insurance down to at least a more manageable level.

That’s just one reason why we want to diversify our contributions for future retirement saving, but it’s a very, very important one, because it can be the difference between retiring at 60, 61 or 62 or having to wade into Medicare at 65.

OK, so now that that’s out of the way and I’ve addressed the health care component, which again, that is a very, very common comment that I get…”Troy, health care doesn’t cost that much. You could get an Obamacare subsidy.”

Yes, possibly you can. But it’s determined by where you take your income from in retirement. So we have to be cognizant of that modified adjusted gross income threshold.

Recap on Social Security. Tim is receiving $3,000 a month or $36,000 per year.

Jane has $0 per month of her own Social Security benefit in this example. But she will qualify, if she waits until full retirement age to get 50% of Tims benefit. She cannot take Social Security until Tim activates it, but if they were to take it sooner, Tim’s amount would be reduced and she would have a reduced spousal amount as well, because she elected that benefit before her full retirement age. One thing I do want to point out, $1.296 million if they lived to 90 years old with these Social Security inputs, that’s how much money Social Security will provide. That’s more than they have saved. So a lot of times people say, “Troy, you know, I’m just going to take Social Security when I retire.”

Let’s slide this number down. Let’s say he takes it at 62, OK? And she takes it at 62. Total lifetime benefits, now $1,070,100. So, that is a significant amount. More so than the lifetime benefits, though, for me, it’s the annual reduction, that’s let’s call it $10,000, $11,000 per year less for Tim. And then hers is another $7,000 or $8,000. Let’s call it $7,000, or $6,300. That is a significant amount of less annual income.

If they live into their eighties, even early 80s, you know, they’re going to pass through that break even point, probably late seventies. We’ll look at it. But that is a lot less income. So Social Security is a big decision. So what was that, about $300,000 or so?

OK, other retirement income here, there is no pension, there is no rental income from other investments, it’s just a very simple example here. Total investment assets: $1,000,000 again, IRA, Tim, $900,000, taxable joint account, $100,000 equals $1,000,000. No debt, net worth of $1,000,000. I have the portfolio…the investment strategy, this is my Step 1 of Oak Harvest Retirement Process, is risk management and investment planning, because looking at this as we’ll see when I do a what if scenario, depending how the money is invested and more importantly, the decisions that they make year to year with the investments, hopefully not allowing emotion to creep into the picture and get out of the market when they’re fearful and stay in through turbulent times by being connected to the plan.

But however, the money is invested and whatever the returns are that are achieved makes a tremendous difference in how long this money lasts. They are invested, I have them right now in a 60/40 portfolio. OK, so we are going to look at this, this is a Monte Carlo simulation.

So what’s cool about this Monte Carlo simulation and is much more effective or at least realistic when modeling out into the future is, I hate the average rate of return assumption, because the average rate of return model says we’re going to average five or six percent per[a][b] year.

And in the real world, you’re never going to make 5, 5, 5, 5, 5, 5, 5, 5. That is a faulty model, in my opinion. What a Monte Carlo will do is look at different returns in different years.

And then we have a thousand different simulations that we can take a look at to see what happens if the markets up, up, down, up, down, down, up, or one thousand or in this nine hundred and ninety nine different scenarios, which gives you a much better context of how secure your retirement actually is.

OK, 25%, this is not a good score for them to be retiring. Now, I know somebody in a comment and say, well, Troy, you’re just trying to scare people. You just want people to become a client.

No, I don’t care if you become a client or not. I do this all to help you understand the different decisions that go into retirement planning. This is just the truth. OK, part of the problem is spending that $100,000 and retiring at 60 means we have to pool more than one hundred thousand dollars out

because of taxes. And most of the money being in that retirement account for seven years before full retirement age. When we look at what happens if they take Social Security at 62, because I know some of you are thinking that, well, the odds will go up if we take Social Security at 62.

No, the odds actually go down if you take Social Security at 62. OK, what we have here is one of the trials. We’re going to look at a few different trials here before we start to tinker with some of the variables.

OK, the average return of this trial with the 60-40 portfolio. This is the 500th or the median simulation. This bar graph here tells us the annual return in this one trial and this is the amount of money in the portfolio.

Very clear visual here. So, this is actually not a horrible trial. We have +8% , a modest year, +6%, +16%, +4%, before we ever encounter a loss. This is a flat year, it’s not showing, but then we have a -9.76%.

Then we have a lot of good years. Still, we run out of money and it’s because we’re taking such large distributions in the beginning. Now, I’m going to tinker with these distributions in a second, but I just want to show you a couple of these simulations.

So this is a worse simulation, 2.19%, but it’s because we have a modest year in the beginning,+3%. But then -11% , here’s our portfolio value after one year to $930,000.

But this is the sequence of returns risk. We talk about this in the video I did – two portfolios that average seven percent, one one runs out of money, one does not. The sequence of returns risk is one of the greatest determinants of how long your money will last.

And ultimately, what that means is the combination of taking money out and market losses can have a negative, almost spiraling concept to the portfolio or spiraling effect and you see that visually here. They have to take that one hundred thousand if they want to spend it more than $100,000 , because it’s all in the IRA and

there’s taxes. And then we get a loss. You see the significant drop. It drops from $930,000 to $722,000. Now, what about a positive scenario? Because 25% or 250 out of 1000.

This was a successful retirement. That’s what this looks like. So it is possible, 25%, it’s not a great number. I wouldn’t retire at 25% and I think most of you probably would not as well.

But this is what it looks like. So, you know, +14%, +14%, modest year, -16%. Couple down years here, we see the sequence of returns effect right here. Drastic. You see how significant it is. There’s nothing greater that can illustrate the sequence of returns risk than I think this illustration right here, just a couple of

modest down years combined with larger distributions from the portfolio brings us from $1,000,000, to about $479,000 at the end of this year right here. OK, but still things normalize as far as what we would like to see over a long period of time as far as investment returns and the portfolio, things get a little

bit scary right here. OK, we’re down to $354,000 but things get better. This is a scenario where very possible you could retire in this situation and be OK. So, a wide range of outcomes there

but I wanted to make sure we got that across. Now the software so I’ve set the risk tolerance for this couple to be very similar to how the portfolio is currently constructed. The software says based on that preset risk tolerance and how the portfolio is currently invested, the algorithm runs some numbers and or run some scenarios and

says, OK, you’re better off at this current allocation based on your risk tolerance. The probability stay the same. First thing I want to show you is Social Security. OK, so I said earlier that the probabilities actually go down if you take Social Security earlier.

Here, we see if they take it at 62. Same numbers we looked at earlier, drops to $25,000 and $11,700, probability goes from 25% and used in the first scenario to 17%.

So, taking Social Security earlier does not increase the probability of success, it actually decreases it. Now, what’s also unique in this particular example is that deferring it, many general articles that you’ll read tell you to defer, defer, defer Social Security for as long as possible.

Well, here’s a very good example of a scenario toward deferring. If they both wait until 70 [they] have much more annual income, at least the husband will, because the spouse’s income or the spousal benefit can never be more than 50% of the spouses, the spouse, the other spouse, their full retirement age benefits.

So in this example, Tim’s full retirement age benefit is thirty six. Hers will never be more than half of that 36, but she cannot elect spousal benefits until he turns his benefit on. 21% is the number.

So deferring Social Security and this example does not increase the probability of success. OK, now I want to visually show you the base spending goal and the go-go spending years and the impact inflation has because inflation erodes our purchasing power over time.

So, we see down here the $100,000 spending goal that increases with inflation during that first 10 years. If we want to maintain today’s purchasing power of $100,000, again, as time goes on, we need to pull a little bit more out.

This is a very modest inflation assumption we have in here at 2.25%. We can tinker with that inflation rate, but that’s not what today’s video is about. This drop in spending, so what the overall orange line is, is their spending goal.

This is what we went through in the beginning in the goal section. We see the drop, $90,000 is the bottom line here. OK, so even though it is reducing, if you remember, from $100,000 to $75,0000 in today’s dollars, but ten years down the road, that $75,000 spending goal, it’s actually

about $93,000. So, we need to still pull out more than that $75,000, to keep up with inflation in this example, and then growing that at 2.25%, we see what happens. We need to pull out a large sum of money to keep up with inflation.

If I turn Social Security on here, so the dark blue represents the portion of the overall spending goal that Social Security covers. I’m going to take off the orange line, turn on what the shortfall is. So from a retirement planning perspective, one of the first things we would want to do if we were building an income plan

for this couple, we want to come in here and we want to start to identify the gaps. OK, where are we going to take income from? And how much do we need? How much do we need is the first question.

Then where do we take it from? But in this example, this couple, they only have one place to take it from because it’s all in the IRA. 90% of it. But we see these big massive shortfalls in the beginning.

So this is the problem. And taking Social Security earlier does not improve the problem. It actually makes it worse. So a very clear illustration of the challenge for this particular scenario. Of course, we’re going to go back and look.

And if they work to 62 or 64, we’re going to look at tinkering with these spending goals and what that does to the probabilities. But under this scenario, just because you have a million dollars, it doesn’t mean that, yes, you can absolutely retire unless you want to spend $30,000-$40,000 a year, then

, yeah, you can probably make that work. Still not 100%, but a high degree of probability. If you’ve accumulated $1,000,000, I can virtually guarantee you you don’t want to live on $30,000 a year. OK, this is one of my favorite parts of the financial planning software.

And I like it because it allows us to tinker with some of these numbers. So, it’s a goals based planning deal. And we see the basic living expenses of $75,000, but the $25,000 here in the Go Go spending years.

So the first thing I’m going to do is, OK, no, Go Go spending. We don’t like the $25,000 number, but we really want to retire. Sick of working, sick of my boss, sick of my coworkers, sick of my job.

Can I do it? Well, we can do it with a greater degree of probability than before because we have eliminated that. So the question then becomes $75,000, can we live on that? This does include Social Security spending, by the way.

So it’s not, we need to take $75,000 out of the portfolio for all the years. It’s total spending inclusive of Social Security. 73 is not a horrible number. I’d like to see it higher, 80, 85, 90, but 73 just simply warrants a more careful monitoring and in paying closer attention to the portfolio progress.

But as well as the trend that we’re on here, I’d like to see this 6 months, 12 months, 2 years, 3 years later. Worst case scenario, staying flat, but ideally increasing. OK, so let’s say we wanted to spend, let’s make it 10, $9,000 those first 10 years, probably not a good number for most people.

. But let’s say we do this. We want to do, let’s say $60,000. Let’s say we do $60,000 as the base spending goal, OK, forever. And then the first 10 years, I still have it left at $9,000.

Well, guess what? That brings us up to 99%. That’s obviously very doable. So all the parameters that we’ve looked at so far, this is probably a more realistic spending threshold for the assets accumulated in that type of account for people this age and life expectancy is of age 90.

I want to look at just a couple more tinkerings here, a couple more variations to help you understand portfolio performance. We’re gonna look at a more conservative versus more aggressive portfolio. And I also want to reduce the life expectancy down a little bit in one of those examples.

OK. What we have here is called a sensitivity analysis. Essentially, we’re going to play with different variables and see how sensitive the plan is to those adjustments. Right now, we have the current scenario. This will not change. This will be our baseline.

We have one scenario here where we’re going to alter with one variable, and then a third one, technically a second one, where we’re going to alter a different variable and we’re going to compare these two to one another based on those variables that we’ve changed.

OK. First thing I want to look at is right now in the 60-40 portfolio, the composite return is about 5.1%, 5%. This would be net of all fees, which is a pretty reasonable expectation if you’re going to put 40 percent of your money in bonds, because we really can’t expect them to return to

much of this type of environment. So, first one, I’m going to go straight equity growth. So this is going to be a very aggressive type portfolio in this one I’m going to say, you know what, I can’t take the risk in this hypothetical example.

I want to make it the most conservative, because a lot of times what I’ll see is either one of these scenarios, if someone knows they need to make a large distribution from the portfolio mentally, what we say sometimes is, Troy, I really need to take a lot of risk here because I don’t have a lot of time

, but I really need to catch up because I want to spend or have this quality of lifestyle, and I don’t think I’ve saved enough. So the first reaction may be to take extra risk. The second scenario is the other end of that spectrum where Troy, I just don’t I can’t afford to take the risk.

I can’t stand to see my accounts go down. I want to preserve what I have, turn Social Security on, just kind of close my eyes and hope everything works. So what’s the difference between the two? How do they impact the baseline scenario or how do they compare?

OK, so this is the more conservative one. It drops to 0. And that’s because if we’re not going to, this is going to be something like a seventy 75%-85% bond portfolio. It’s just simply not going to work.

Your returns will be negative when you take into account inflation and taxes. Plain and simple. Probabilities actually go up in this model for being more aggressive. But the likelihood, if we looked at all the simulations of this one floundering and failing much more quickly in some of those failures, it’s going to be pretty dramatic.

But if you ran a thousand simulations out, this one, being more aggressive theoretically would be the better route to take if you didn’t want to go back to work, have a part time job or reduce your spending. Trust me, it does not work like this all the time.

A lot of times when we do the sensitivity analysis, if I’m on the fence or a client’s on the fence with, how should we invest a portfolio, how are we going to manage risk, what is our income tax strategy?

Looking at the sensitivity analysis here can really help provide a little bit of additional input and through conversation with you. Help us decide what the best path is, at least in the short term, and then we’ll do it again moving forward to see how things have changed and if we make any adjustments based on that new data

. I’m going to bring these back to where they were. So basically, I’m bringing these back to isolate those variables again. So all three should be the same. Now I want to alter the life expectancy. So again, the portfolio is net of fees, 5.5%-5%, which is pretty standard for a 60-40 portfolio.

I’m going to change Tim’s life expectancy to 82, Jane’s to 85. And the first sensitivity analysis, this one I’m going to change is to 77 and we’ll leave hers at 90. Calculate that out. So the only variable here is life expectancy that’s altered.

OK, so both of these are higher simply because if we aren’t living as long, we don’t need as much money to support our lifestyle so the probabilities increase. This one is actually higher. It’s too high. Oh, Jane, when she’s alone & retired, so meaning once Tim is gone and Jane’s alone, I needed to change this.

So typically with one spouse will do a 20% reduction in the cost of living because supporting 1 spouse is less than 2. So, just for simplicity purposes here, I’m going to bring it down by $15,000 and.

we run those scenarios because if Tim passes away at 77. That’s 13 years that Jane has supporting only one spouse. Taxation wise, she moves into the single brackets. Only the year that Tim dies does she get to stay in the married filing jointly.

So we’ve done several videos, but one recent video on the impact of this. I think it was the “4 things people aren’t telling you about retirement”. And one of them is when one spouse predeceases the other, you move into that single bracket and can be a pretty significant increase in taxes and reduction in income.

A double whammy. In that scenario. OK, so in this scenario, it’s the opposite here. So it’s exactly what I was just talking about, can be a double whammy. So he predeceases her much sooner than his average life expectancy and she lives till 90 , doesn’t look good.

It’s less than the base model. To make one quick correction here, I forgot to input the sixty thousand on scenario 2 here. 31% and 22%. We go through these scenarios with our clients on an ongoing basis just to tinker, to look at, to understand, to provide the analysis, the data, and help you make better

decisions. If this is similar to your situation, I hope you got a lot of value from it and you understand some of the context that we retirement planners that we deal with on a daily basis when doing analysis and looking at your individual situation.

Maybe this wasn’t close to you, but you like the appeal and the ability to go through and do this type of analysis. So if you are looking for a partner to help you with retirement, if you’re looking to make a change, feel free to reach out to us and set up an appointment to have a conversation.

If you just want to keep watching the videos and continue to learn on your own time, that’s excellent as well. As always, I appreciate you watching the channel. Make sure to hit that subscribe button. Hit that thumbs up.

And if you have any comments, put them down below and I’ll try to respond when I can. Thank you very much.

 

[a]I am here 11:56:24
[b]Ok, finished the transcription