I’m 60 With $1 Million. How Much Can I Expect To Spend In Retirement?

By Troy Sharpe, CFP®, CPWA®, CTS®
Reviewed by Nathan Kattner
Last Updated: 04/02/2024

 

You’re 60 years old and have saved $1 million for retirement. And you have some major questions:

Can you retire?
How much can you spend?
How long will your money last?
How do you pay less tax?
If something happens to you, will your family be okay?

I previously did a video with this same title covering these very issues, but I did want to cover this in article format as well for those who prefer to read or see things in black and white.

I will be addressing the aforementioned questions and looking at things such as contingency planning, Social Security, taxes, income, and more.

These are things that collectively underpin what I call the “light bulb” moment. The moment you realize all of the decisions that you have to make and how they all interact with one another when you transition to retirement.

Introduction

I’m Troy Sharpe, CFP®, CPWA®, CTS®, Founder and CEO of Oak Harvest Financial Group and host of the Retirement Income Show.

Maybe you are close to retirement or perhaps you retired a few years ago. Either way, you find yourself reading this article or even watching the associated video. Today we are going to focus on the “light bulb moment” I just mentioned.

To start, I want to talk about what that is. Briefly, it’s the moment when you realize you’re leaving the accumulation phase and you’re going into the distribution phase.

All of a sudden you shift from the “saving, saving, saving” mindset to the realization, “Oh my goodness, now I have to spend everything that I’ve saved my entire life for.”

In that moment you are confronted with a slew of questions and thoughts. What if the market goes down? How much income should I take out of my portfolio? Wherever I take my income from will impact how much tax I pay – and not just this year but going forward. How do all of these decisions impact me over the next 20 to 30 years?

All of a sudden you feel like you’re on an island by yourself and you start to understand how critical these decisions that you have to make really are. That’s the “light bulb” moment.

My purpose today is to help you start to understand how all these variables interact with one another. How making these decisions, coupled with other decisions that you have to make in retirement, all come together.

It’s important to recognize that the decisions you make after encountering the “light bulb moment” will provide security that will last throughout your retirement. Or the opposite could happen, where your decisions potentially jeopardize your ability to maintain your standard of living in the future.

No matter where you stand in terms of pre- or post-retirement, the information covered today should definitely be of interest and prove helpful.

The scenario

Let’s start by creating a hypothetical couple and laying some of the parameters of the scenario.

We have a husband and wife, John and Jane, respectively, both who are 60 years old. They’ve saved $1 million and are tired of sitting in traffic and going to work every day. Their primary question is, “Can we retire now?”

The next question is typically, “If we do retire, how much money can we spend?” But it’s not just a matter of “if” they can spend that money. They really want to know if they can maintain and sustain their standard of living. Will they be able to keep up with inflation. Have enough later in life to pay for medical expenses and ensure they don’t run out of money.

Go-go Slow-go No-go

We are going to look at what we call a go-go, slow-go, and no-go income plan for our couple. This is a very common income plan that we develop for people.

The go-go period is the first 10 years from 60 to 70. During that period we’re going to look at taking $100,000 out each year. The slow-go years are from 71 to 78 and they will be taking $75,000 out in that period. Finally, the no-go years are from 79 and onward, where they will take out $50,000 annually until the end of life.

For this scenario both the husband and wife will be living until age 90, but we can look at some different life expectancies as well. We’ll also look at taking Social Security at different ages and whether or not to do a Roth conversion.

We also look at some contingencies. What happens if the market crashes? What happens if either of them ends up with long-term care (LTC) needs? What happens if one spouse predeceases the other?

On that last subject, if you’ve seen my video (Four Things People Don’t Tell You About Retirement), one of the biggest planning mistakes, or at least things that we don’t think about when it comes to retirement planning, is if one spouse predeceases the other spouse.

This is a big issue financially, as the remaining spouse will lose a Social Security check. They will also go  from the “married filing jointly” tax bracket into the “single” bracket. Oftentimes, this can create a big increase in taxes as well as a loss of income with that Social Security check going away.

There are also many issues and contingences we will look at. That said, I have sat with thousands of families who have faced all kinds of issues and there’s no way to cover them all.

My goal here is to simply get you thinking – to start to connect those dots and understand that decisions have to be made, and to recognize that there are consequences that come with these decisions.

It’s important to point out that oftentimes those consequences won’t be realized until 10, 15, 20 years down the road.

Income plan

So, as we are creating the income plan we need to recognize typical spending patterns. In the go-go years you’re spending more. During the slow-go years you’re slowing down, but you’re still going out to dinner and doing things. And in the no-go years you’re really not doing much or going anywhere – you’re spending a lot of time at home.

In our example the base living expense number is $50k. In the go-go period we add $50,000 as a spending goal on top of that base expense number, so we have $100k per year. Keep in mind that will inflate due to inflation.

After that period, the slow-go years start, with a $25,000 per year spending goal added on top of the base expenses of $50,000, equating to $75,000 annually. Again, that figure will inflate due to inflation.

In the remaining no-go period we use their base expenses of $50k for the plan. And the same thing will occur with our numbers due to inflation.

Inflation

We’re all aware of inflation so it’s important to point out that these figures will inflate. Meaning that in today’s dollars this is what we want to be spending, but recognizing inflation erodes our purchasing power over time.

If we want to spend $100,000 dollars a year, we need to be pulling a little bit more out each year to maintain our purchasing power in today’s dollars. For sake of planning in this example, we use a 2.25-percent inflation rate. Granted, I know inflation in the economy is currently higher than that, but we don’t anticipate that inflation near the current level will last for the next 20 to 30 years.

In fact, if we look at the 10-year Treasury rate (keep in mind that the bond market is a great soothsayer of what inflation is expected to be in the future), it is right now about 4.3 percent.

Income sources

Regarding planning, income is an important issue we look at. And Social Security is a big issue within that. For this scenario we’re first looking at them taking it at 67. John’s is $36,000 a year, while Jane’s is $31,715.

Regarding their investment accounts, Jane’s 401(k) has $250,000, John’s retirement account (IRA) has $700,000 and they have $50,000 in additional savings.

Keep in mind that most of this money is in what’s called qualified retirement accounts. That means they got a tax deduction for putting money into those accounts, but in retirement they will have to pay taxes every single time they need money from those same accounts.

Given they only have $50,000 in after-tax savings, every time they take money from their qualified accounts they’re going to have to pay income taxes.

Regarding their primary income sources, I would have liked to see a more tax diversified structure leading into retirement, meaning we’re saving more in an after-tax bucket. Ideally, they would have some money inside a Roth IRA. That said, their situation isn’t that bad.

If you have less than $2 or $3 million inside that 401(k), that becomes a problem for taxes down the road. Where they are at is actually fine. I’m good with this money being in the qualified buckets as is, but if it starts to get a significant amount higher we’d definitely want more tax diversification.

Simulations

Now we’re going to look at a Monte Carlo simulation. This is basically a stress test of John and Jane’s retirement portfolio. We want to see what affect different scenarios would have on their retirement savings and determine the probability rate that they would be able to maintain their standard of living throughout retirement and not run out of money before passing.

Examples of the scenarios we will run include things like one spouse passing sooner than expected, the two starting Social Security sooner versus later, their portfolio experiencing different annual market gains or losses, what happens if one delays retirement, the need for LTC, and more.

The Monte Carlo simulation actually runs 1,000 different scenarios (think tests) of various market returns and gives us an overall number representing the likelihood they will have money left when they both pass.

We’re going to run our simulations based on key assumptions:

• John and Jane are both 60 and hoping to retire at age 60
• Spending $100,000 from age 60 to 70
• $75,000 for the next eight years
• Spending $50,000 indefinitely thereafter
• Plan expiration for both of them at age 90
• Annualized inflation rate of 2.25-percent

In running the simulations there are a couple things to point out. First, based on our base assumptions the probability rate comes in at 80-percent.

That’s not a horrible number. It’s much better than 50- or 60-percent for sure, but it’s not where we’d prefer at 90-, 95- or 99-percent.

One big thing I want to note here is what that means. Each line on the chart represents a single simulation. In this overall simulation, if you were to retire 1,000 times, in about 800 of them you would be okay. You should have money left when you pass.

In sampling some of the green lines representing individual simulations that resulted in positive outcomes, we find that one shows a result of having a little over $500,000 left. Others selected show positive balances of $443,000, $873,000, and a really good one of over $1.7 million remaining, respectively.

But there are 20 percent of the simulations that forecast a situation where you would run out of money before passing.

What is important to recognize with virtually all these simulations is the fact the assets are spent down in the beginning. This puts us into a potentially precarious position in these beginning years where the accounts are going down because we’re spending more.

Remember that this couple is hypothetically retiring at age 60. They can’t turn Social Security on yet. They have to pull from their retirement accounts. They’re going to have to pay taxes on those withdrawals. We actually have to pull out more than $100k in this spending goal scenario. We’re very vulnerable to the “sequence of returns risk.”

If you’re new to Oak Harvest or our YouTube channel, the sequence of returns risk is the combination of taking income out of your portfolio when your also experiencing market losses.

If you take out 5-percent and the market goes down 15-percent in the same year, you’re down 20-percent. Your $1 million goes to $800,000.

To maintain that same level of income the following year you have to take $100,000 out, but you only have $800,000 left. It’s a higher percentage than planned that you must take out.

That’s the sequence of returns risk. You lose money in the first few years and you significantly reduce the probability of success in retirement.

Roth conversion

Now we want to talk a bit about Roth conversions. Because this couple has all of their money inside retirement accounts, there’s really no excess cash outside of those besides that $50,000 in savings with which to pay the taxes on any Roth conversion.

Additionally, because they’re retiring younger they’re forced to withdraw more money from the portfolio. In this particular situation, I probably would not advise any Roth conversions even though all their money is inside those tax-infested retirement accounts.

The reason?

If we do a conversion it would have to come out of the 401(k) or the IRA. And we’d have to take more out than necessarily wanted because we would have to pay the government taxes on the conversion. This compounds the issue. And it leaves us less to earn interest on. Fact is they are already in a vulnerable position if the market goes down.

Even though I probably wouldn’t recommend a conversion in this scenario, if we were to have a really good year in the markets next year and the couple following, that might change our thinking. Where the accounts go up $200k or $300k, and we’re sitting at $1.5 million or higher.

John and Jane are a little bit older at that point, so it’s very possibly we’re going to relook at that. We’re going to relook at it every year regardless, but that may put us into a position where it makes more sense to do a Roth conversion at that point.

Another reason why I wouldn’t be worried about Roth conversions for this particular couple is the relatively tame taxes.

Even though you have $1 million in qualified accounts in this example, one of the big reasons you consider Roth conversions is because you have so much in the retirement accounts that once you get to required minimum distribution age (RMD), which is now 73 (if you reach age 72 after Dec. 31, 2022), you’re forced to start taking money out of that account and pay taxes on the distribution.

Doing so can put you into a very high-income tax bracket – possibly much higher than you were in during the working years.

If you also have a pension, rental income, or significant sources of income from other places, having a lot of money inside retirement accounts can put you into very high tax brackets when RMD starts.

It’s a little under 4-percent that you must distribute in the first year, but it goes up to 5-, 6-, 7-, 8-, 9-, 10-, 11-percent as you age up throughout your seventies, eighties and into your nineties.

In this couple’s case, their taxes aren’t huge – they’re not killer taxes.

That said, we have some pending legislation out there that could affect tax code. For now we are looking at current tax code. If they keep their word in Congress and don’t raise taxes on people in this income range, taxes shouldn’t be a big deal for this family down the road. We will have to see how that extrapolates out into the future to see if their taxes remain reasonable.

This isn’t anything as a financial advisor and retirement planner that I’m ultra concerned about. I’d much rather keep the money in the account earning interest instead of writing checks for conversions and sending it to the government. They are already in a vulnerable position retiring young.

Identify shortfalls

At this point in the process we would want to identify shortfalls. To do so we would look at a graphical representation of the spending goal compared to the Social Security income and identify the shortfall.

This is a very important step when we’re income planning. We have to not only identify the shortfall, but we have to identify what is the best financial tool to generate that cash flow and determine which tax bucket it should come from, such as your IRAs or your non-IRAs.

Taking a look at the inflation-adjusted go-go, slow-go, no-go spending income plan, we see it starts at $100,000 in income taken each year. Because of inflation it gets up to $120k in distributions during the go-go period.

Then during the slow-go years starting at age 71 the income level taken out of their accounts drops. We reduce to $25k plus the baseline expenses of $50k for a total distribution of $75k annually. But just as during the go-go years that figure increases due to inflation.

Finally, during the no-go years the income taken from their accounts decreases considerably because they are slowing down and not really going anywhere or spending outside of healthcare.

Early trouble

Okay, till now we have focused on the couple’s qualified savings. So now we will look at Social Security, which is their only real source of secure income.

As we stated previously, Social Security won’t start until age 67 for both spouses. It does represent a pretty good chunk of their income, especially in the outer range beyond their go-go years. But they’re not taking it for six to seven years in this scenario.

One of the big challenges here is the shortfalls in the beginning. This is why they get into a vulnerable position early on in their plan.

In order to spend more in the go-go years and retire at 60, they have to pull more money out of the portfolio. We’re pulling out more money earlier, leaving them with a pretty substantial shortfall.

Given the situation, typically what we will see in a case like this (70- to 80-percent of the time) is for the family to say “Troy, we are just going to take Social Security sooner.”

Theoretically, that makes sense because you’re going to take Social Security, which is going to reduce the need for portfolio withdrawals. The truth of the matter is for some people that is the right strategy. For others, it’s not.

There’s so many different pieces interacting together that it really requires this type of in-depth analysis to be able to make an informed decision. Before fully delving into the SS analysis it was important to demonstrate what I’m talking about and show what some of the shortfalls are, especially in the early years.

As we get in their Social Security analysis we’re going to look at cumulative income received if they both live all the way to our projected life expectancy. We also want to look (comparatively speaking) at what the annual income numbers received will be if they take it early versus at full retirement age.

Social Security analysis

First up, there’s no need in this example to wait until age 70 because they’re retiring early and they only have a million dollars. They are definitely going to take it at age 62 or 67, or somewhere in between.

Here are the probabilities. I don’t see this often, but we find they have an 82-pecent probability of success whether they start Social Security at age 62 or 67. If they wait and take it at 70, even though they would receive more in Social Security, their probability of success drops to 58-percnt.

What that means is that 58-percent of the time they are projected to still have money from their savings when they pass, but 42-percent of the time they would run out of money and only be left with Social Security later in life. That’s not a good thing.

Looking at both annual and cumulative income received if taking Social Security at 62 versus 67, John would receive $25,200 versus $36,000 annually. Jane would receive $22,200 versus $31,715 annually.

For the two combined that’s $1.374 million received from Social Security from 62 until 90. And it’s $1.625 million received from Social Security from age 67 until 90, assuming they both make it to full life expectancy.

Now there are a couple of things to consider at this point.

First, if one spouse predeceases the other unexpectedly, then the smallest Social Security check goes away and the family is left with the larger of the two.

We need to consider a strategy for this scenario. If one spouse is unhealthy or not expected to live as long, or one spouse is expected to live much longer, it may make sense to do some sort of combination strategy here.

For example, the highest-earning spouse with the largest Social Security defers as long as possible. If he or she does predecease the other then the higher Social Security check will stay in the family.

The second thing we consider is what’s happening in the “real-world,” where we’re sitting down with you to review. We discuss how the portfolio is doing. We consider the forecast for the economy. Ask about your entire situation. What are your needs, goals and dreams? What are you actually spending?

We track this over time. Keep in mind that you will always have access to your plan digitally. We’ll sit down and talk to you about it anytime you want.

Speaking of our plan, we have built a proprietary planning model customized specifically to your needs. We call this our Retirement Success Plan. Stop right now and check this out before continuing – it’s that important.

Continuing our analysis, in the real world if the portfolio is up 30- to 40-percent, let’s say over a relatively short period of time, and we hit age 62, and you’re not very aggressive, we might adjust.

For example, let’s say we felt good about things and decided to tilt it a little bit more aggressively in the beginning years of retirement. We might consider deferring Social Security because that’s guaranteed lifetime income and there would be guaranteed growth to that payment if we do delay.

Let’s instead take some of those profits we’ve gained out of the portfolio, reducing your equity exposure and let Social Security defer one more year.

Real world planning and decisions

An important point to make here is the fact that in the real world it’s not just about the math. It’s about so many other things. Once again, this is the light bulb moment.

Once you start to realize all the decisions that you have to make and all of the variables out there, you realize we can never make 100-percent of the best decisions 100-percent of the time.

We have to make the best decision as frequently as we can, looking at all of these different variables. This often requires having a conversation and talking it out.

We have to remember that retirement planning, financial markets, taxes, income and all the rest is not necessarily always black and white. There’s a lot of grey area.

This is why working with someone who understands these nuances can help provide better information so you can make a more intelligent decision.

Play zone

Now we’re going to look at what is called the play zone. Our clients love this, especially if they’re not retired yet. They can actually log in and start to move a slider around and see the impact of working one more year or retiring one year sooner.

Let’s say John says, “You know what, I don’t hate my job and I don’t really know what I would do if I retire. I think I’ll probably go to 62.”

With all these same variables that we’ve looked at, his success probability now jumps from 80- to 82-percent up to 95- to 96-percent. That’s pretty substantial.

Now let’s say John absolutely doesn’t want to work anymore. He’s fed up, hates his boss, doesn’t like the commute…he’s just tired. He sees the 82-percent probability figure and decides he’s not comfortable with that. “I’d like that to be a little bit higher.”

So he changes income in the go-go years of the plan, targeting spending at $95,000 for the first years versus the $100k. That jumps his probability of success up to 90-percent.

What if we then couple that with reducing our slow-go spending some? Now he would be up to 95-percent probability. At that point John’s probably feeling pretty good about pulling the cord and retiring.

For him to be able to make that decision for himself, all we had to do was connect the couple with what their spending meant for their portfolio longevity.

“Hey, if we just plan on spending somewhere between that $90,000 to $95,000 range, instead of $100,000 in the early years, and a small adjustment in the slow go years, you’re going to end up with a much more comfortable probability of retirement success.”

Connecting with your money

In the real world we tend to find that people spend more money in the first couple of years of retirement. This is typical. But then it will also typically reduce. No one is going to spend exactly $100,000 a year for the next 10 years.

This is why it’s so important to be connected to your money, to do reviews, to have a relationship with a financial advisor who understands retirement. We’re going to do this analysis every single year when we have conversations with you. This is what our job entails.

The market goes down we may have to spend less. The market does really, really well, so we can spend more. All of these pieces are connected.

What are you afraid of?

Now we’re going to look at a really cool feature that deals with negative issues – “What are you afraid of?”

Most of our clients simply don’t want to see their portfolio go through many of these scenarios throughout retirement. That’s understandable. They want steady, predictable streams of income coming from multiple places, with increasing income sources.

But things can happen. The market crashes and they don’t want to lose 40- to 50-percent of their money. They’re also concerned about taxes and inflation, and long-term care. Overall, this module looks at what you fear.

So, let’s say we were wrong about inflation. The bond market, as I said earlier, is telling us that inflation long-term is not a concern. That’s what the bond market’s telling us, but Congress is spending a whole lot of money.

The Federal Reserve has printed trillions and trillions and trillions of dollars. Maybe we’re wrong, maybe the bond market’s wrong. What happens to this plan if inflation goes up to 3.25-percent from 2.25-percent. This is the problem for this particular plan. (Insert the clip at 23:50 from the video)

The success probability drops to 55-percent. Keep in mind that what we did earlier in the “play zone,” such as reduced spending or working a bit longer, doesn’t affect this. We’re still at that 82-percent probability of the base case.

Instead this assumes that inflation is 3.25-percent now and remains that way indefinitely until plan expiration. I share this to show the power of inflation and how that can destroy the purchasing power and reduce the probability of success for your retirement.

Here’s another “What are you afraid of” scenario. We hear this a lot. What if Social Security gets cut? Let’s say your benefits get reduced by 15-percent. It drops to 62-percent success probability in this particular example.

Now, I do not believe your Social Security is going to be reduced. I guess it is possible if you are in the so-called means-tested category that Congress may come up with in the future.

Let’s say if you have X amount of dollars, or if you have this amount of income, maybe they’ll say you don’t need your Social Security.

With some of the things that we have pending in this tax legislation right now and the reconciliation bill, I wouldn’t doubt it. Honestly, if that’s a consideration down the road, I would assume it’s not going to impact the majority of people in retirement.

This is just my gut – most of you probably do not have to worry about Social Security cuts, but it’s something that could happen.

Now we will look at “low returns” scenario. This is the biggest issue most people are in actual jeopardy of in retirement, in my opinion.

There is a line of demarcation. Once you cross over from the accumulation phase and you enter the distribution phase in the retirement years, we get more sensitive to volatility. This is based on my experience working with thousands of families over the course of my career.

The average investor tends to make bad decisions with their portfolio. Selling at the wrong time can cause your portfolio to lose 10-, 15-, 20-percent of its value that it otherwise would not have.

Extrapolated out over many years we could very easily see a reduction in average returns of 1-percent. This would result in a drop to 73-percent in terms of success probability in retirement.

One of the worst things we can do is allow the news and noise that’s out there to dictate what we do with our investment portfolio. We don’t have crystal balls and there are so many emotions tied into investing.

But If you take your money out every time the market drops 5-percent because you’re scared of it going down 30-percent, you’re making mistakes. You’re costing yourself money long-term and you probably shouldn’t be in stocks at all.

Another common scenario is one spouse passing earlier than expected and the other lives longer. Let’s say John dies at 79, but Jane lives to 94. It’s not good. This would drop the probability of success to 53-percent. That’s largely due to one Social Security check going away.

Keep in mind that in the real world we would adjust spending for Jane. This would keep her connected to the portfolio, making sure she understands how much she could spend. Being connected is the big thing in that particular moment.

Let’s look at long-term care given that is often an issue for some in retirement. These expenses are a big concern for our clients. So let’s stress-test for home health care or LTC in a facility of some sort. Let’s say John passes away naturally, so there’s no need for long-term care.

But with Jane she does have a concern. So at age 85 we adjust and say she will need $84,000 a year or $7,000 a month for LTC. The success probability drops to 66-percent.

All of these are examples of what we refer to as sensitivity analysis or contingency tests to determine how some of these variables might impact a retirement plan. We’re just looking throughout the plan so we can demonstrate how any single or combination of scenarios might impact the couple. It’s better to know and be able to adjust.

Conclusion

In closing, it’s important to note that everything that we do in our videos and directly with clients in terms of analysis revolve around a snapshot in time.

Next year everything’s going to look a little bit different. Your portfolios will have changed. You will have spent different levels. Even emotional issues may be different as far as your goals and what you’re trying to accomplish, your belief in the markets, et. cetera.

Bottom line, we have to stay connected. This is what retirement planning is about. It’s not just, “Here’s your plan. See you later. Manage the investments.” It’s not simply a retirement plan. That’s not helpful. That’s not an approach that anyone should do.

At Oak Harvest Financial Group we can be here for you to answers your retirement and related questions, just as those posed in this article and the associated video. You should do yourself a favor and watch the entire video here.

If you are currently utilizing a retirement plan (either your own or one created for you) our team would be happy to review it to determine if it is capable of really meeting your goals.

Or we can assist you by creating a retirement plan capable of helping you to retire with confidence. We can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, legacy, and more, customized to your family’s specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!