You don’t want to run out of money. Sometimes you lay awake fearful of becoming a greeter at Walmart or possibly a food sampler at Costco. Conversely, you also don’t want to be so afraid of running out of money that you don’t spend anything that you’ve accumulated through all those years of hard work. The question is, how much can you spend? We’re going to look at a few different spending options. We’re going to isolate one of those options to focus on tax planning. Also, we’re going to look at the impact of Social Security and overall how much money is left in different situations or circumstances. We’re going to tie all this together with the goal of helping you understand how much you can spend if you save $2 million and not be afraid of running out of money.
Three Different Retirement Spending Goals We Usually See
From my experience of sitting with thousands of people, there are typically three different goals that we see when it comes to how much do we spend and how much is left over. The first one is someone who really doesn’t have a lot of needs, they live very modestly, and due to accumulating a couple of million dollars, there’s an expectation that there will be a large sum of money at the end. We’re going to explore that scenario.
The middle one, which is probably the most common, is someone who wants to enjoy their money. They want to have a go-go spending plan. They want to spend more, that is, in maybe the first 10 years or 15 years of retirement. Then bring it down a little bit later. Make sure that you’re okay, that you’re not going to run out, and you can spend money where you want without necessarily having to check prices.
The third one is you want to die with no money left whatsoever. Nothing to the kids, nothing to charity. The kids don’t deserve it, and you just want to spend it. You’ve earned it. You’ve worked hard. It’s your money. You want to spend it. We’re going to explore some of the decision-making and the impact of that decision-making around all three of those scenarios. If you stick around until the end of this video, we’re going to talk about one possible thing that could wipe out all three of those situations, no matter how careful you are.
Potential Outcomes of DIY Retirement Planning
I was playing golf a couple of weeks ago, and I was having a conversation after the round was over with someone who I just met. We started the conversation into money, finance, and retirement. He told me he’s going it alone. He’s saved up a bunch of money for retirement, and he’s doing his own investments. I asked him what he’s doing for taxes and income planning. Of course, those were abstract-type concepts. He just, like most people who don’t think about retirement and all the decision-making that we talk about on this channel, just thought it was about putting 60% in stocks, 40% in bonds.
For some reason, I started thinking about just going into a river. Instead of having a tour guide or someone that’s traveled the river and knows what’s up ahead, he was essentially getting into the river, this is what I was thinking, without having any understanding of the twists and the turns, the dips in the river, the possible rapids, the hidden rocks. Even if there’s maybe Niagara Falls at the end of the river, and he’s just cruising along and has no idea what’s coming, or the decisions that he’s making or how he’s prepared will help him navigate whatever comes his way.
I don’t know why I started thinking about this, but the metaphor really started to make sense. Whereas, working with someone who’s been there and done that is similar to having a tour guide on the river. Someone who’s traveled that river hundreds of times, thousands of times. They know where the pitfalls are, they know where the rapids are, they know how to take you down the smooth route, or if you want a little bit of an adventure, a little bit more of an experience, they can take you that way. Most importantly, they know that there’s not Niagara Falls at the end, where if you just keep going, not paying attention, you’re going to fall off and possibly get into some trouble.
Basic Parameters For This Planning Exercise
All right, as usual, we’re going to start with the basic parameters of what we’re looking at here. We have a husband and wife, 60 years old, about to retire. They want to retire in just a couple of months. $2 million inside the IRA. One has Social Security of $2,000 at FRA, full retirement age, which would be age 67. The other has Social Security of $3,000 at full retirement age. They are thinking about one spouse taking it sooner because since they’re retiring around 60, like most people, they’re like, “Hey, should I take my Social Security? I think that’s a good idea. At least one of us, maybe.”
In this scenario, we’re going to assume they’re taking their Social Security at 62, and this is a permanent reduction, so it’s not $2,000 a month that they will receive for this one Social Security. It reduces down to $1,425. The other spouse is going to wait until age 67 and then take the full retirement age benefit. We’re doing life expectancy out to age 95. This way, within the plan, if you die at 88, you’re still going to be okay.
1st Scenario: $84,000/year + Additional $50,000 for First 15 Years
We’re going to start with the middle scenario here because this is the most common. This is the one that we see most often whenever we’re sitting with people in your situation. This is someone who accumulated $2 million. Their base living expenses are $84,000, so that is permanent. That is going to cover just your base living expenses, taxes, insurance, going out to eat, food, et cetera. During the first 15 years of retirement, they actually want to spend an additional $50,000 per year. For 15 years, this is going to get them up to age 75 and
by then they plan on slowing down a little bit. The $84,000 will be increasing with inflation over time. It will be a higher number down in 15 years, but the go-go spending will go away. I have an additional spending goal input, but we’re leaving that at zero now. If we have time, I may come back and add a little bit more to it. This is the base scenario that we’re looking at. Someone who has accumulated some money, they want to enjoy it, they want to not be afraid of running out of money, but also they aren’t so afraid of running out of money that they’re going to not enjoy what they’ve accumulated.
Now, remember, I have one spouse taking Social Security at 62, the other one waiting until age 67. We just went through the spending goals, $2 million in assets. They are all IRA assets, so there is going to be a tax problem here. Based on everything we’ve input so far, what does it come back as? It comes back as 64%.
Now, we’re going to look at the range of possible outcomes because 64%, while not ideal, it’s not necessarily the nail in the coffin. What it means is 640 out of 1,000 simulations, when looking at different performance within the stock market and bond market, the returns that you realize inside your portfolio, combined with when we’re taking Social Security and the distributions needed to keep up with inflation and maintain your standard of living, we look at the 99th percentile down here to the first percentile over the course of your retirement.
Then we have the future dollars that are in your plan, in your accounts, versus what those future dollars are worth in today’s value. This is a very important concept that I believe most people overlook in retirement.
Now, we see at 64%, right over the median here, of course, is where we’re going to exhaust those funds. At the median, the 50th percentile or 500th simulation, we actually have $1.2 million left in future dollars inside the plan, but that will only purchase about a half million dollars of goods and services in today’s dollars.
When you think about retirement planning, you think about projecting out your account balance is, one, most people don’t take into consideration all the variables. The taxes is the biggest one that people tend to make mistakes with because the tax code is tremendously complex, and you can’t just do 28%, or 25%, or 32%. It’s very inaccurate.
One of the biggest mistakes is someone saying, “Hey, you know what? I’ve done all these calculations, and it shows that even if I spend this, I’m going to have $600,000 in 30 years. That is good. I am set.” Well, when you discount that $600,000 to the present value, meaning this is how much your $600,000 will actually pay for in the future based on today’s dollars, and you see that’s like $100,000 to $150,000, what happens with health care? What happens with maybe if taxes go up? That is not a large margin of error there. Just keep that in mind, future value of your account and what it actually will pay for in terms of today’s purchasing power.
The first adjustment I want to look at here is Social Security because that’s kind of the low-hanging fruit. I get it. You’re retired at 60. You want to save your money and your account balances because that makes you feel more secure, makes you feel like, “Hey, if I have this money, I’m going to be okay.” The truth is, there aren’t many things more valuable in retirement than a secure guaranteed stream of income, one that will be there for as long as you are alive and your spouse.
We’re going to look at this a little bit more closely when we get to the tax analysis, comparing the asset balance versus the Social Security income. What I’ve done is I’ve went over here and changed it to get to 74% probability of success. We went from 64% with the original Social Security strategy. All we’ve done here is change the Social Security and we get 10% higher probability. That’s 100 scenarios out of 1,000 that, in this hypothetical, they don’t pass away broke.
A couple of things I want to point out. One, the Social Security, both of them at 70, 44, and 29. That’s about $74,000 of income from age 70 until 95. The break-even point here, comparatively speaking, is 78. If you think you’re going to live to around 78, you will receive more money from Social Security if you wait until then. Now, there’s an opportunity cost involved, and we would need to do some advanced calculations to look at the true break-even. Still, it’s a good high-level analysis.
Now, if we took it at 62, it’s 58. If both spouses take it at 62. This is one of the big mistakes that I often see. Now, for some of you, it may make sense to take it at 62. It may make sense for both of you to take it at 62. In this particular scenario, if we want to build in that margin of error, even if you think you’re going to make it to 86 or 88, it still would be a mistake for both of you to take it at age 62.
It’s about $500,000 of less income taking it both at
62 versus 70. What happens is yes, you’re preserving more money inside of your account in the earlier years of retirement. Once you get in the out years, you’re having to draw down a significantly more amount of money from your savings and that’s not when you want to be drawing money down is in those later years. Now, I want to look at that same chart we looked at previously but just that one change of deferring Social Security for both spouses until age 70. This is very interesting. We have similar amounts of ending dollars, even though there’s a 74% probability of success. In 100 of these simulations, even though this is a higher probability of success of not running out of money, we see the end of plan future dollars really isn’t significantly different
Some of you may right now be thinking, “Well, Troy, why would I take Social Security at 70 if I took it at 62 and I’m going to end up with a similar outcome as far as the dollars that I have?” The answer to that question is let’s say you’re 88 and still kicking along and your dollars in the portfolio, let’s just say are roughly the same.
Would you rather have the original Social Security strategy here? $125,000 of total income actually if we come here to 88, 71, and 34, $105,000 of Social Security income, guaranteed stream of income that you can’t outlive. Security, peace of mind, help you sleep at night. Would you rather have the same asset balance in $105,000 with your original Social Security strategy? Or at 88, would you rather have a $150,000 of Social Security income? 90 and 60, 150.
That’s the difference when you look at the security the peace of mind the amount of money less that you have to withdraw from your portfolio for medical expenses, whatever may come up. That’s part of why deferring the Social Security gives you more security over time is because even though the asset balances maybe saying some of the calculations or comparisons that you do, you cannot calculate peace of mind.
As someone who has a lot of clients that have made it into their 80s, and even we have clients in their 90s I can’t tell you how many times every time I sit down with them they tell me what makes them feel most secure is knowing that that mailbox money is being deposited every single month. The people who care the least about the stock market volatility are the ones that are the oldest and have the most amount of secure income. Keep that in mind.
Back to the analysis of taking Social Security of 62 and 67. I haven’t changed anything in either of these scenarios. In case you’re wondering the investment portfolio is just your standard 60/40. Back to the original analysis I just wanted to go through this with you because I can’t tell you how often we see someone comes in they’re working with maybe a different firm, I won’t mention any names, but many firms do this.
They run the analysis which on the surface looks similar to what we’re doing here, but in reality, what they’re doing is they’re taking the performance of stocks and bonds and other asset classes over the past 30 years. Then what they’re doing is simply flipping them on their head and saying. “This is how we expect these asset classes to perform over the next 30 years.” I can’t tell you how bad I think that is. It’s probably going to lead to a lot of people running out of money.
The reason I bring that up is because this is one of the most important things we can do with the Monte Carlo simulation. We don’t want to use past returns. You’ve heard it, past returns are not indicative of future performance What we want to do when we’re doing these Monte Carlo analyses is have a tool that can show us different sequencing of returns. We don’t want just your average rate of return. We don’t want to assume past is going to be predictive of the future.
Then we look at some of these different scenarios or simulations, we see the sequencing of the returns is different. This would be pretty bad for someone if they had three consecutive years of losing money in their portfolio. Whereas if the next 25, 30 years has a better profile of returns across the entire portfolio, obviously, you’re going to be in a lot better shape probably going to end up in one of these quartiles up here and things are going to work out for you.
Again, going back to the metaphor at the very beginning. We need a plan of action. We need to know what’s ahead in that river. We need to know where the rapids are. I’m not just talking about market performance with stocks and bonds I’m talking about taxes. No, we don’t have the foresight to see what’s going to happen but when we build these plans and we do the modeling we’re anticipating these things happening.
We’re building out the allocation which is how much is exposed to risk with respect to how much income you need inflation et cetera, but also the tax strategy, and then as we were going to look at in a minute, how do all these things come together to give you the best probability of success. We may not be able to foresee if the tree is going to fall or if the market’s going to crash, but we can build a plan that’s meant to defend against those types of occurrences from hurting you.
2nd Scenario: $84,000/year
All right. Now, we want to jump into the scenario where you have a modest lifestyle. You’re really not spending much I’ve plugged in just the $84,000, I’ve completely taken out the go-go spending for the next 15 years. This may even be a bit high but I just want to go through some different considerations because, one, this money’s all in retirement accounts but two, since we’re not really afraid of running out of income in this particular scenario, taking Social Security sooner can be a more viable strategy. There’s going to be a lot more money left at the end of the day.
This is where if your goals are to leave money to kids or grandkids, well, we need to have that estate planning conversation. We did a good video on trusts last week that’s posted. It’s been doing really well getting a lot of good comments. You may want to check that one out. You can click right up here. If you don’t have those goals of giving the money to charity there’s going to be money left so we have to decide who is going to receive that money.
If it’s just charity, well, maybe there’s some tax planning that we can do because when you give money to charity upon your death if you don’t care who else is going to receive it, you don’t receive any tax breaks. Let’s start planning to use that money during your life If you’re not going to need it to create additional benefits for your retirement. All this ties together. Getting a little off track here but that’s important.
We’re going to click the button here and it is going to come out at 98%. Going to look at the same thing that we looked at earlier just to see a range of outcomes of how much possibly could be left. This is the simulation. Now, we are looking at in current dollars and future dollars same thing we looked at before. The median is dying with $5 million which will purchase about $2 million of goods and services in today’s purchasing power.
In one of these simulations down here, we actually do run out of money. If we looked at that, that’s the markets probably down 20 out of the next 30 years. Here is a reasonable range of outcomes. The question is what are we going to do with this money and estate taxes could possibly be a concern.
In 2026 the estate tax law is going to change. It’s going to drop from about $25 million from a married couple to an inflation-adjusted around about $12 million, $12.5 million. Over the next 35 years, given that we’re spending $2 billion per day in interest payments on the federal debt, there’s a decent chance that the estate tax laws will change.
There could be a situation where you are subject to estate taxes here and then we would want to build something in for that. Again, we have to decide who this is going to go to. This is a range if you live a modest lifestyle with about $2 million, you can expect those assets to reasonably grow. We’re not having overly aggressive growth rates here. It’s probably about 5% to 6% is what this is assuming. Hope that helped you.
Okay, high-level tax analysis of the scenario that we just went through. When we look at having all that money inside the tax-infested retirement account, remember, you’ve got a tax deduction for putting money into the retirement account. When you take money out, you have to pay income taxes. Too many people follow the conventional wisdom advice, which is defer those retirement accounts as long as possible.
In this particular scenario, we have $2 million and it’s all inside the retirement account. If you take one thing away from this video and you’re still in the accumulation phase, please save some money outside of your retirement account so you have two different buckets of money that have different tax characteristics. If you retire prior to 65 you have some flexibility of where you can withdraw your income from this will help you beyond your, probably, current understanding so just trust me on that one.
If you have all the money in the retirement accounts, if you do nothing once you get to retirement, you just let it defer take income as needed, we have a high-level analysis apples-to-apples comparison. All we’re doing here is changing the distribution strategy and whether or not we’re doing Roth conversions.
This is what we call a dynamic plan. It’s a multi-account distribution strategy where we are incorporating some level of Roth conversions. We see a couple of different things here one ending value in this simulation is about 2.5, in the same simulation it’s 1.6 so about $900,000 maybe $800,000 in additional potential value and about let’s call it $800,000 in less tax paid. I want to show you a ledger real quick and compare these two columns because there is a drawback from this particular strategy that may not be right for you.
We covered the positive benefits of possibly considering the Roth and distribution strategy applied over the investment plan. All of this together we call the retirement success plan. We see here, this is what we call a glide path. The green is the strategy where you pay more in taxes. You have less money at the end of the rainbow. The blue is a more advanced account distribution strategy tax planning strategy. I just want to high-level show you, hey, why this may not be appropriate for you. Maybe it’s better to go the other route. This is not the full picture, but it is something you should be aware of. We have 1.7 versus 1.2 at the low point here. A more strategy-focused distribution plan is going to get us into a situation where we actually have less account balances. Now, there’s a couple of reasons for that. Because when we look at it comprehensively, from not just today’s decision-making, but once again, we’ve actually traveled this river before. We know where the bends are. We know where the rapids are. We’re looking out into the future. We’re building a long-term strategy here that focuses on not just investments, but income taxes, estate planning, everything.
Here’s what we see. One, in the dynamic plan, we have Social Security. It makes sense to defer out. In the early plan, the base plan, conventional wisdom, we’re taking Social Security early. This is a large contributing factor to why account balances are higher early in life because we don’t have to withdraw the amount that’s being provided from Social Security.
Over here, we’re paying more in taxes because we are buying out Uncle Sam from our retirement accounts. Over here, we’re kicking the can down the road. By deferring Social Security and buying Uncle Sam out, our account balances are less than they would be if we just put our head in the sand and did absolutely nothing. The question becomes, which one puts you into a more secure position over the long term?
We see here, the kicking-the-can strategy, this is the total taxes that we’re paying over time. This assumes, we see here, continuing to go up, continuing to pay taxes throughout the course of retirement. Now, all this assumes is what we already know, that in 2026, tax rates are changing. It will become more expensive to withdraw money from your retirement account. That is the law as it currently stands. We know that. It is not assuming any potential tax increases down the road, which are very possible.
Now, compared over here, we’ve bought Uncle Sam out. We’ve deferred our Social Security, so we’re going to have a lot more guaranteed income. We see from about age 70 on, we pay zero taxes for the rest of our life. Zero taxes. Taxes could go up. Unfortunately, one spouse could pass away early. What happens there is you go from the married filing jointly to the single brackets, that’s a tax increase.
You also have much higher, I told you I was going to come back to this and talk about it later, earlier in the video. We have a much higher guaranteed income. Even though our account balances are less, 1.5 here versus 1.9, let’s call it 1.5 versus 2, our guaranteed income here is only $57,000 versus over here it’s $101,000.
Would you rather have, when you’re thinking about this, $1.5 million, $1.6 million with $100,000 of secure income being deposited, like clockwork, or would you rather have $1.9 million, $2 million with just $57,000? I’m not saying one’s right or wrong, but think about it. What would you rather have?
3rd Scenario: $150,000/year – A Risky Choice
Now, the third scenario. You come in, you tell me, “Troy, I don’t care if the kids get any money whatsoever, I want to spend it, I want to enjoy it, and I want $150,000.” Well, this is what we’re going to look at, $150,000. I’m not going to spend a lot of time here, but I do want to drive home a couple of points. First and foremost, it’s your prerogative if you want to spend that money, die with nothing. This is a pretty good way to do it. It’s an 8% probability that you will die with money. 92% that you will meet that goal.
In reality, though, whenever someone tells me they want to die with nothing, a lot of times it’s just a figure of speech. They’re not being literal. Sometimes people are literal. Without knowing exactly when you’re going to pass away, if you’re not terminal, well, you can spend this level of money, but this is about the best we can do. We’re showing you here, based on spending it, we can just give you a range of years of when you may run out of money based on the market performance.
You will still have that Social Security check, but you’re going to have to downsize your life, obviously, to meet whatever income that Social Security check provides. Your life becomes a country music song. You’re going to have to get rid of the spouse, get rid of the car, get rid of the dog, and it’s just going to be you and a Social Security check.
Something like this is how you end up being the food sampler at Costco or the greeter at Walmart. Coming back to our river metaphor, this is Niagara Falls. We didn’t necessarily see that coming. We didn’t know when we were going to pass away. We spent this exorbitant amount of money, and now we went off the edge of Niagara Falls.
BONUS: What To Have in Place Before Age 65
Now for the bonus. If you’ve stuck around this long, you’ve earned the bonus, but you’ve also got a lot of really good information. If you just fast-forwarded to this point, well, you missed a lot of good information. Go back and watch it. No bonus for you. I want to stress the importance of retiring before 65
having a health care plan in place, having money set aside for health insurance. It’s about $2,000 a month for a married couple for health insurance premiums. I’m going to expand upon this, so stay with me. Now, my grandparents went through a tremendous health situation where they spent more than $1 million in the first few years on health insurance, or excuse me, healthcare expenses because they didn’t have health insurance. I’ve seen people skip it, and then something happened, and I don’t want that to be you. Be aware that health insurance is around about $2,000 a month, let’s call it approximate depending on where you live, for a husband and wife.
Now, second thing here, make sure you have money, if you’re leading into retirement, saved outside of your retirement account. Because if you do, you can withdraw from that pot of money that’s already been taxed and qualify for a subsidy for a health care policy that’s on the exchange. Maybe you can reduce those costs from $2,000 a month to $1,000 a month, or $600, or $800, or possibly $0 per month. Be aware.
Having those two pots of money that we talked about earlier, one of the reasons is retiring prior to Medicare gives you the ability to withdraw money from the already taxed money to keep your modified adjusted gross income down, and therefore qualify for a subsidy that can get you to potentially $0 per month of health insurance coverage. Now, you need enough what we call non-qualified dollars to last how many ever years prior to Medicare. Keep that in mind.
The number two thing here, long-term care later in life. Depending on where you live, long-term care expenses can be anywhere from $5,000 to $40,000 per month, depending on the severity of the need that you have. My grandparents’ story, $10,000 a month for the first nursing home, $8,000 a month for the second nursing home. They were awful. They almost killed them a couple of times. We brought them in for home health care, $40,000 per month. My grandmother was spending, to have two nurses and 12-hour shifts, 24 hours a day.
This was almost 20 years ago. It was rural North Carolina where they had bought a mountain home and retired to, but we have clients now that are paying for home health care. They’re easily spending $20,000, $25,000, $30,000 a month for a mother or a father. It’s not hard to get to those levels.
When we talk about how much money is left in the planning that we’re doing, if being comfortable, being in your home, if those types of things are important to you, we need to know that. We need to work that into the plan because that will impact the amount of money we feel is safe for you to withdraw and maintain a standard of living.
It also impacts the investment plan. It impacts everything that we do. It’s part of the estate plan. If you are overlooking health care costs prior to Medicare, but also later in life, this is the one thing that can completely wipe out everything that we just talked about, leaving all the planning that you’ve done otherwise completely move.
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🍿 Dive deeper into the factors considered when Planning your Income for Retirement: https://youtu.be/Ey3jugfFmJ8
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This video discusses fixed-income investing and utilizes the 10-year U.S. treasury as a general representative fixed-income investment. Conclusions reached, opinions stated, and downside risks and potential returns presented should not be construed as applying to other types of bonds or fixed-income assets. Other types of fixed-income products carry different levels of risk and return potential and should be evaluated as an element of a diversified portfolio with your specific risk tolerance, investment objectives, and timeline in mind. Nothing in this video is investment advice, an investment recommendation, or an offer to buy or sell any security. Investing involves risk.