I’m 62 With $1.5 Million Saved: What Can I Spend and Still Retire Securely?

You’re 62, have $1.5 million saved for retirement, and you have the big questions. Can you retire? How much can you spend? How long will your money last? How do you pay less in taxes over time? In today’s hypothetical case study, we’re going to explore a social security analysis, we’re going to look at different portfolio combinations, and a Go Go income plan where we stress test different levels of income that provide more income in the first 10 years of retirement with the intention of tapering that back later on.

Case Study Overview & Financial Goals

The first step in the retirement planning process is to gather the objective data. While we do that, we also have to understand who you are and what’s important to you, the subjective side of the equation. We’re going to start today’s hypothetical case study video looking at the basic objective goals of this hypothetical couple. One of the biggest mistakes that we see far too often in retirement is people not spending enough in retirement, not spending as much as they otherwise could. This typically happens for a couple of reasons.

The first is simply fear. The fear is caused because of uncertainty, by not being attached to your money, not having a plan, not having the visibility to see how the decisions you’re making today are impacting your long-term security. This uncertainty, this disconnection is what creates the fear, and the result is you don’t spend as much as you otherwise could. When we start to look at building a retirement income plan, when we stress test different levels of income, it’s important to do one thing.

One, find a comfortable range initially, but then look at it on an ongoing basis. If we have good years or if things are improving, make the recommendation to spend more if you like. If things are going the other direction, it’s a dynamic income plan. We may want to pull back, but staying connected to it over time is very important. Whenever we look at these case studies, these are nothing more than a snapshot in time.

If you’re in this particular range, nothing we’re going to go through today is personal advice or a recommendation that, yes, you can retire because this is a snapshot in time. Depending on how you’re invested, what other decisions you’re making, this could all change in six months or a year or two years. This is for educational purposes to help you understand some of the things that go into the decisions that need to be made for a successful retirement plan.

Go-Go Spending Strategy & Retirement Phases

What we’re going to start with here is a Go Go income plan. We have a base level of spending of $75,000. The husband’s living to 90 in this example. We have the wife until 94 so we’re planning on about a 30-year retirement. Income drops there, of course, when one spouse passes away. We have healthcare expenses. If you’re retiring prior to Medicare, one of the biggest out-of-pocket costs you’ll have is private health insurance.

Now, everyone’s situation may be different. You may have, if you do have COBRA, it’s still going to be expensive, but you may have insurance provided by your employer. At the end of the day, this is the average cost for health insurance expenses and the average out-of-pocket expenses for a married couple in this country at age 63, $30,000. Then when you go on Medicare, you have your Part B, your Part D, maybe a Medigap policy. These are the average costs for that.

Here’s the Go Go spending plan. What we’ve done is we’ve added an additional $10,000 of spending on top of the base $75,000 for 10 years. That’s $85,000 to spend in addition to the healthcare costs throughout retirement. The $10,000 does go away after 10 years.

Here’s what that looks like in graphical form. We’re working with a 2.5% long-term inflation rate, which is actually above the Fed’s long-term target for inflation at 2%. Again, being a little bit conservative, I know inflation is a bit higher than 2.5% right now in many areas, but this is what it looks like.

We have the beginning years where we have the out-of-pocket costs for health insurance, the big expense where everything jumps up to $120,000. That goes away. We go on to Medicare, but we have the Go Go spending, the $85,000 adjusted for inflation. Keep in mind if we want to spend $85,000 and most of your money is in a retirement account, you actually have to pull out more than $85,000 because you have to pay income taxes. Then the Go Go spending goes away the first 10 years of retirement.

Here’s that baseline $70,000 plus health expenses for the remainder of the retirement plan. As you can see, in today’s dollars, spending that $75,000 plus the out-of-pocket healthcare expenses, $140,000, $160,000, $180,000. This is a big part of retirement income planning that often gets overlooked is how big of an impact the inflation-adjusted income need is in the future. This is what it looks like, and then we have one spouse passing away, the income need drops. That’s visually what the goals look like from the requested income plan.

Social Security & Inflation Considerations

Now we have the Social Security, which is a guaranteed lifetime income. We’re not going to get into assumptions of what if Social Security goes away, or any of those items. Just conceptually, we’re looking at a guaranteed lifetime income, and Social Security has cost of living adjustment. It’s an increasing string of guaranteed lifetime income. We’re starting with a base case of, we have Mr. YouTube, it’s the hypothetical case study. $33,600, that’s about $2,800 a month. That’s his full retirement age benefit at age 67. Mrs. YouTube, $26,400 at age 67. Baseline Social Security income.

Here’s a breakdown of the investment assets. The $1.5 million is broken down $1.3 million into qualified retirement accounts, and then $200,000 in non-qualified investment accounts. Now, when we look at the investment mix, the composition of the portfolio, this is something that we see quite often when someone retires from their job, they have their 401(k), and they’re coming over to see us. Maybe it’s the first time they’ve ever worked with a retirement planner. Definitely a retirement planner, but maybe the first time an investment advisor or a financial advisor.

This is very typical in the middle or at the end, or even possibly in the first few years of a bull market, where most people, I would say, do not understand how to properly rebalance a portfolio. When markets do really well, what happens is the stock portion of your portfolio grows, grows, grows, grows, whereas the bonds typically are going to remain behind. We get this over-allocation to equities, and we have some pretty conservative growth rate assumptions here.

What I want to point out is this is something that probably started out maybe as a 60/40 portfolio, but over the 3, 4, 5 years leading into retirement, the equities performed well. In today’s world, bonds have performed quite poorly for the past three or four years. This would not be an uncommon allocation that we saw someone coming in to see us from the very first time retiring with a 401(k). We’re at 83% stock. This is where step one of the retirement success plan comes in. We need to match your actual willingness to take risk with how much risk you have in the portfolio.

Portfolio Risk

We see here, in the Great Recession, this portfolio would have lost about 40%. That’s how much risk is actually in this portfolio. Part of step one is to understand is are you comfortable with that? Are you willing to stay committed to an investment plan that has that much risk if something like that happens? The answer is probably no. We have to rebalance the portfolio, bring it back in line, so when the next recession and market crash comes, you are not in panic mode and wanting to sell, which could be a big mistake that could cost you hundreds of thousands of dollars of income in the future.

When we get to the recommended part of the plan, this is the adjustment that we’ve made to the overall portfolio. What we’ve done here is we’ve adjusted the risk score down. This is more common of what we would see when someone comes to see us. Typically, they don’t want to be way over here on the risk spectrum, but also they don’t want to be way over here and not achieve any expected growth. Typically, most people want to be right in the middle there.

The questions would be, if the portfolio dropped 20%, is that something that you can stick with? Is that something that you can live with? Are you anxious and you can’t sleep at night? If the answer to those questions is yes, that you are anxious and this is really uncomfortable, look, we need to bring this down, get you to– This is maybe a little bit too much, but adjust this according to where you’re comfortable.

Then once we identify your comfort level or your willingness to take risk, is that portfolio that we would then construct, is that going to provide enough expected growth to help meet the spending goals that we set earlier? If not, something needs to give. We need to either adjust the portfolio or adjust the spending goals. This is all step one of the retirement success plan, but it’s an important concept to understand when it comes to building your own retirement plan or just learning about retirement planning.

Different portfolio allocations and changes to probability of success

Now, based on all the parameters that we’ve covered so far, the question is, do you have enough? How likely is your money to last as long as you do? Here, we’re going to run a Monte Carlo analysis that looks at 1,000 different portfolio simulations. What happens if these are the returns? If these are the returns, what is the probability that of those 1,000 simulations, 83% in this particular case, you end up passing away both spouses with money left over? This is the answer, 83%.

Is that a bad number? No, it’s not a bad number. Is it 99%? Of course, it’s not, but if it’s 99%, you’re probably definitely not spending as much as you otherwise could. For me, this is a pretty comfortable range, because I know if you’re a client, we’re going to monitor this as time goes on, and if it starts to go down, we’re going to make some adjustments. Either we adjust the portfolio, we adjust the spending levels, we start to look at opportunities that may be out there to help improve the situation. 83% is not bad.

What we’re going to show you now, we’re going to look at the Social Security analysis and we’re going to look at an adjustment to the portfolio. This adjustment is going to be a little shocking to you because what’s going to happen is the lower average return portfolio is going to provide a higher probability of success than the portfolio that has higher average returns.

Now we’re going to look at the software’s analysis and its recommendation based on looking at a few objective factors like changing the Social Security strategy and also the investment portfolio to bring it more in line with the willingness to take risk. 96%, so this is just adjusting the Social Security strategy and the portfolio’s risk level, bringing it more in line with the willingness, that 52 risk score that we set initially. This is even without any human input, looking at tax planning and looking at various other actions that could take place to increase the probability of success.

Now, here’s the cool thing. Before I get into some of the modules and a deeper analysis, if we were having this conversation and this was now coming back at 96%, we would do analysis, of course, and make sure that it made sense on the back end before having the conversation with you. We would switch the conversation to, “Hey, 96% is great, makes you feel very secure, but would look at how much wealth that means you’re going to have later in life.” This is probably too conservative, meaning you’re not spending enough.

Depending on one of your primary goals, is it either to maximize wealth to your family and loved ones, or is it to enjoy your retirement and to spend more money? For most people, they want to spend more money, and then whatever’s left is left. You may be in the minority that says, “You know what? I really want to maximize the wealth for my beneficiaries,” then the conversation would go in that direction and look at opportunities to do so and, of course, in a tax efficient way.

When we jump up here to 96% by just simply changing those two items without even looking at taxes or anything else, we would probably rotate back to talking about, “Hey, what happens now if we increase the baseline from $75,000 to $85,000 or the Go Go from $10,000 to maybe $25,000,” and start to stress test it that way until we found a happy medium with the probability of success and the comfort of living provided through the higher spending. Of course, it’s paramount to stay connected to the plan and be willing to adjust in the future as things change.

Here are the changes when we look at the current scenario, which was full retirement age at 67, taking Social Security, the recommended scenario, and also the current portfolio versus an adjustment to the portfolio based on the risk willingness and the other goals that we’ve set. The first change is 45% less stock. That’s a big change in the portfolio, and with that, of course, is going to come less deviation, think of it as guardrails. When you have high exposure to stocks, you have very wide guardrails, meaning you might make 30%, you might lose 50% big guardrails.

When we bring this in, we reduce risk, you narrow the guardrails. By narrowing the guardrails, in this particular example, you have increased the probability of success because you have diminished the uncertainty that comes with an aggressive portfolio. This is a big one. 45% less stock. Then the Social Security. From the current, taking it at full retirement age, deferring it until age 70.

 

Here’s the benefit. $33,600 versus $41,664. The question is, if you’re retiring at 62, 63, where are we going to pull the money from in order to bridge the gap from retirement date until age 70? That’s another video for another day, but that’s something that we would obviously dive into in person. I want to look at the probability numbers, isolate just the Social Security in a minute so you can see how it impacts the overall probability of success versus the portfolio change.

Social Security Claiming Strategies & Probability of Success

Let’s dive into some of the individual modules for the current versus the recommended, and I want to look at Social Security first. We’ll come down here to the bottom, and we are going to look at the analysis. Here’s the Social Security analysis. Both at 67, full retirement age, both at 70, and we’ll look at this one spouse at 70, the other at 67, and just looking at the probability. 83% was the probability of success in the current because that’s how we set it as the base case. That’s where we always start at full retirement age and then typically make a recommendation for you to take Social Security sooner or later based on every other aspect of the plan.

Isolating just these Social Security variables, deferring till 70, increases it to 87% probability of success, and one spouse at 71 and 67, 86%. Not a ton of difference between these two, and honestly not a ton of difference between any of these. If you were 62 or 63, this is something we would monitor as the years progress. If the portfolios are doing well, maybe we take Social Security sooner. It’s something that we would monitor.

The bigger point here is that from going from 83% to 96%, the Social Security made a smaller impact in the overall increase in the probability of success. The big impact came from the portfolio reallocation. Now, we’ll look at that in more detail. Here we’re looking at the average return for the entire portfolio for the more aggressive portfolio, so the current scenario. Average 6.37%.

Averages are very funny when it comes to investment planning and income planning and retirement, because at 6.37%, there are literally an unlimited number of ways that you could earn returns annually to have the average be 6.37%. For example, you could make plus 30, plus 30, plus 30, minus 50, minus 50, huge swings, and the average over time could come out to 6.37%. It could be plus 8, minus 7, plus 8, minus 7, plus 8, plus 8, plus 8, minus 6. That smaller range could still equal to 6.37%.

One of the big mistakes that people make when developing their own spreadsheets and doing their own analysis is just assuming an average rate of return over time. Here’s what happens. This is the current portfolio, 6.37%. Now we’re going to look at the plan that’s 96% probability of success, and we’re going to see that it has a lower average rate of return.

Here, we have the recommended scenario. We are going to look at the average return analysis of this portfolio, and we’re going to see that it comes in 5.22%. This is pretty significantly less. Almost what, 1.15%? 6.37% – 5.22%. This average rate of return, even though it’s smaller, creates a better probability of success. Now, if you were running your own spreadsheet and you put in the column that had average rate of return, 6.37% versus 5.22%, the 6.37% is going to come out ahead. It’s going to show you in your spreadsheet that you have more money and more likely to succeed.

What spreadsheets are unable to do, or at least most spreadsheets that we see, and half our clients are engineers living here in Houston, is the variation of returns. What actually happened to get to that average rate of return, and that’s what the software is doing. It’s looking at 1,000 different portfolio returns to come up with that average, and then saying, out of those 1,000 situations that it averaged 6.37%, how many of them were actually successful? How many of them failed?

Sequence of Returns Risk and Comparing Aggressive vs. Conservative Portfolio Outcomes

Now I want to show you the bad timing. Bad timing just simply means, what if you retire when the market is down? The market is down for a couple of years, and we’re going through that right now. As I record this, late March 2025, market had a really bad February, it’s having a pretty bad March, and things are going down. Here, we have a -25% and a -9.84%. This is the more aggressive portfolio that has a lower probability of success. Then if we look at the bad timing for the more conservative plan, what we see is, we’ve limited the downside in the beginning.

This is where sequence of returns risk becomes a big deal. That’s the combination of losing money and taking withdrawals. Let’s say you were taking 5%, 6%, you have the health insurance, you have not turned Social Security on yet, so oftentimes you’re taking a larger percentage in those beginning years. When you pair that with losses, of course, it makes sense that your portfolio is going to last longer if your bad timing results in a -14% versus the -25%.

This all goes into the analysis, but it’s something to be aware of, is what happens in these first few years of retirement a lot of times determines how long your money will last. The more conservative portfolio, when we look at what a bad timing event does, obviously we have a lower downside, which leaves more money to rebound and to gain and to pull income from as time progresses.

Now, I actually want to show you what that sequence of returns risk could look like in terms of portfolio value. We come to the more aggressive here with the lower probability of success, more aggressive portfolio. What we see on the sequence of returns side is that we cross over– Here’s the baseline, 1.5%, and these are all different simulations of what that more aggressive portfolio, what you could realize in real life.

You see, on the upper side, it crosses over 4 million, and on the lower side, it doesn’t show it, but this is probably getting down on the low side to 500,000 or so. This is averaging between 6.3% and 6.4%, but this is only 22 trials. In this small sample size, all 22 of these were successful, 0 were failures. Point being, you see the wider range from 4 million, probably 5 million, maybe up to 5 million, down to about 500,000. That’s a big range of outcome by simply how aggressive the portfolio is.

Here is the more conservative portfolio that gives a higher probability of success, and I think this really sinks it home, why you don’t have to be as aggressive in retirement as you were in the accumulation phase, why it doesn’t make sense, because we see we’ve narrowed our guardrail. Now we’re just crossing over the 2.5 million, probably 2.5 million, because we’ve got 2 million to 3 million here, so about 2.5 million to just under 1 million. 24 trials this sample ran, all were successful, none were failures, but a much tighter range of potential outcomes.

Now that we’ve established that Social Security is a dynamic decision, which the software recommends we take it later, but depending on how things are going, we still may take it sooner because the largest impact on this hypothetical case is actually reducing the risk, lowering the range of potential outcomes. Now, what we would do is we would transition the conversation into spending, because as I started this video with, one of the biggest mistakes we see people make too often is simply that they don’t spend enough because of uncertainty and fear. Because they don’t have the plan, that’s why there is uncertainty, and that’s also why there’s fear.

Here, now that we’ve established this baseline, without even getting into the tax analysis, what we might want to do is to come in here and say, “What happens if we start to increase some of these numbers?” Let’s say our baseline living expense– You know what? Let’s say we’re fine with that, but on the discretionary side, the Go Go, let’s say we want to increase that up to 20,000 a year. Just start there.

We started with $75,000 plus $10,000 for Go Go for the first 10 years of retirement. Now we’ve increased it to $20,000 per year, so we’ve doubled the Go Go spend for the first 10 years, still in a very comfortable range here. Also, maybe we want to adjust this, the overall baseline spending up a little bit here in retirement. This is too much, we see. Now we can’t have the $85,000 plus the Go Go, and then we can play around with these numbers to see what’s comfortable, but most importantly, the values are going to change daily if you’re invested in stocks and bonds.

Importance of flexibility, risk management, and strategic Social Security decisions

We don’t need to look at it daily, of course, but we do need to stay connected to the plan. This is how we would adjust, or one of the tools that we would use to see if we’re on track, if we need to make some adjustments, and if we have a good year, hey, let’s spend more money, let’s go on that extra vacation, let’s do the things that are on your bucket list that you want to, as long as you also know that maybe when things are bad, if we’re having this dynamic income plan, that we may want to pull back in uncertain times.

I hope this video was educational. If you have any particular scenario you’d like us to run through or if you have any other comments whatsoever or questions, please make sure to leave them down below, and we look forward to seeing you on the next video.