I’m 64 with $500k Saved: Can I Retire?
You are 64 years old with $500,000 and you want to know, can you retire? If so, how much can you spend? There are a lot of decisions that need to be made here and they’re very consequential when you’re around that $400,000, $500,000, $600,000 asset level because you have much less margin of error. The bigger question really is, when should I take social security? How does that impact my spending? Can I enjoy the lifestyle I want to enjoy in retirement?
That’s what we’re going to dive into in today’s video. We’re going to look at not just how much you can spend, but we’re going to look at the impact of different portfolio returns or market environments and how they could cause you to adjust your spending in retirement. More importantly, if you stay connected to your plan, how you can be proactive and make those adjustments yourself to help secure your retirement and help ensure you don’t run out of money?
Case Study Parameters including Health Insurance, Desired Spending
As usual, we have to start with some groundwork for this case study. We have husband and wife that are both 64, soon to be 65. Health insurance prior to retirement is not an issue here. As a matter of fact, we see this often to where as soon as someone turns 65 or wants to retire at that age, that’s when they reach out to us because they don’t have to worry about health insurance anymore. Which, by the way, it can cost somewhere around $2,000 per month to cover both spouses for private health insurance. 65 is a very, very big age in this country.
64 years old, they have two social security checks. One is for $36,000, the other is for $26,000 but that’s if they defer it all the way until their full retirement age, which for most people is 66 or 67. Now, they want to spend $80,000 a year in retirement. That is inclusive of their social security benefits. Social security has a cost of living adjustment so that income will increase over time.
Of course, your portfolio withdrawals, you want them to keep up with inflation as well, so that, that delta there, the difference between social security and their spending goal, that’s how much they have to withdraw from their portfolio. We have both spouses with expected longevity of 90 years old. Now, before we look at some of the analysis that does a deeper dive into some of the choices that you have in retirement and how they impact your overall security, we have to create the baseline.
1,000 Trials: Can I Live Comfortably?
Here is 1,000 simulations. One thing I want to say about statistical models is that they’re just that, they’re models. They take tons of assumptions. They run those assumptions out over, in this case, 1,000 different simulations. Imagine if you were alive and you had 1,000 different lives going out at the same time. Some of those are going to be successful, some of those will not be successful. That’s all the Monte Carlo simulation is doing here. We run a thousand trials, we see a lot of red squiggly lines, which red is not good. We see some green, which, of course, is good when we look at the overall probability of success, 25%.
Now, if you saw this and the portfolio is a 60/40 allocation here. Investment returns are around 5.5%, 6%. When you see this, you, you may say, “Oh, man, Troy, I’m going to have to work forever. I need to get to that $1 million. There’s no way I can retire.” I want to tell you, it’s not as bad as it seems because this is where staying connected and making real decisions in real-time, month after month or year after year, in understanding how the impact of those decisions affect you and your retirement. We could still comfortably retire here. We just need to be flexible. We need to be willing to make some adjustments.
This is not the end of the world. If you’re really fed up and really tired and you want to retire and you see that, “Man, this simulation is 25% probability,” you may feel hopeless. I don’t want you to feel that way. What does the 25% mean? Out of those 1,000 lifetimes that are running parallel if you think, we talked about this in a previous video the metaverse where you have all these different worlds going out at the same time. Well, in 75 of those worlds, you pass away with no money, and 25 of them, that person is successful. That’s basically all that means. I set social security to be turned on immediately upon retirement here, and that would be my first inclination.
The Importance of Social Security Timing
If someone came in, in this particular situation, I would want to preserve the assets because, again, the delta of additional social security benefit that you would receive if you wait a couple more years, it’s probably going to take somewhere around 18, 20, 22 years to catch up. Meaning if you turn it on now, and let’s say you receive a hundred thousand dollars of income combined over a couple of years, it’s going to take you 15 to 20 or so years to get that same $100,000 from the increased monthly income that social security would provide you if you waited until full retirement age.
My first inclination would be to, let’s look at turning social security on early because I see that there’s a high spending goal here. They want to maintain that forever, not just a short period of time, and we need to preserve some of those assets. That’s the first inclination and that’s a little bit about why. Let’s look at the individual trials here. I think this is really important because we’re going to slide this slider up and down, and we’re going to look at different investment returns and how they impact your portfolio balances.
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Navigating Different Market Environments
For the purpose of this video, I want to get your mindset into thinking that investment returns in the future are predetermined. We’re going to limit to 1,000 different metaverses here. You are just simply on one of those potential paths. Now, of course, we have no idea what this– In this hypothetical predetermined investment returns in the future, we don’t know which path that we’re on. For the purpose of this exercise, if you could just wrap your mind around that and say, “All future investment returns are already predetermined. I just don’t know which path I’m on out of the 1,000 simulations.”
Hope that wasn’t too confusing, but we’re going to look here at the median scenario, so 500th out of 1,000, the median. What we see over here is we see the returns of one of these predetermined investment returns in the future. This is the path that we’re on. In this simulation, in this lifetime or within the metaverse, this one out of 1,000, which happens to be the median, we had a couple of negative returns in the beginning, some good returns, a bad year, and then a bunch of green.
We have 10%, 20%, 30% minus 10%, minus 20%. Then of course, on the access down here, we have the year, so the timeframe. Then here is our portfolio balance. We started about $500,000. We have to take some money out in that first year, of course, and that’s reflected. We see we’re pretty level for the first six years of retirement. We don’t really dip below that $400,000 level. You’re probably feeling pretty good in that particular situation. Now, this one bad year, and this is the 60/40 portfolio. We get about a 20% decline, we see the drop. Now, we’re probably starting to panic a little bit, but don’t fret. As long as we’re willing to adjust, what would we do in this year where the market goes down?
We definitely wouldn’t recommend it, but you would maybe naturally realize, “I need to reduce my spending because my portfolio’s taken this big hit. I’ve lost 20%, I’ve withdrawn X amount, and I’m not feeling so secure here,” but things stabilize here. We have some positive years in the market, but look what happens. Even with these positive years in the market, look at the trajectory that we’re ultimately on.
Potential Trajectories: Will I Run Out of Money?
Even though we’re feeling pretty stable here for the next five, six, seven years, we’re actually on a trajectory to run out of money in 2042. That is 18 years total that the money has lasted. Really, we just had this one bad year here. Of course, a couple in the beginning, but they’re very modest negative years.
In this simulation, we feel pretty good for most of it. We have one hiccup, and then we feel pretty good, but then all of a sudden it really starts to spiral. A couple of more simulations here. First, we’re going to slide it to the right, which is a worst outcome. We have some modest positive years, a neutral year here where it’s basically flat, some good ones, and then boom, boom, boom, three bad ones here.
This is a really good example here because we’re feeling good. We’re 10 years into retirement almost and we have more money than we started with or at least right in that range. Then all of a sudden this happens. We’re feeling good, but we’re really in this metaverse, in this predetermined outcome world. We’re actually on this path and we are going to run out of money actually sooner than the last one that we just went through, even though we feel more stable and in a better position because of the positive earnings in the beginning of the plan.
The Importance of Mindset and Flexibility when Retirement Planning
This is why I wanted to put you in this mindset because when you look at it in the sense of that I am on some predetermined path, even though we have no idea what future returns could be. When you think of it that way, we’re doing really good here. Now, we can’t tell the future. We’re probably not going to make any adjustments to our lifestyle or portfolio at this point. Once we have that first negative year, even though it’s modest, we need to reduce spending because what happens if the next year is also bad or the next year in this particular example? How much do we reduce spending? 10%, maybe 8%, maybe 12%, somewhere in that range.
Maybe we take a year or two where we’re just doing a little bit less. We’re 10 years into retirement in this particular example. We can make adjustments to the portfolio as well. I’m going to show you some things in the back end of this video, as far as some of the contingency options, if you don’t make those changes. We need to be able to adjust when things start to go against us. If things go against us earlier in the plan, we need to adjust at a younger age.
An Analysis of Risk vs. Reward
Here we have an analysis of risk versus reward and this is somewhat counterintuitive. Maybe it’s not, but everything that we’ve looked at so far, we have the most conservative portfolio to the most aggressive. This equity growth down here, this is 100% stock investments. We actually do see that the probability of success increases as we get more aggressive. This goes back to what I said in the beginning about statistical models. We’re making assumptions.
In an equity growth model, where we’re 100% stocks, mathematically over time, we’re going to have more of those 1,000 simulations that are successful because here’s it says about 52% because when you take a lot more risk, you have the potential for much higher returns. Because you have the potential for much higher returns, in those 1,000 predetermined or Metaverse lives, 520 of them, you have really good returns.
Now, you have 480 that are really bad, but I want to show you the timeline that we just looked at, the individual trials for something like this because what we’re really doing is we’re expanding the universe of potential outcomes. We could run out of money in eight years or we could be very wealthy at the end of 24 or 25 years. Even though it increases the probability of success, I want you to ask yourself or think about it, does it actually increase the likelihood of success? Now, probability is a mathematical calculation.
Likelihood, that is taking all of your experience from your past experiences in the market investing, how your emotions interact with things, what may happen in the future, just everything beyond the math. For example, we may have a higher probability of success here, but if you’re 72 years old and you lose 50% of everything in a single year, are you staying committed to that plan for the portfolio to rebound and to get you back on track? That’s what I mean about likelihood. When we take into consideration the real-world practical results, what are you doing, and how does that impact your plan?
Individual Trails for the Most Aggressive Portfolio
Here are the individual trials for the Most Aggressive Portfolio.
We see we’re in the median again. In this particular one, we have a couple of good years, we have some bad years, but we see the chart is entirely filled out because our money lasts as long as we do. Here’s the visual depiction of the asset base. Again, we have timeframe down here. We have amount of money that you have over here and some similar themes here. Very good in the beginning because we have some good returns. It starts to dip a little bit. Here’s a good example. Now you’re 7, 8, 9, 10 years into retirement, you’ve started here, now you’ve come down to here.
Mathematically, if we stay committed to this plan, and have really good returns in the future, it’s going to be okay, but what is the likelihood of seeing your accounts go from here to here, being a little bit older, that you would actually still stay committed to this investment strategy? That’s what I mean about mathematical models and probability. They’re good on paper, but in the real world, there’s a lot more that goes into the decision of how we invest, how much income we take, and this is why I’m stressing the point to be flexible.
The Importance of Staying Aware and Flexible
If you are 64 with $500,000, and you want to spend $80,000 a year, and the Social Security is what it is, just understand that you need to be flexible with your choices. Once things start to go against you, that’s when you need to start making some decisions. This is really a monthly assessment if you’re in this very high-income situation. Here’s another good example where I just slid the slider up to the worst, more towards the worst, simulation 627, and let me just show you the asset base. Things are going good here. We’re feeling pretty good.
We’re starting to maybe give more money to the kids or donate to church or our trips, we’re flying first class because things are going really, really well, but then look, we’re at this predetermined. This is why I want you to think about things being predetermined, even though they’re not, but for this exercise, we have no idea what’s coming. We’re doing great. We have more money 15 years into retirement than we started with, but then look how quickly it all goes awry.
We never know what path we’re on, but in this particular scenario, if we would have made some adjustments, probably right here, we’d said, “Okay, we had the downtime. Let’s wait to see what happens. It’s pullback spending,” I would– realistically we would want to get more conservative here. Just I want to hopefully plant some seeds here so you can start to make better decisions with your retirement and understand that it doesn’t matter what your experience has been in the past or where you are today, things can take a dramatic turn for the worse and you need to be flexible. It’s more important when you have lower asset levels, meaning $500,000 $600,000 $700,000, $400,000 $300,000.
Situations When Delaying Social Security Work Better
Just a quick comment about social security here because the more aggressive portfolio, the higher assumed rates of return in the portfolio actually impact our social security decision because if we knew that we were going to have really good investment returns from that equity model portfolio instead of here at age 64, turning social security on right at retirement, probabilities actually increase by deferring until your full retirement age.
The concept here is pretty straightforward. If we are going to have higher returns over longer periods of time in our portfolio, we can afford to delay social security because, one, it’s going to give us more lifetime income, which increases our probability of success, but we’re not hurt as much from withdrawing from the portfolio sooner because we’re going to make that up over time by earning higher rates of return compounded over many years.
Here we’re back to our original scenario where we have a more conservative portfolio, which is more reasonable, and we also have the social security being turned on at retirement as opposed to waiting until full retirement age. Now, the reason, again, I’m leaning towards the social security taking it sooner is for a couple of reasons.
One, if things go against us in the beginning, we’re withdrawing less from the portfolio. We have, or we build ourselves in a little bit of protection there. Additionally, we don’t know how long we live. This math is showing living in until age 90, but what happens if one spouse passes away sooner?
We’re building in another margin of error there, but we’re also creating some flexibility by maintaining more of our assets for the first 10 years of retirement, and I’m going to show you what I mean in just a minute, but mathematically, taking social security sooner is not the right thing to do in this particular situation.
If we just looked at the math, the probabilities are a bit higher for success if they were to still defer until age 66, but just me and my experience, retirement planning, working with families, this would be the direction that I go in, is let’s take social security sooner. Again, this isn’t black and white because there are so many assumptions that go into retirement planning and you have to know the people that you’re working with.
You have to understand various factors that could impact the security of their retirement over long periods of time, so that’s just where I’m at.
Rules of Thumb That Help You in the Long Run
I want to jump into some of these contingencies that we talked about earlier and I’ve been putting some of these in throughout the video as far as, number one, we need to be flexible. We have to be willing to adjust how the portfolio is invested.
Whether we get more conservative or even more aggressive, for example. Let’s say we’re at the bottom of a two or three-year bear market collapse and you’ve been pretty conservative in your portfolio, I’m not telling you to do this but this would probably be wise, is to start to maybe incrementally shift some of that fixed income into more equity exposure because the whole point of investing is to buy low and to sell high.
At the bottom of a bear market, and of course, we don’t know where the bottom is, but when it’s down 30%, 40% that’s pretty low. Changing the investment portfolio, getting more conservative or aggressive at appropriate times, and of course, according to your willingness to take risk and within your financial plan, reducing spending, that is a huge thing within your control, even if it’s just for a year or two.
Or I’d say more importantly, when you’re having a good year in the stock market, theoretically you can spend a little bit more the next year, but if you have a bad year in the market, this is just best habits or best practices, we should pull back that spending a little bit. Now, everyone’s situation is unique, but that’s a rule of thumb that if you want to follow certain rules of thumb that could benefit you.
Creating a Sustainable Withdrawal Strategy
Here, I want to focus on the asset base in this 25% probability scenario. This is what I mean, asset-based. We’re starting with $500,000, fund all goals, take social security sooner, have some investment earnings, we pay taxes, our living expenses are $80,000. That’s what we want to spend. Then we’re left with $498,000.
As we see in this particular scenario, again, there’s only a 25% probability of success with the model here, but you know what? In the real world, if we want to retire at 64 and we’re in this particular situation and we’re staying connected to our plan and we’re aware of some of the contingency options, we do have some choices. Now, we’re out here. We’ve really enjoyed retirement. We’ve done what we wanted to do. Very clearly, first thing we would maybe consider, we’re a little bit older, we’re entering those logo years as we talked about.
We could reduce spending here to stop the drain of the assets. This couple also I have built into here a $600,000 home fully paid off. Now, we don’t talk about reverse mortgages often, but if I were in this particular situation and the accounts are going down and I wanted to continue to enjoy my life, I don’t care too much about what the kids receive, a reverse mortgage is a very viable option. Not going to dive too deep into them but the government has made a lot of changes to the oversight of these reverse mortgages over the past 20 years.
Long story short is as long as you can pay your taxes, keep the house in good shape, your house can never be foreclosed on. You do the reverse mortgage. If it’s appraised at $600,000 typically I believe it’s about $300,000 that you could take out of it. That’s money you never have to pay back. That’s $300,000 cash infusion, no interest out of pocket to you. The interest accrues and whenever you pass away, the home is sold.
The bank sells the home. They take the proceeds from the sale of the home. They pay off the money they gave you the $300,000 plus the accrued interest over that timeframe from when they gave you the money to when you passed away. They keep that, the interest, and get their principal back and then anything left over goes to your heirs or whomever you’ve named as beneficiary. One, keep in mind that reverse mortgage option because if we start to see the portfolio balance going down and you have a paid-off home, reverse mortgages are actually a very viable solution. That’s one contingency. Your second option here is what’s known as SPIA or single premium immediate annuity.
Fixed-Indexed Annuities: Consider the Alternative
This paper focuses on uncapped Fixed Indexed Annuities which, if
structured properly, can help control financial market risk, mitigate
longevity risk, and may outperform bonds over time.
How that simply works is if your portfolio is starting to decrease in value here and you don’t really care how much is left to the children, you can maximize your guaranteed lifetime income payout by taking a portion of these remaining assets at some point in the future here. Let’s say we do it right here at $400,000 and let’s say we take $200,000 and we give it to the insurance company, and in exchange, we receive a guaranteed lifetime income.
Let’s call it about $20,000 per year. Could be $25,000, could be $23,000 but somewhere in that range. Now, for that $200,000, we’re receiving about 10% of what we’ve given them every single year. If we live to be 85, 95, or 105, we’re still going to receive that 10% of our original deposit. We create tremendous leverage. The older you are, the more value, if you have life expectancy, and immediate annuity becomes. Now, why does that make sense?
We see here in this particular example we have, $63,000 in Social Security. Our investment earnings are paying us $22,000 per year. We are on a trajectory to run out of money way before we run out of life. We’re receiving more income than our entire $400,000 can provide from an investment return standpoint based on how it’s invested and we’re only taking $200,000 of that to give to the insurance company.
Let’s say it’s $20,000. We’re receiving about the same but we still have $200,000 to invest. If we lose or, excuse me, if we run out of that $200,000 that we’re still investing, which is likely, now, we’re going to have the guaranteed lifetime income of social security plus an additional $20,000 on top of that. We’re already on the path to running out of income here and that’s where the immediate annuity, not to be confused with a fixed annuity or an indexed annuity or a variable annuity, it’s an immediate annuity, completely different type. That’s where the immediate annuity can play a role.
Again, this is a contingency option. If you want to spend more in the early years, you start to see your accounts dwindle over time, you have the reverse mortgage as an option, you have the immediate annuity as an option, and of course, you have the choices to reduce spending, to change the investment portfolio based on how things are unfolding. As long as you stay connected to your plan and understand what those choices are, you should be in a position to make some pretty good decisions.
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