Retirement: I’m 60 Years Old with $900K in Savings. Can I Retire Now? What is My Risk Capacity?

Retirement Planning: So you are 60 years old and saved roughly $900K of money in the bank, can you comfortably retire? Will you have to plan strictly? What is your Portfolio Risk Capacity? This is need-to-know retirement information going into 2023.

 

60 with 900k Saved:

Troy Sharpe: You’re 60 years old, with $900,000 saved, and the question is, can you retire? In today’s video, we’re going to look at a few different decisions that could be made, the impact those decisions have on the plan, with the overall goal of not running out of money.

 

Troy: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, a certified financial planner professional, host of the Retirement Income Show, and a certified tax specialist. In today’s case study, we’re going to look at a situation that’s not too dissimilar from what we normally encounter in our day-to-day operations here at Oak Harvest Financial Group.

We have James, who is 60 years old, he comes in and he says, “Troy, I want to spend about $70,000. I’m just tired of working. I want this year to be my last year. I want to spend $70,000. I think I’m going to live to about 90 years old. Pretty good health, and I want this $50,000 to increase with inflation over the course of my retirement, but for the first 10 years, and what I hear you talk about in this go-go spending phase, I want to spend an additional $20,000 per year, bringing that first 10 years of spending up to $70,000 per year. Then that go-go spending goes away, and then we have the inflation-adjusted $50,000 to plan for from age 70 to age 90.”

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James tells us that since he wants to retire as soon as possible, he thinks it makes sense to take Social Security the first time available. Claiming at 62, a little more than $2,000 a month at $25,000 per year. He also has that $900,000 broken out to 401(k) money, of $700,000, and then $200,000 in a taxable account, or what we call non-qualified, outside of the retirement account. Very important to point out here that the tax characteristic of these two accounts and the investments inside them and the interest and dividends and the withdrawals from them are taxed differently. That’s part of an overall tax plan.

Now, James also has a home that’s completely paid for and worth $600,000, but he’s told me that, “I don’t want to use this to fund any of my retirement goals. I’ve lived in this home for a long time, I want to stay in the home,” but we know from a planning perspective that we do have that in our back pocket if it’s needed down the road. James’ total net worth here is about $1.5 million. Looking at the paid-off home of $600,000, the $700,000 inside the 401(k), and the $200,000 of non-qualified or taxable account assets. Now, as part of the process to understand where someone is and where they’re trying to get to, we have to understand, how is the portfolio currently allocated?

James tells us that, “Troy, I know I’ve wanted to retire, so I’ve been investing aggressively and trying to get ahead of the game.” Here we are in 2022 and the markets have pulled back some, so that double-edged sword is starting to rear its head, but we see James’ 93% stock. One of the questions that we have, from an internal planning perspective, is if we keep this same level of risk while we retire and start taking income out of the portfolio, what does that do for what we call the risk capacity, or the portfolio’s ability to take on risk while distributing income in the retirement phase?

We have to look at the guardrails. Guardrails are essentially a statistical calculation of probabilities of the portfolio returning this much on the high side, in a good year, and this much on the downside, in a bad year. If these guardrails are too far apart, and we’re taking income out, if we run into a bad couple of years that bump up against that bottom guardrail, we significantly increase the risk of running out of money.

Part of the analysis of the planning is, is this an appropriate guardrail for this type of portfolio given the desired income level? With everything we’ve looked at so far, the question is, if James continues doing what he’s currently doing, and retires, with the desired spending level, the assets that he’s accumulated, living in until age 90, what is the probability that he has success? Well, it comes in at about 61%. That’s probably not a good retirement number. That’s something we want to see if we can work to improve. I’m going to pull up the what-if analysis here, and start to look at some of these different decisions that we could make and see if we can get this probability to increase.

Okay, now we have the what-if analysis, where we have two different columns up here on the board. Right now, they’re identical. We’re going to keep this one the same, as the base case, everything that we just went through. Now, we’re going to start to change some of these variables to see what the impact those decisions have on the overall retirement plan. This is much more of an art, at this stage, than it is a science because we want to start to explore different scenarios, and then see what is most comfortable for you.

Once you understand the impact of these different decisions, you can take some time to weigh, think about them, weigh the pros and cons, and now we’re starting to work together to craft you a retirement plan that gives us increased probabilities of success, but also something that you feel very, very comfortable with. The first couple of options we have, which are the most simple and usually have the biggest impact on the plan, is we can either work longer or spend less. James says, “No, I don’t want to spend less. I have a specific plan. I want to get my RV, I want to travel the country, I want to play some golf. I’ve done my budget. I need to spend that 70,000 for the first 10 years.”

The first thing we’ll look at is the impact of working another couple of years. I’ve changed the age here to 63, as far as retirement. The only variable we’re going to change at this time. I don’t want to change too many variables at once, I want to see the impact of different decisions, how they impact the overall plan. That gives us a bit of an increase. The next thing I want to look at here is Social Security. Social Security is a very valuable source of guaranteed lifetime income. First, it’s an increasing stream of income. It increases with inflation. Two, no matter what happens with the stock market, that income is always going to be coming in.

Instead of taking it at 62 and having a significant reduction in the lifetime income that we receive, because I don’t want to change spending, we still have the $50,000 and $20,000 in here. I want to change the Social Security from taking it at 62 to taking it at full retirement age. Changing the Social Security election date gets us up to 76%. We’re definitely moving in the right direction here. After a conversation with James, and he realizing that, “You know what, I do feel really secure with that increased Social Security income because if the market doesn’t cooperate, I know I’m still going to have that much higher income later in life.”

That would lead us, down the road to say, “Okay, let’s look at adding more guaranteed lifetime income.” If we can get your baseline income to cover a majority of your spending needs, then we don’t need the market to perform necessarily as well later in life. Now, we want to look at the impact of adding more guaranteed income to the plan, which has the effect of providing more security later in life, because if the markets don’t cooperate, we know we have a certain level of income being deposited every single month, no matter how long we live.

If you go to our website here, it’s oakharvestfinancialgroup.com, we have, up top, an income rider quote, where this is constantly searching for the highest amounts of guaranteed lifetime income that are available in the marketplace. Simply input the variables here. In Texas, age 60, IRA money, income starts. We’re going to start looking at seven years here, and I know the dollar amount I would want to put in, 300,000. The good news here is you can input any of these different variables. We don’t ask for your information. It’s a calculator tool that you can play with on your own. Single life payout, and we get a quote.

Here’s the output screen. We have all of these different companies over here. When you see the same company twice, it’s because that company offers multiple different products, with the same income rider. An income rider is just an addendum or an attachment to a contract that guarantees no matter what the stock market does, a certain amount of lifetime income based on the specifications you input. About $33,000 here. That’s about 11% of the initial deposit with that income starting in year seven. This is why we call it a deferred income annuity, because it gets a guaranteed growth to calculate a guaranteed lifetime income that you then would incorporate into your plan.

In this what-if analysis, we come down here, I’ve already input it, so $300,000, and then we just calculate these scenarios. Now we’re up to 87% here, so now things are starting to look a little bit better. Let’s make a couple of different adjustments here because, remember when I talked about the guardrails? That’s too aggressive of a portfolio, given the income need, especially in the beginning years. Now that we’ve added some deferred income into the plan, the portfolio’s capacity for risk increases later in life.

All that means is, because there’s so much income coming in, the portfolio can withstand a bit more volatility later, once Social Security and the deferred income annuity kick on, because you’re needing to take less from the portfolio. Let’s make a couple more adjustments here. After retirement, we don’t want to keep the current investment strategy. Let’s get a little bit more conservative here. Go from an aggressive plan to something a little bit more conservative. Then, you know what? Let’s also say, now that we’re starting to move in the right direction, instead of retiring at 63, what happens if we retire at 62? Get you retired one year earlier than some of these other numbers.

Now we’re at 83%, retiring at 62. I want to look at one more variable here, because you may want to get a part-time job. James may want to be a starter at a golf course. Maybe he wants to work in the church, and he can get $10,000 or $15,000 a year. Maybe he just wants to work two, three months out of the year. The next thing I want to look at is, if we’ve done all this, now what happens if, during this first 10 years of retirement, he decides he wants to work three months out of the year, or maybe just a part-time job, and work one or two days a week?

Instead of needing $20,000 per year, we just need another $10,000, let’s say, from the portfolio. Really, that’s only earning $10,000 extra in retirement income. You could do that driving Uber. Many different choices there. You know what? I’m just going to decrease this. No, I’ll leave it there. Now, with James deciding to maybe work part-time here, to reduce that spending need in the first 10 years, let’s see if we can also get him retired at 61. Now James has decided that working part-time, and hey, we’re talking $10,000 here, so this isn’t a lot of money.

Now I want to see, what happens if we go back to the original goal that James had, of retiring as soon as possible, at age 61? We’re going to change this back to his original goal, 61. Calculate all scenarios, and now this gets us up to 94%. We started at 61, where James was originally at, whenever he came in, if he kept doing whatever he was already doing, we got him up to 94% here. I want to take a minute, before we finish the final concept in this video, to discuss some of the adjustments we’ve made so far. To get James from 61% to 94%.

First and foremost, we adjusted the Social Security election strategy. Secondly, we added that deferred income annuity. Thirdly, James has decided to work part-time to generate $10,000 per year, in those beginning years, to help reduce the burden of taking out an additional $20,000 of retirement income. Finally, we’ve brought the guardrails in on the investment portfolio, which helps to eliminate very bad outcomes that could happen with his original 93% allocation to stocks. We haven’t totally went to bonds or cash, we’ve just brought those guardrails in by reducing our equity exposure in the beginning years of retirement. We can always adjust that later.

Now, last thing I want to do is look at what we call the combined details. All of these things together in a spreadsheet, just so we can see how these different pieces are working together, and then look at what we call different Monte Carlo analysis. Now I want to share with you some of the individual trial analyses that we run, just like we would for a normal client, to help identify not only where the weak spots are in the portfolio, but how these different decisions that we’re making, impact the overall client balance.

It’s not just looking at what we call an average rate of return, it’s looking at a thousand different simulations, we’re going to look at a couple here, and the order of the return. Check out the video, if you want to understand more about this concept, you can click the link up above. The title of the video is, How 11% Average Returns Could Destroy Your Retirement. That will really get home that concept of it’s not about what you average, but it’s about the order in which you realize returns over the course of your retirement during the distribution phase.

Here we have this individual trial, and it’s the median scenario, out of a thousand different scenarios. I just want to go through this fairly quickly with you. Based on some of the adjustments to the portfolio, we see the investment return column here. All of this, I think, averaged out to, I think it was about 4.5% gross returns. I can go back and double check that in a second. You see, it’s never 444444 or 6666. This is what it looks like in the real world.

James retires essentially at the beginning of 2023. We have the deferred income annuity clicking on here. We’ve changed Social Security. It clicked on here. If we add these two together, come heck or high water, there will be, minimally, $74,000, almost $75,000, deposited into his bank account every single year. Now, if we look at the retirement need, it’s about $61,000 plus the discretionary go-go spending, is about $12,299. About $73,000. What this does is, because we’re getting so much from these two sources, it really reduces the need for the portfolio to perform.
If we go out, go on out through retirement, you see Social Security, is it increasing income?

Later in life, now we’re up to about $89,000, almost $90,000 of income. Our $90,000 inflation-adjusted retirement income need is covered by the amount of guaranteed lifetime income that we have in the portfolio, which then allows our portfolio balances to stabilize, because we’re not needing it to support our lifestyle later in life.

 

 

This is just one example here, but we see the ending portfolio value, even though it spends down a little bit in the beginning years, it starts to stabilize because the income provided from the decisions that we’ve made put us in a situation where we don’t have to withdraw so much from the portfolio. Now I want to look at a different trial. Just to confirm here, the 500th scenario was an average of 4.6, but you saw the different order of those returns and how we actually got to 4.6.

If we slide this up here, let’s assume it’s a pretty bad scenario. This is going to, we change it here, find a look worse return. This brings the average down to 3.05, and we still see Ember graph form here, that the portfolio value still is stabilized. It’s primarily because that change in the Social Security decision and adding the deferred income annuity. It still puts us into that position to where if the market doesn’t perform, we have enough income from guaranteed sources, that we’re not dependent on the stock market to provide us income in retirement.

Especially later in life, when we typically are more conservative, and most people that I’ve worked with don’t have the same stomach, at 80 or 82, to stay invested in big market pullbacks as they did when they were 52 or 62. Now what I want to show you is the comparison to what we just looked at, in the individual trial analysis, to the original plan that came in at 61% with all the original input.

If James just wanted to retire, not go see anyone, make any adjustments, I want to show you what that looks like on the individual trial analysis. Remember, in this scenario, we kept Social Security at 62, no job, so the spending stayed at 70,000, 20,000 was that go-go spending, no change to the portfolio. We still have the aggressive portfolio, which brings in the possibility of some pretty bad outcomes, and no deferred income annuity here to help stabilize the income generation later in life, as well as the volatility impact on the portfolio.

When we look at this, so here we go. James has a 900,000, you see we have none of the annuity income here, Social Security starts out at about 26,000 for him, a little more than 2,000 a month. Now, look at the investment returns here. Because it’s a more aggressive portfolio, the range, the guardrails are increased here. Finally, the spending, we have the 50,000 plus 20,000 increasing for inflation, with the go-go lasting 10 years.

In the first 10 years of retirement, we see things are going pretty well, even at this spending level, because we have some pretty good returns in here. Even though we have a couple of bad years. What happens is, the income, because of inflation, the income need increases later in life, and we see it really just takes a couple of bad years here, minus 21, minus 12, we go from a million to 755, and then it’s pretty much all downhill from there.

In this particular scenario, running out of income, except for Social Security, which is now only up to about $44,000 per year, compared to the other plan with the deferred Social Security, so full retirement age, and the deferred income annuity, we were at, I wanted to say it was around $85,000, $88,000 of income, not dependent on the stock market. Here we’re only at 45, in the mid-80s, so that means we have to take more out of the portfolio, so it’s more susceptible to bad returns later in retirement.

Now, the big takeaway here is, this is what a good retirement planner does. It’s not necessarily about the investment returns, it’s about determining how much money you should have in the market when you should take Social Security. We didn’t even get into taxes here. Additional benefits could be provided through tax planning, but what you should do with taxes, and identifying those spending goals and those needs, in order to get you retired, and stay retired. Then staying connected to this plan over time. That’s what a good retirement advisor does. It’s not about outperforming the market, it’s about finding a plan that gets you and keeps you retired.

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