Troy Sharpe: You’re 60 years old. You’ve saved $1.2 million. The question is, can you retire? Now, we’re going to look at this from a single person’s perspective because I know many of you have been asking for that, not a married couple. We’re going to look at different variables, change them around, see how it impacts spending, and get you to that point where you can have a better understanding if you’re in a good situation to retire.
Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, host of The Retirement Income Show, and also a certified tax specialist. Many of you have been asking for me to do a video about a single person. I get comments about this all the time. Now, single people, as opposed to a married couple, have different challenges. First and foremost, you have one social security check. That means less guaranteed lifetime income.
Long-term care and health care is a bigger planning issue because you don’t have anyone that’s going to take care of you such as a spouse. You may have children, you may not, but it is a bigger concern. There are also other variables such as the tax brackets. You can have about half of the income and still be in the same tax bracket as a married couple, so different challenges.
This video is going to be focused on the single person, but if you’re a married couple looking at this, many of the concepts are still the same. I say this all the time in the videos. When I do them about married people, the concepts are the same. My goal here is to help you learn more about your money, learn more about planning, so the concepts are what’s most important.
Just a brief interruption. We spend a lot of time putting these videos together to help you stay more connected to your money. If you subscribe to the channel, that helps you stay more connected to us. Don’t forget to comment down below and share this video with a friend or family member. Instead of summarizing all the variables, I’m just going to go through them here on the board as I would if you were sitting in front of me here in the office.
We have James. He’s a male, 60 years old, wants to know if he can retire. What I did is I put he’s retired, so we have no salary, no other income coming in. We have him in Texas here. We can change the state. No matter where you live, the biggest ramification would be state income taxes if you’re in a state that has income taxes. All right, so we have James from a planning perspective, living to age 90.
I do get a lot of comments. It says, “Troy, most people are going to die away before that. Why are you planning until 90?” Well, first and foremost, if you die before 90, then, hopefully, we’ve done our job and you don’t die broke. If you are working out, if you’re eating healthy, if you’re doing the things that you need to do to have an extended life, you need to be prepared to live longer than what the average mortality table say you will.
Just for example, I googled a couple of articles here and this is medical innovations for 2021 and 2022. First one here I’m going to talk about is the migraine medications, great breakthroughs, and migraine medications, robotics, Hep C treatment. This was really cool, 3D printing. They’re able to 3D print exact replicas of your organs so surgeons can practice surgery before they actually perform it on you. Smart pacemakers and defibrillators that work much better than previous models. The results go directly to your smartphone to monitor.
This is 2022. Next-generation mRNA vaccinology, but this does have applications for cancer. For prostate cancer over here, PSMA-targeted therapy, new treatments for the reduction of LDL, type 2 diabetes, hypertrophic cardiomyopathy. Implantable devices for severe paralysis. This is actually an implant that can help you regain motor function and skills if you are severely paralyzed. This is amazing.
AI for early detection of sepsis, predictive analytics for hypertension. A lot of the technology we see working its way into the medical industry and there are new devices, new procedures. We have to plan on living longer than what your parents did or what your grandparents did. I just wanted to encourage you to do your own research here before you comment that, “Troy, most people die at 80,” or “I knew someone who worked their whole life, then they died the next day.” Yes, that is very possible.
Long story short, you need to understand that there are technologies that are likely to increase our life expectancy through a greater ability to treat diseases, to cure diseases, and also just help you live a more functional and healthy lifestyle much longer than your parents or grandparents. With that said, we plan to age 90 or age 95. Now, if you tell us, “Troy, I’m very unhealthy. I drink a lot. I smoke a lot,” well, okay, we’ll plan to 78 or 82 or whatever that number is, but most people aren’t in that boat, so age 90.
All right. Now, we have the life expectancy set and we know how old you are, 60 years old. We need to look at, what are the basic needs? We have here, basic living expenses of $50,000 a year and what we call the go-go years. This is when we’re more active and we want to spend a little bit more money in the early years of retirement. We’ve thrown out an additional $20,000 on top of this for 10 years, so total spending is $70,000 out of pocket plus health care.
This is the big one and we’re going to look at some planning scenarios to reduce these healthcare costs and see how that impacts the overall probability of success. After 10 year years, this discretionary go-go spending drops. In the plan, we just assume it’s an inflation-adjusted $50,000. The inflation factor we’re looking here over the next 30 years is 3%. Now, I know we have higher inflation right now, but that’s unlikely to happen for the next 30 years.
We’ll have some reversion to the mean and it probably won’t be 2% or less than 2% as it has been for about 15 years. It should revert more to the historical norm. Somewhere around 3%, maybe 3.25%, possibly 3.5% long-term, so we’re going to look at 3% here. For social security, James has a hypothetical $2,800 a month at full retirement, age 67. That’s where we’re going to start, but we’ll look at different ages, taking social security, have a brief discussion about that, and see how it impacts the probability of success as well.
For investment assets, James has $950,000 in his 401(k) and I threw $250,000 in here in a taxable account. Hopefully, James has been watching the channel for a few years and he’s heard me say, “It’s important to save money outside of the retirement accounts,” so that’s what I’ve done here. I want to explain or show you some examples today of why that’s so important to have some money outside of the retirement account if you’re going to retire before 65.
James also has a home that is fully paid off. Value is estimated at about $600,000. In this case study, James has a net worth of $1.8 million, no debt, $1.2 million in investment assets, $600,000 in the home. Of course, again, the $1.2 million is broken down, $950,000 in qualified assets, 401(k), and the other $250,000 is in non-qualified assets, a bank account, a brokerage account, something that’s outside of a retirement plan.
Okay, so we have the base parameters input. I’ve explained them to you. Now, we want to shift to that risk discussion. Here at Oak Harvest, we talk about two components of risk. First and foremost, we want to know, what is your willingness to take risk? On the back-end, our planning team is going to look at what’s called “risk capacity.” Risk capacity is simply how much income you need from your portfolio and what percentage is that of the overall value.
If you have a need of 5% of your portfolio per year, you have a low capacity for risk. Because if the market tanks and you have too much risk, you need to take out 5%, 5%, 5% over the next three years. If you suffer 30%, 35%, 40% losses, all of a sudden, you’re 50%, 60% down in the first couple of years of retirement. That’s not a formula for success. We look at that in the back-end, but we talked to you about your willingness to take risk. Here’s a very simple sliding scale.
It’s a stock portfolio here. We’re looking at about 60% stock, 40% bonds. In the Great Recession, this $1.2 million would’ve lost about $300,000. A good question is, are you comfortable with that level of risk, that level of volatility? Someone may say, “Troy, I’m completely comfortable with risk. Let’s increase the allocation to stocks.” Okay, well, during the Great Recession, if we were 82% stock, 18% bond, we would’ve expected to lose almost $500,000 inside this $1.2 million portfolio.
Some of you may say, “You know what? I’m not comfortable with that. I want a much lower allocation to stocks because the paychecks have ceased. I’m no longer working. I have to depend on this money to be there for me as long as I live, so I want less risk. I’m only willing to accept maybe a 10% loss.” This portfolio would’ve lost about $124,000 in the Great Recession of 2007 to 2009.
I’m going to put this over here towards a more standard 60% portfolio because this is a pretty standard recommendation in retirement. Now, just because this is a standard recommendation in retirement, doesn’t mean that it’s right for you. It also doesn’t mean that it’s necessarily effective in this current environment that we have with inflation high, interest rates rising. Bonds typically don’t perform well in that environment, but still stock model, we just want to look at some of the planning concepts.
Now, that was a risk willingness or a risk tolerance exercise that we’ll do with clients, but here is how in this case study that he’s currently invested in the 401(k) at work and he’s considering retiring. Again, this is, “I’m 60 with $1.2 million. Can I retire?” When we look at the portfolio, he’s currently about 88% stock. This is very common actually. We’ve seen people over the past few years when they come to talk to us very heavily tilted towards stock because interest rates have been so low. Bonds have been such horrible investments.
The only way to get any type of return over the past few years has been to allocate a little bit more heavily to the stock market. Now that James is thinking about retiring, we have to have this discussion, “Okay, this is how you’re currently invested, 88% stock. Are you comfortable with a potentially 43% loss, assuming something like the Great Recession happened again?” $511,000 down. Most people who are about to retire who’d need income– Remember, James needs $70,000 to meet his goals over the next 10 years, increasing each year at 3% for inflation.
That’s a pretty big hit, but this is how he’s currently invested. Now, we’re going to see, what is the probability of success based on all the variables that I’ve went through with you? James is 60. We have a planning age of 90 life expectancy. He has $1.2 million saved. Of that, $950,000 is in his 401(k) at work and $250,000 is in a non-qualified brokerage account.
He has social security of $2,800 a month, which we’ve tentatively planned to take at his full retirement age, initial analysis, and he has a $600,000 home that we do not have being sold to fund any goals. We want to see if this plan can work without selling the home. Then also, the investment allocation, he’s currently 88% stock in his 401(k) and only about 12% bonds. Let’s see what the current scenario looks like. Can he live until age 90 and not run out of money?
Okay, it comes in at 58%. Is 58% a good number? No, it’s not a good number. Is 58% a bad number? No, it’s not a bad number either. This is just where he currently is. We haven’t done any planning. We haven’t looked at any variables. Again, I can’t stress this enough. Whatever this snapshot and time currently tells us today, it has literally no relevancy moving forward because the most important thing is doing this every single year as the portfolio changes, as you have surprise expenses, as things develop.
The most important thing when you hire a financial advisor is the relationship you have with that firm moving forward. Because right now, this is 58%, but it could be 69% or 78% in one year. It also could be lower. The most important thing is to stay connected to this. This just gives us an idea of where we’re currently at with all the variables that I’ve input based on certain assumptions moving forward. I set the risk tolerance to 60%. Remember, he is currently at 88% allocation.
When I hit this next button, the software is going to say, “Based on your risk tolerance of 60%, which is about 60% stock, you should reduce your allocation to equities because that’s too much risk. If we get into a down market, you may sell and, therefore, hurt your chances long-term of success.” Based on that risk tolerance that we input, the software is saying, “You know what? You should reduce your exposure to equity,” but look what it does, it decreases the probability of success to 51%.
Now, before we start making some adjustments here to see if we can get that number up, I want to show, first and foremost, what the spending plan looks like with respect to inflation. Again, the go-go years, we’re starting at a $50,000 base spending need. That covers property taxes, insurance, food, travel, et cetera, those things, those basic things, maybe not travel.
Travel would be covered in the additional go-go spend that we have input over the first 10 years. James in this case study comes to us and he says, “Troy, this is what I have. This is where I’m at. I want to retire, but I want to spend $70,000 a year.” What we see here, the first 10 years of retirement, the first five, James has to go into the private marketplace to buy health insurance.
It’s obviously inadvisable to go without health insurance from 60 to 65. We see with health care plus the $70,000 of spend, he actually needs about $97,000 because of inflation by year 2026. He goes on Medicare, the spend drops. The inflation-adjusted $70,000 number at 3% is now $87,000 in 2027. To wrap up the go-go years, it’s all the way up to about $100,000 a year. This is what inflation does. Inflation is real, especially in retirement.
We need an income. We need a tax. We need an investment strategy to tackle this. Someone who wants to spend $70,000 per year adjusted for inflation at 3%, 10 years later, that’s already up to $100,000 per year. We have to understand this concept. The go-go years goes away. Now, we just have that base $50,000 spending level. Here, that, on an inflation-adjusted basis, has grown to $76,000.
We get out to 2039. It’s up to $100,000 almost. We get out here to 2047. It’s up to $127,000. A lot of people say, “Troy.” In the comment section, I’ll have the title of the video and it’s, I’m 60 with $1.2 Million. Can I Retire? Some of them will just write, “Yes.” Okay, I get it. Yes, you can retire. That’s not the ultimate question. It’s, “Can I retire and maintain my standard of living and have a comfort level with my spending without the fear of running out of money?”
The only way to be in that position is to literally spend none of your money. Just live on social security or spend a very, very modest amount, maybe 1%, or you have a financial plan that you’re connected to, that you’re constantly reviewing with somebody you trust, whether that’s us, whether that’s your advisor, whether you go and get the education yourself and spend the time it takes to learn this. You have to have a plan. You have to be connected to it.
The first change I’m going to make is if someone came in and we were having this conversation, myself or one of our advisors would say, “You know what? We need to look at spending the non-qualified money first in retirement, do that analysis, because what we want to do is qualify for a subsidy to reduce the out-of-pocket or, excuse me, the health insurance premium cost.
Now, we would also run that analysis compared to doing Roth conversions. Whichever one helps us most in the short term and long term is a discussion that needs to be had. Now, I can tell you this much. Getting rid of the health insurance premium here of about $13,000 a year, by the way, that does include anticipated out-of-pocket expenses. For a 60-year-old in this country right now, you’re looking at somewhere probably between $800 to $1,100 a month for health insurance, which is outrageous.
If we manage our 1040, which is the tax return, meaning we manage where we take income from during the years from 60 to 65. We can get that number on the tax return down, which then qualifies us for a subsidy, but this is a planning procedure. We need to look at not only how that impacts us today. How does that impact us long-term? Then contrast that against doing Roth conversions.
Roth conversions absolutely would help James long-term. There’s no doubt about that. I’ve done this long enough to know that without even doing the analysis, but it’s a conversation to be had. Some of you may say, “You know what, Troy? I’m going to bite the bullet now. Maybe I’ll do seven years of go-go spending because I’m really concerned about taxes, so I want to do these Roth conversions. Go ahead and pay the money and get Uncle Sam out of my pocket.”
Others may say, “You know what? I want to continue to grow my money. I want to pay less today and that’s the route I want to go.” It’s not our decision to make. It’s our job to show you the numbers, to run the analysis, to do the contrasting, but you make the decision. Okay, so I went in and I’ve changed the assumption. Now, retired before Medicare, $3,677. That is the average or what you should expect on average out of pocket. This is copays, deductibles, prescriptions, et cetera, out-of-pocket costs for somebody whose age 60 in this country.
I’ve reduced the health insurance premiums to zero because we’re going to, in this first case, withdraw from the non-IRA money first, which is not a taxable event, which brings the income significantly down on the tax return, which then qualifies you for a subsidy. I recently had a conversation with a client about this and they said, “You know what, Troy? We never go to the doctor. We’re in pretty good health. Actually, really good health.”
They ended up changing, so we did this and they ended up saying, “You know what? Next year, when we re-enroll, we’re just going to get the very, very low-level bronze plan because we haven’t been to the doctor in a long time. We just want to be covered for some of those catastrophic items.” All I’ve done in this first scenario is change where we’re taking the income from in retirement that first year for James to go through the case study and see, how does that impact the long-term probability of success?
If we just go here to the current, if you remember, it was 58% before. Now, it’s 65% on the current. If I go to the recommended because the risk tolerance is lower, it’s going to drop this probability of success. Again, not a great number, not a bad number because it is just a snapshot in time, but it is an improvement. Now, I don’t have time in this video, but what we would do in real life is we would compare that then to paying the premiums but doing Roth conversions and look how that impacts long-term.
In this particular case, my gut tells me that doing the Roth conversions will not make sense. We would want to spend down the non-qualified money now, and then just look at that analysis year-to-year, because this is saving about $10,000 a year. If we did the Roth conversions, that would increase income, which we would have to then pay the $10,000 a year in health insurance premiums, plus the taxes on that conversion.
Now, one thing I want to add to that is you don’t have to get your income all the way down to zero in order to qualify for a subsidy. Due to the coronavirus, legislation was passed that in 2022 and also last year, 2021, you were able to have more income than traditionally you’re allowed to have and still qualify for a subsidy. In 2023, it’s projected that those limits will go back down to the pre-COVID thresholds. It’s a planning exercise. Again, every single year.
The next logical place to go is, what happens if James sells the home? A couple of ways we could go about this. We could assume he rents or finds somewhere to live that the costs associated with that rent are similar to what he’s paying currently in property taxes, insurance, maintenance, et cetera, or we could assume he’s going to pay a little bit more in rent. If you’re in a low property tax state and it just doesn’t cost you much to maintain your home, it might be a lower number, so we need to increase your spending.
We could change those expenses. We could look at whatever needs to be customized to your particular situation to help understand, “Does this make sense for your situation?” We’re going to assume he sells the home. I’m going to give him a year and a half here, 2024, to sell the house. Assume we’re going to get about $550,000 for it after real estate commissions. It is a projection. We could do a high, medium, and low, what we call a sensitivity analysis with this, but I’m going to keep it simple.
Just assuming in 2024, he receives $550,000, which then will be used to help reach those retirement goals and the expenses stay the same. Assuming maybe he’s able to find a place, even possibly relocate to where the expenses stay the same as, currently, it costs to maintain the home with property taxes, insurance, et cetera. Now, we’ve sold the home. We have that cash infusion coming in 2024.
Let’s see the results of the current situation. It jumps up to 94%. Obviously, this is a huge decision that could drastically improve the probability of success. Now, let’s see what happens if we also reduce the risk exposure in the portfolio. Look at this. The probability increases now to 96%, whereas before, it was dropping with the lower-risk portfolio. Here’s the kind of the two-edged sword between lower risk. It depends on your portfolio’s capacity for risk, which, if you think back, is how much income you need to withdraw.
If you need to withdraw higher amounts of money from your portfolio, going conservative actually reduces the probability of success because it virtually guarantees low returns. Because of that high withdrawal, you’ll never make it. Increasing the risk in the portfolio, while it can slightly increase the probability of success because in some of those Monte Carlo simulations, you’re going to hit some home runs and you’re going to be okay. In some of those, you’re going to drastically run out of money and much sooner than you would in the conservative portfolio.
It’s kind of a double-edged sword there. Just, hopefully, let that concept soak in. Okay, so now that we know selling the home makes sense, maybe James wants to look at, “Hey, Troy, what happens, instead of investing all of that $600,000, if I take $200,000, $250,000, $300,000, and I find a home that has smaller maintenance expenses, insurance expenses, property taxes, but instead of renting, I buy a place?” or you say, “You know what? If expenses are the same with that selling-the-home decision and either renting or whatever that comes about, what happens if I want to spend more?”
What we would do is simply look at, “Okay, let’s say we increase the discretionary spending in the go-go years, which is on top of the base living expenses of $50,000, the probability only drops to 94%.” That’s very, very viable. What if he says, “Ah, I’m going to keep the $600,000, but I don’t want to go to a town that has a lower cost of living. I want to stay right here where I currently live in this city, but to rent, it’s going to cost me more than what it costs me to maintain my home.”
The base living expenses. Now, this is a 30-year projection, but let’s say it’s going to cost an extra $7,000 a year. Okay, that goes to 83%. I say, “James, we just maybe need to live in a lower discretionary budget in the go-go years.” 87%. Again, 83%, 87%, 92%. This is just a snapshot in time. We can adjust the plan in a year or two or three based on monitoring and tracking all of these numbers. We just need to stay connected.
When I close out these videos and I say, “Our goal is to help you stay more connected to your money,” this is exactly what I’m talking about. It’s planning analysis year in and year out based on portfolio returns, spending, goals, desires. Everything that makes your retirement happen, it’s staying connected to it as far as creating a plan that you understand what the ramifications of your decisions are.
In summary, the planning decisions that we have to make as a single person in retirement do bring challenges to the table. First, long-term care. Health care later in life may be a concern if there isn’t a spouse or a child there to help take care of you, either due to cognitive decline or functional mobility decline. Whatever it is, you may need more money for healthcare expenses. We need to bake that into the plan.
You only have one social security check, so less guaranteed income. Tax brackets. You can have about half the income of a married couple and still be in the same tax brackets. Planning for individuals does bring unique challenges to the table. The decisions that you make, staying connected to a plan, that’s what gives you the peace of mind to know, “Okay, I’m on track,” or you’re not on track. Either way, we can make adjustments moving forward.
We looked at selling the home to finance retirement goals. We looked at where we take income from, non-qualified versus qualified, to help reduce health insurance premiums in the first five years of retirement. Those are all decisions that need analysis that need to tie into the short-term and long-term needs of your retirement. Then, most importantly, you just need to stay connected to your money.
You need to be connected to what the decisions that you’re making, the impact that they have on your security. Share this video with a friend or family member. If you know someone who is in this situation, this information is valuable. It can help them make better decisions. Hit the thumbs-up. Subscribe to the channel, of course, so you can stay more connected to us and that helps us keep you more connected to your money. Comment down below.