I’m 62 with $750k: How to Retire Early and When to Get That Social Security Award Letter

You’re 62 and saved up $750,000. You’re tired of working and you want to know, should I retire? Can I retire? Do I have enough? How long will my money last? These are the questions that may be keeping you up at night and stopping you from living your best life in retirement. I’ve sat with hundreds of people over the years that come into the office. They sit down. They say, “Troy, I’m done working. 62 is right around the corner. I’m going to retire. I’m going to turn on my Social Security benefits.” They make that income decision before we make the allocation decision.

The Decision Dilemma: When to Retire and Activate Social Security

With the Retirement Success Plan, there’s a reason why the allocation comes before income planning, then tax planning. What I’m going to do in this video is actually go through different scenarios and show you some of the things that you should be considering before you actually make that decision, pull the ripcord, go off into retirement, and turn your Social Security on at 62.

Okay, we have to cover some of the basics first to provide context for the entire plan. We have both husband and wife, 62 years old, and they want to spend $60,000 per year. Retiring at 62, taking Social Security early, there is a permanent reduction in both the personal Social Security benefits and also the spousal benefits. In this example, the husband is the only one who qualifies for his own personal Social Security check. That’s going to be $25,000 a year at age 62. That takes into account the reduction from full retirement age.

His wife, even though she worked and busted her butt for many, many years, unfortunately, the government doesn’t count that work as qualifying for a Social Security check, so she is going to have to take spousal benefits. That’s $11,000 a year in this example. We’re going to look at what happens if they defer it until 67, 70, how that impacts the overall plan. They’re both 62, wanting to retire now. His Social Security is $25,000, hers is $11,000, $750,000 saved as I said, $650,000 of that is inside the IRA, $100,000 of that is in savings.

Now we’re not going to get into the potential of tapping equity inside the home, but for this example, the home is worth $500,000. That is something that could be tapped either through a reverse mortgage later in life or a home equity loan, possibly selling the home, buying something smaller, renting, a lot of options there. We’re just going to focus on the assets saved, the amount of income that they want to spend with respect to inflation over time, and look at how that Social Security decision impacts their security.

Step by Step Process: Account Allocation, Income, and Tax Planning

We’re going to jump right to the magic button now and see what the probability of success is for everything that we’ve talked about so far. The investment portfolio is allocated pretty traditionally, 60% stock and 40% bonds. The life expectancy for the wife is 94, the life expectancy for the husband is 92. One thing to note here, I was doing some research and I think it was the Stanford Center for Longevity. I did a research study, I didn’t check into the details, you can look some of this stuff up. I do encourage you to look into longevity studies and what’s happening with medical science and technology when it comes to extending our lives.

The study said about 40% of people, men and women, underestimate their life expectancy. Males more so than females, so I think it averages out to about 40% there. We see this very, very often when we have conversations with people. For some reason, we just have this tendency to underestimate our life expectancy. When we’re planning for retirement, of course, we’d rather plan for a bit above the averages as opposed to a bit below the averages.

One thing to take note here is once you hit the age of 65, your life expectancy numbers are different than when you look at life expectancy as a whole of the population. A 65-year-old female, the average is about 87, give or take a year or so there. A 65-year-old male, I believe those averages right now are around 84. Those are the averages. Take into consideration your own health, family longevity, et cetera. For planning purposes, we’re going to assume 94 for the wife and 92 for the husband.

Inflation, Longevity, and the Probability of Success

Okay, we have 79% probability of success. For some of you, you may say, hey, that’s great, I’m comfortable, let’s do this, let’s go ahead and retire. Others are, well, you know what, if I hopped into a plane and it only had a 79% chance of landing on my destination, I’m probably not getting into that plane. How can we look at improving the 79% probability of success?

Okay, the first thing I want to point out here is inflation. We’re just running this at a long-term 2.5% projected inflation rate. We see starting out at $60,000, it gets all the way up just because of inflation to $122,000 a year. When we look at these out years, we’re having to withdraw from our assets in conjunction with Social Security enough to meet our spending goal in today’s dollars. We’re going to have to withdraw around $100,000 in 2044. We see $108,000, $116,000, $125,000. That’s 30 years from now.

When the first spouse passes away, typically there’s a reduction in spending. That’s what this drop-off is reflecting, but it’s very important to understand the erosion of your purchasing power over time because of inflation. Now, we’ve just all been through a period of high inflation, so it’s fresh on our minds and we understand how that can erode our purchasing power. When we’re projecting into the future, we have to take into consideration how our future dollars, our future streams of income need to account for higher and higher withdrawals. This is why we need to strategically invest the money in the allocation.

Step one of the Retirement Success Plan is so important because to maintain the same level of purchasing power, we have to see those assets grow. We have to have either increasing income. We have to make sure that this gap is taken care of because this right here, $116,000, is the exact same as this $60,000 when we look at a 2.5% projected inflation.

The very first thing I want to look at here is just simply taking Social Security at a different time, not changing anything else, no conversions, no tax planning, everything 100% the same except the election or timing of Social Security. Here’s the strategy that we’ve currently looked at. $62,000 for both spouses, 79% probability of success, $25,000, and about $11,000 here for our sample hypothetical clients, John and Jane.

Now, we see if they wait until full retirement age, so $67,000 for both spouses, it jumps up to 94%. At age 70, it jumps up to 97%. If John begins at age 70 and Jane at her full retirement age, we’re still at 97%. The very simple solution is defer until full retirement age. Now, it always doesn’t work out like this, but this is a fairly common analysis where we see someone who comes into the office and they say, “Troy, I’m ready to retire. I’m going to turn my Social Security on. I’ve paid into it. It’s time to start getting my money back,” but you need to have visibility into how that decision is impacting your future security.

Strategic Timing: Impact of Social Security Deferral

People underestimate how much income they actually receive from Social Security. Even if we turn it on at 62 and we make it to these life expectancies, it’s $1.1 million, almost $1.2 million of income from Social Security. Many of you who maybe you haven’t saved up $750,000 or you’ve saved more or less, when we look at retirement, there is no retirement without income.

If you value your retirement in terms of the amount of income that you can generate from either the assets that you’ve saved or the amount of money that you’re going to receive from Social Security, technically you’re a millionaire, right? Because you have a million dollars in lifetime payments that are coming to you from the contributions that you’ve made into the workforce.

Keep in mind, only one spouse worked in our example here. If both spouses had worked and Jane’s Social Security was higher, then this number would also be a lot higher. We’ve seen Social Securities checks maximized with an optimized income plan and this number gets over to $2 million, $2.5 million, even $3 million of lifetime income just from Social Security.

Over here, if we wait to full retirement age, it’s $1.38 million, almost $1.4 million, and here at age 70, 1.43 million, 1.43 million. The very first thing we can do is live off the assets that we’ve saved and accumulated, live off dividends and interest. That won’t be enough to hit that $60,000 spending goal. You would expect to see those asset values decline in value in the first few years until you hit age 67 and turn on your benefits at full retirement age.

At that point, you’re looking at $33,000 and $16,000, so about $50,000 a year. The majority of your income will be coming from Social Security so that really reduces the amount of stress you’re putting on your portfolio and that has a very positive effect from the potential risks that are out there. Sequence of returns, what happens if the market goes down while we’re making these big withdrawals, the longevity risk is significantly diminished because we’re five years older, so our life expectancies are compressed. A lot of positive benefits happen here by deferring Social Security longer. That’s why we see mathematically computate to 94% probability of success versus 79%.

The Million-Dollar Decision: Social Security and Lifetime Income

I know many of you are saying, Troy, I’m not waiting until 67. That’s great. That’s fine. I’m not waiting until 67. What else do you have? Before I get into a potential solution that we find a lot of people in this particular situation really appreciate and value, I want to make sure that there’s proper context provided around these risks. Because if you’re going to make this decision to turn Social Security on at 62, I want you to be aware of what could negatively impact you.

The first thing is bad timing. If you retired a couple of years ago and turned on Social Security, or three years ago during COVID, you have went through this exact example. We look at market goes down the first couple of years. The bond market has been down now for basically three years. When you combine that with equity returns being negative, you start to get into quite a pickle when you’re also distributing money from your retirement accounts.

The only thing that we see different in these two plans, just a quick line chart. The red is our bad-timing example. The green just assumes your typical average rate of return. Both of these portfolios averaged about 5.5%, but because the red line experienced losses in the first couple of years, -20%, -7.5%, we see the dip here, the same average rate of return that point forward. These first two years of retirement determined the rest of their quality of life. Because if this is what happens to you, you’re not probably sleeping as well as if the first two years were like the green lineup here. There is an emotional and also psychological domino effect to bad things happening to retirement accounts and value of your savings in retirement.

I want to show you one more chart that visually illustrates the risk of sequence of returns a bit differently. We see here 16 different simulations. Out of the 1000 simulations in the probability of success that we looked at earlier, this just simply pulled out the 16 where the average rate of return was between 5.3% and 5.4%. Virtually identical average rates of return. What we see here is 12 of them are successful, four are failures. Failure means running out of money, means you die, you have nothing except that Social Security check.

Now, we see that the only difference, and this is really important, that the only difference is the sequence that you realize those returns in your distribution phase. If anyone ever tells you the average rate of return matters in retirement, they’re absolutely wrong. Average rates of return are only important in the working years where you’re contributing and saving money. You’re accumulating to get to the top of the mountain, so then you can plant that flag, you can walk out the door and retire, and now you’re dependent on those savings and Social Security for the duration of your life.

Once you enter that distribution phase, you start coming down the other side of the mountain, average rates of return mean absolutely nothing. It’s the sequence of returns that will determine how long your money lasts. Proper strategy is to build an allocation that can provide you the income with respect to a tax plan that allows you to weather the storms that will invariably come at some point in the future. If we can build that plan that allows you to stay committed to your retirement plan and provide the income to maintain your quality of life, you’re probably going to be in a much better position than not.

Now I want to show you the impact of adding a secure source of guaranteed lifetime income on top of your Social Security so we take out the risk of the stock market going down, the bond market going down, how that impacts, what your income looks like, and your overall probability of success. We have Social Security, then we’re going to add here the strategy income, so this is adding the fixed annuity. Now our shortfall, we can see here is just in the beginning years of retirement.

What happens, we eliminate or we significantly reduce, we have a little bit of a shortfall here, the impact of the stock market or bond market putting you into a situation to where you have to spend less or you’re not sleeping at night. We make these withdrawals from the investment account in the beginning years while we still take Social Security at age 62, and then we see we have two sources of guaranteed lifetime income coming in regardless of how the market’s performing which allows you to feel more comfortable, to sleep a bit better at night, but also have your investment account that you stopp taking withdrawals from once we turn that income on, allow it to sit there and hopefully the market performs well and that can grow and appreciate in value and then you’ll have that as well on top of the home that we talked about earlier.

Just to show you now from a probability standpoint what happens, we click this little probability button, and then what we’re going to see is, without the fixed annuity strategy, we were at 79% like we talked about, just simply adding that fixed annuity, 99% probability of success. That means again 999 out of a thousand of these simulations, we pass away with money.

The reason we pass away with money is because once we complete that 10-year deferral period for the fixed annuity with the guaranteed lifetime income benefit, once we complete that deferral period, unless an emergency happens or something unexpected, we’re not anticipating touching that investment account, so it can just sit there and grow, grow, grow grow. Meanwhile, we’re getting all this mailbox money. We have two sources of guaranteed income no matter how long we live.

If you pass away early and unexpected, the principal balance, whatever’s remaining, goes to your family. If one spouse passes away, the income continues to the other spouse. Now, you could set this up for a single lifetime income. Maybe you’re not married or you have other sources that might kick in later to replace it. Looking at the joint income, what we’ve done is created a lot more security, a lot more reliability. In order to get that number, what we did is we took $300,000 out of the retirement account and we rolled that over to another IRA, and opened the fixed indexed annuity account.

If you come to our website, click on Annuity Education, Income Rider Quote, it takes you to a page where you input your information, how much you’re looking to invest, the dollar that you have to invest, when you want to take income, your age, your spouse’s age, and it prints out this little fancy chart. It just simply shows you all the different carriers out there, the amount of guaranteed lifetime income based on single or joint. The difference between all these carriers, not only is the amount of income, but the way the principal grows, the way it earns interest, how much annual liquidity.

If something comes up and you need to go in and take out $10,000, $20,000, $30,000, typically you have 10% annual liquidity here. The terms and conditions for all of these contracts are a bit different, but what is fully guaranteed by each of these carriers is the amount of guaranteed lifetime income. Maybe you don’t want to defer for 10 years. Maybe you want to defer for six years or five years or seven years or two years. You can input all that information and come up with your own quote.

A couple of final thoughts here. You defer it for 10 years, it’s going to give you $48,000. That’s off your original $300,000 investment. Over the next 10 years, years 11 through 20, you’re going to receive $488,000, almost $489,000. If you live another 10 years or your spouse lives another 10 years beyond that, so 62 to 72 deferring, 72 to 82, $489,000 roughly. Then 82 to 92, another $480,000 of guaranteed lifetime income.

When you look at annuities, they’re not stock market replacements. They should be considered bond alternatives. The value should be taken into consideration of the sleep insurance, the ability to not worry, where’s my income coming from? What is the stock market doing? Is my lifestyle going to change? If something happens, will I have to pull less out? The real value in these financial tools, especially when put together with other financial tools like stocks and bonds in a retirement plan, is that we don’t have to worry about where income is coming from based on what the market’s doing. We can plan, we can have some dependability and reliability in there. We’re also creating multiple streams of income in retirement.

We’ve done a decent number of videos on fixed annuities versus variable annuities, some of the pros and considerations, a couple of just highlights here or disclosures. With all of these here, these are 10-year surrender charge periods. That means for 10 years, you can only go in and most of these allow you to access 10% of your account value per year. You put $300,000 in, you need to access $5,000 or $20,000 or $30,000, you can go do that. Each year you can take out 10% of the account value. It’s one of the terms and conditions I mentioned before that may vary bit to bit from these companies. This list changes all the time. I don’t know all the terms and conditions memorized by heart, but typically it’s about 10%.

Be careful who you’re talking to and who you’re working with. Annuities pay commissions. The typical commission that the firm will receive is somewhere between 6% to 7% of the deposit that you put in, similar to a real estate commission. The difference is you don’t pay the commission in the form of a direct payment to that agent. If you deposit $300,000, that $300,000 goes to work for you. This is the fully guaranteed income. The commission that the agent receives does not reduce your principal balance. What the insurance company does is they put that surrender charge schedule in place.

Most insurance companies are making somewhere between 1% to 2% profit margins on their fixed book of business, but they do it through massive amounts of volume, billions and billions and billions of dollars typically for these bigger carriers. How that commission is typically split is somewhere between 20% to 30%. It usually goes to the agent. The rest of it goes to the firm. Just be careful who you’re working with. If you start looking at different annuity products out there, I know there’s a lot of people doing dinner seminars that are selling annuity products. You just want to make sure that you work with someone who’s going to have your best interest at heart, give you all the information, and tell you some of the things that you need to know.

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