I’m 61 with $1 Million In My 401(k). Can I Retire?

 

So, you have a million dollars inside your 401(k). You want to retire at 60. You probably have some questions. Do I have enough? Can I retire? And how long will my money last?

In this video, we’re going to look at various hypothetical scenarios, some of the decisions you could make and how they impact the grand scheme of things. And we’re going to reduce this down to a probability so you have a very clear understanding of how these different decisions can impact your ability to retire at 60 with a million dollars inside your 401(k).

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income show, Certified Financial Planner Professional and Certified Tax Specialist.

So, on the screen here, here’s our hypothetical couple, Jason and Mary. Jason is 58, currently employed, Mary is retired. [They] live in the state of Texas, have annual income of $100,000. Jason wants to retire at the age of 60.

So, the first thing we have to identify is . . . Well, the first thing is: How long are we going to live? With the advent of medicine and technology, science, life expectancies keep increasing in this country. So for this example, we have Jason making it to 92, Mary making it to 94. We’d much rather plan for a little bit longer life expectancy, especially if you’re in average or above average health, than plan for a shorter life expectancy. So, good numbers here.

Then, the goals. So, what exactly do we want to spend? So, in this example, Jason and Mary, they come in. They say, Look, we’re pretty frugal, we don’t spend a ton of money. We are concerned about inflation. We’re concerned about taxes. But we think we can get by on about $50,000 a year. The house is paid off, we don’t have any of those expenses. The kids are out of the house, out of college, we’re not supporting them anymore. We just want a nice quiet retirement. And in order to retire at 60, we assume we need to spend a little bit less.

Now, here’s the big thing: If this is what we plan on spending, if we want to retire at 60, we have to keep in mind health insurance. So, when Jason retires, we see right here: both retired before Medicare, 2023 to 2027, they’re looking at about $25,000, $26,000 in health care costs. This includes premiums for health insurance: This includes co-pays, deductibles, prescriptions, etc. These are the average out of pocket costs for health care for a couple this age in the country that do not have health insurance through work, they have to go in the private marketplace and buy health insurance.

Health insurance is also one of those areas where we have to be concerned about massive inflation because we’re seeing much greater inflation in the healthcare industry — when it comes to your insurance premiums [and] the cost of care — than we are in the general economy. So, inflation in the health care arena can be anywhere from 5% to 10%. Whereas general inflation economically speaking in this country is still under 2%. So, big disparity in inflation and planning for the basic expenses.
OK. So, OK, we’re gonna look at Social Security now for Jason and Mary. So, if he files a normal application at full retirement age, 67, he’s going to receive about $35,453 a year. Mary will file spousal benefits and receive 50% if she waits until age 67, which is 17,726.
Investment assets. So, Jason here has a million dollars inside the 401(k), but he also has $200,000 outside of the 401(k) that he saved over time to help with retirement. But the big one here obviously, the million dollars in the 401(k) that’s the big pot of money.
Do Jason and Mary have enough? Can they retire? How long will the money last?
So, they’re 58, want to retire at 60, they have a million inside the 401(k), 200,000 elsewhere, they simply want to spend $50,000 a year, but remember Healthcare’s that big kicker. Can Mary and Jason retire?

So, I’m going to hit this button, and this is going to run 1,000 simulations. The main difference in these simulations is what are the investment returns that they experience in all of their years of retirement. So, we’re talking from 60 to 92 for Jason, and roughly the same amount of time for Mary. So, out of 1,000 different simulations, if we run them, about 90% of the time, or 900 out of 1,000 simulations, Jason and Mary pass away with money, but we’re going to look at some important factors that can definitely alter what the outcome is.

The first one we’re going to look at is sequence of returns risk . So, this is very important. Sequence of returns is the order — the chronological order — when we retire and start taking money out that we experience various returns in the beginning years of retirement. And for this purpose, it’s not just the beginning years of retirement, but it’s also throughout. What is the sequence of returns? Is it plus eight, plus 12, minus two, minus six? Or is it minus four, minus 10, minus two, plus 20? Those are various sequences of potential returns. And they have a massive impact on the final account balances and throughout retirement. So this is really interesting, because we’re looking at 18 different trials here, the difference in average rate of return between all 18 of these trials, 5.1%, and 5.2%. So, these are not one is averaging nine. One is averaging three. All of these 18 trials: the only difference in return is less than a 10th of 1%. The only variable is the sequence that they’ve realized returns throughout retirement, this is why investment management as part of a broader plan is so critical to success.

The very best scenario: 2059 — so we’re talking 40 years out — they pass away with $2.8 million. The very worst scenario: 40 years out, they pass away with $172,000. So, we’re talking a difference of over $2.6 million, and the only difference is the average rate of return was varied between 5.2 and 5.1. So, the sequence that they realized returns — as we see here — changes, and over time they change. So, [it is] really critical to understand the importance of managing the investment portfolio in the context of how much income we’re trying to generate, when we’re generating that income, how to keep up with inflation and — with respect to taxes — it all has to be managed together.
Now, we’re gonna look at the impact of different sequences of return and different average rates of return and how they impact the overall portfolio balance through time. This is going to provide context to what we previously talked about. So, in the 500th out of 1,000 simulations, the investment returns in the beginning: positive eight, negative two, positive 18, positive five, positive three, positive 17. These are the account balances over time that reflect the ultimate performance on this series of portfolio returns.
Now we’re going to look at Social Security and the impact that has on income and probability of success throughout retirement. Oftentimes, when people want to retire early (60, 61, 62, 63), one of the first things I often hear is Troy, we want to go ahead and take Social Security. The thought process is if I turn Social Security on now, that’s less money I have to take out of the portfolio. But in reality, what often happens is, yes, you’re preserving portfolio assets today, but because of the reduced Social Security, it puts you into a position in your 70s and 80s where you have to take much more out of the portfolio because of inflation and the lower guaranteed income source.

So, I want to look at this scenario for Jason and Mary. So, I ran another simulation. I changed screens. Now we’re looking at a probability [that] if they take Social Security at 67: 91%. If they take it at 62: 81%. So, a 10% reduction in probability of success. If they take it, here’s full retirement age, what we looked at, age 70. Now here’s an interesting one, deferring all the way up to age 70 for them only increases the probability by 1%. In this scenario I would probably look at this one if I were in their shoes. But when we look at this one, Jason taking it at 70, and Mary at full retirement age, 94%. So, Jason deferring until 70 increases his Social Security to $43,961. One of the reasons that’s important is because when Jason passes away, if he predeceases Mary, especially if he predeceases her at an unexpected early age, there’s only one Social Security check to go around, the other one ceases to exist. So, by him deferring until 70, it increases the amount of money Mary would have in her plan for the rest of her life, whereas if they just took it at full retirement age, it’s $35,000, he passes away, her $17,000 goes away. So, he’s leaving her with $8,000 more per year by deferring until 70.

Additionally, it is a higher probability of success. So, Social Security, it’s not a decision that you make without respect to every other aspect of your retirement. It all interacts with one another, like a set of dominoes. You make a decision, [and] it impacts something else. We need to make these decisions with investments, taxes, Social Security, everything in context with one another.
The third and final scenario we’re going to look at is the impact of retiring at a different age, and also wanting to spend more money in retirement, and see how that impacts the overall probability of success.

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Okay, so as a refresher, Jason wants to retire at 60, spend $50,000 a year, has $1 million in the 401(k), an extra 200,000 outside. What happens to the probability of success if Jason wants to spend $59,000 a year?

Well, that extra $9,000 drops the probability from 91% to 70%. Well, let’s say Jason looks at this and says, You know what? I’m willing to work a little bit longer, to put them out here to 62. Okay, if Jason wants to work to 62, [then] spending $59,000 puts it at about 85%. This is a good number, but keep in mind, this is only a snapshot in time: the portfolio is going to change next year. Things are going to change throughout retirement. Tax changes are going to come. Various factors are going to disrupt this entire scenario over time. So, the most important thing isn’t where we are today, it’s where we are over time. Are we trending up when we retire? Is at 85%, 86%, 89%? Are we staying level? Or are the probabilities decreasing?

If they’re decreasing, we need to make some adjustments. We need to spend less, we need to go back to work part time maybe, whatever it might be, staying connected. You’ll hear me say staying connected all the time on this channel. This is part of what I mean, it’s not just where we are today, it’s what is the trend of where we are over time? And what decisions are we making with the investment portfolio based on the economic circumstances, with a tax strategy based on the tax law? How are we adjusting? And this is where the value of a financial advisor comes in. Understanding where you are and where do you want to be and the various choices we can make with the investments, with the tax strategy, with all the things that interact with one another in retirement, can increase the probability of success over time.

Let’s say Jason wants to spend $68,000 a year. Well, 62 isn’t going to cut it anymore. OK, in that scenario we might need to work a little bit longer. Okay, so again, 81%. This isn’t a bad number, this means 810 out of 1,000 scenarios, we pass away with money. But again, it’s not the be all-in-all — it’s just where we are right now. We need to be connected, we need to have our portfolio linked up to the plan, and we need to understand: As time goes on, we may need to make some adjustments. But by being connected, we’re in a good place to sleep a little bit better at night because we know it’s not just about the money we have. We’re able to see to a certain extent into the future what all that money that we have means for our security when it comes to how much income we’ll have, can we retire, are we retiring too early, [or] too late. And then our team [acts]: once we overlay a tax strategy on top of this, typically these numbers are going to go up quite substantially as well.

The one limitation to this software that we use is: It doesn’t do a really good job with taxes, but it does consider the conventional wisdom strategy when it comes to taxes — which is what 99% of financial advisors (or at least a large percentage) in this country for years have recommended for their clients. But overlaying a tax strategy on top of the investment plan, and on top of the income plan, absolutely can improve these numbers.

So, long story short: We need to be connected, we need to understand how our assets and income are interrelated [and] how Social Security works into that. And then again, how taxes — we have a lot of videos about taxes on this channel — how taxes can increase, our tax strategy can increase our probability of success . . .
If you’d like for us to take a look at your personal situation and you need some help managing the investments with respect to an income plan and a tax plan, and you want to be connected like we’re talking about here today, [then] there’s always a link in the description where you can click to reach out to us and we’ll see if our team can provide some value for your retirement.

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