Retirement Planning at 50. I’m Single with $500K. When Can I Retire?

Troy Sharpe: You’re 50 years old, you’ve saved $500,000, you’re single, and you want to know, when can I retire, how much income can I spend, and will I be okay? How long will my money last? We’re going to look at those questions today and also look at the impact of various decisions that you could make and how they impact your retirement.
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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, host of The Retirement Income Show, and certified tax specialist. I do a lot of these videos as many of you are aware, and we’re focused on married couples because that is typically what we see when they come into our office. I get a lot of demand for the single videos, so we’re going to do that today.
I do want to make a couple of things pretty clear, though. Whether we’re talking about a married couple or a single couple, the principles in these videos absolutely pertain to you. It doesn’t matter if you’re single or married. Now, where those differences can actually impact your retirement is on the tax side of things.
Also, in today’s video, we’re going to look at a single female. For single females, typically, we need to plan for a longer life expectancy. A lot of times, that means more healthcare expenses, possibly long-term care. When we’re planning for a single female, we want to see higher asset balances later in life to help pay for those potential expenses.
One of the things we’re going to focus on today towards the end of the video was the Social Security election strategy. That is a big, big part when you are single because you only have one Social Security income to live off of. We’re going to look at that and how it impacts possibly your investment decisions and also the tax plan that you should have in place.
Basic parameters for today’s hypothetical planning situation. We have a single female, 50 years old. $60,000 of W-2 income or salary and wage. $500,000 inside the retirement account. She is saving $10,000 a year into that 401(k) or 403(b). Estimated longevity, live to 94. Tentatively, we’re going to look at or plan on Social Security at 67, initially, providing $27,203 per year.
Now, this number is an accurate number for someone making this income. Now, Social Security looks at your 35 highest years of wage-earning history. When we put this into the software, someone at 50, making $60,000, it’s not an exact number because we don’t input every single year’s earning history into the software, but based on this at this age, this is a reasonable estimation for what your Social Security could be. If you don’t know what your Social Security is, I encourage you to go to ssa.gov and put your information, create an account, and look to see what your estimated Social Security benefits are.
Now, like I do a lot of times, I want to start with the inflation chart because this shows how much money we actually need to plan on living on in order– We’re starting with $50,000 in today’s dollars, but in order to maintain that purchasing power over time. I get a lot of comments on these videos. A lot of times when we’re on appointments with the people, it doesn’t click that if I want to spend $50,000 in 20 years, I actually need about $100,000, so I’m not pulling out $50,000 every year.
I talk about this in a lot of videos because it’s one of the biggest misunderstandings, I think, that people have in retirement. Inflation erodes the purchasing power of your dollars. Many of you are very aware of this right now because we’re going through a period of surging inflation. If we talk about wanting to spend $50,000 in today’s dollars, we have to understand that that is an increasing amount of income that we need to be pulling out of the nest egg.
Now, I have a reduction right here. We call this a slow-go reduction. We’re starting with $50,000 in this hypothetical scenario for an annual spend. She’s 50 years old. We’re going to look at a first retirement date of 60. This is at age 60. This is in 2031. Then for about 15 years, we have that spending assumption in place.
Then, at about 75, that’s the slow-go years for a lot of people or we’re just simply not doing as much as we used to do or slowing down. Still, we have expenses. We have possibly housing expenses. We have food expenses. We have medical expenses. At 75, if you take care of yourself, you’re still very active a lot of times. We have plenty of clients in their 70s and 80s that are very active. We still need to plan on maintaining this purchasing power. The reason I don’t drop it down, sometimes you’ll see me do a no-go reduction where we’re just not going anywhere anymore in our late 80s or early 90s, it’s because as a single female, you have a longer life expectancy. If you need a long-term care need or home health care need, those typically are longer for females than they are for males, so I’d rather plan as a planner to make sure that we have enough income later in life to, hopefully, pay for these expenses.
Just a quick interruption here, if you like the content and you want to continue to learn more about retirement and help make better decisions and keep yourself more connected to your money, hit that subscribe button, hit that little bell icon, and comment down below. I try to respond to as many of them as I can, and they give me good ideas for future content.
The first thing I want to look at is how much did the assets grow, but I want to look at this, not with what we call an average rate of return, I hate when financial planners do this. When we look at, “Well, if we make 6% every single year–” That’s not how you do retirement planning. We need to look at simulated returns, real-world expected returns. Not an average rate of return.
Average rates of return are good if you’re in the accumulation phase because you’re not pulling money out. In the distribution phase, we need to look at the impact of positive returns, negative returns, simultaneously with portfolio withdrawals and see how that impacts the risk of running out of money. Over here, we’re starting with $500,000 today, contributing 10,000 to the retirement account until retirement. Here are the simulator returns for this one model.
Now, this is just one of over a thousand simulations that the software projects. We’ll look at some of these different simulations, but realize that every single year here, we have three down years. This would be pretty scary for someone right before retirement. Understand that looking at different investment returns and then multiple different simulations where we see multiple different return scenarios, that’s going to give us a better idea of how secure or how probable the success of our retirement is.
Jane’s retirement in this one simulation, the assets have accumulated to $918,000, but I want to point out here, just two years prior because of the three years of negative returns, the assets were 765. Couple of years prior to that, they were 970. Jane’s probably feeling really good right here at 970 because we had some good investment years.
Then we get this drop in the market. This can be a scary situation. This is a very scary situation, but what I want you to do is I want you to keep focused on the long term because when you’re in it and the market’s going down and you see your accounts going down, this is where I’ve seen people over the years make significant mistakes that is tremendously detrimental to their long-term security.
If you could actually see into the future when you’re in the middle of this storm that’s going on when your portfolio is going down and you’re closer to retirement, if you could see out into the future, you’re probably not going to make rash decisions. You’re probably not going to sell everything and go to cash and put yourself in harm’s way. We live in the moment, we’re emotional human beings, and when our security is jeopardized because of consecutive years of market decline, it’s tough to stay that course. It really truly is.
One of the things I want you to do in this scenario is begin to mentally prepare for what your actions will be or what your actions won’t be when this happens because it will happen. If you have 10 years before retirement, there’s a very good chance that, at some point, in the next 10 years, we’re going to have one year or two years, possibly three years of market declines. I want you to be prepared emotionally, mentally for what you’re going to do, or better yet, what you’re not going to do at that time.
What I don’t want you to do is to sell and go to cash because if we have perspective of what the future looks like, if we can get out of the present and understand, historically, the market’s never been down more than three years in a row. It happened in the Great Depression, the World War II, and the dot-com bubble bursting. Three times, the market was down three years in a row. We need to just keep perspective over the long term.
Now I want to give you an idea of what the cash flow looks like in retirement and then we’re going to focus on the shortfall so we understand how much we need to pull out of the portfolio. Then we’re going to look at a few different simulations and then tackle Social Security. Here we have Jane’s retirement 2031. Because of inflation, if she wants to spend $50,000 in today’s dollars, again I can’t beat this point home enough, we need to pull out about $60,000.
If we’re deferring Social Security until 67, full retirement age, that means we have some years where we need to pull out of the portfolio. This is also one of the most dangerous times. It’s called the sequence of returns risk. Ideally, we have positive returns in the first couple of years of retirement, that puts us into a much better position for long-term success. If we have negative returns in the first few years combined with portfolio withdrawals, this can put us into a negative spiraling type effect.
One of the strategies is to have a dynamic spending goal. Now, I don’t believe in the 4% rule, I just personally don’t believe in it. Bond rates are too low, if interest rates rise, bonds are going to go down, we’re living longer lives, medical expenses cost more, that rule was made up way, way, way, way long time ago when we were in a completely different world.
I do believe in a dynamic spending goal. What that means is, if the market’s down in the first few years, we need to plan on reducing our spending, don’t just go by the 4% rule. If the market is up, maybe we can spend a little bit more. We can only make those decisions, though, if we’re connected to our plan and we understand what those decisions, what they are, and how they impact our long-term security.
Now we take Social Security, it’s $39,709. Some of you may be saying, “Troy, well, you told me back on this other screen that Social Security was $27,203.” Yes, but Social Security has built-in cost of living adjustments even while you’re working. The Social Security here, even though it’s 27 right now on that statement, it’s $39,709 by the time we actually get to retirement because there’s more years of working, there’s 10 more years of working plus the cost of living adjustments.
If we need 68 and Social Security’s giving us 40 at this time, our portfolio need, how much we must withdraw from the portfolio, is about $28,000. I know a lot of you don’t like spreadsheets, so here I’ve put that same $28,000, essentially, into graphical form. We have our spending goal, if you can see here with the orange dotted line. This is the same chart that we looked at earlier.
Social Security turning on at 67, and then the shortfall, what do we need? About $29,976. Once this logo reduction takes place, we have a little bit smaller need. In the beginning years, this is where deferring Social Security can be a little bit risky. Let’s say the market tanks and you’re too aggressive in your portfolio. One good strategy might be turning Social Security on.
That may not be a good strategy; also, we need to look at the impact of flipping over that domino. How does it play out for the rest of retirement in various different simulations? We just have to make the best decisions every single year. Retirement Planning is not a game of black and white. Everything impacts everything. There are way too many models, way too many variables to assume we know everything.
We have to make the best decisions year by year. By compounding good decision on top of good decision, on top of good decision, I believe we can put ourselves in a much more secure place long term. Now I want to look at more than just one simulation. That last spreadsheet and chart that we were looking at, it simply showed investment returns of one year. It was 1 simulation out of 1,000. We’re going to hit this button, it’s going to run 1,000 different simulations and give us a probability of overall success with the parameters that we’ve looked at so far.
77%, we do see a lot of green here, which is good. The red, if you can see it down there, those are scenario investment returns or sequences of investment returns over time where it didn’t work out. We run out of money because investment portfolio doesn’t perform as we expected. 77%, it’s not a horrible number, it’s not a great number. The planning part is, okay, now what can we do over the next 10 years? What adjustments to the portfolio? What saving strategies? What tax strategies? Let’s build up, let’s prepare for retirement better. As time goes on, over the next 10 years, the goal would be to increase this number.
Now I want to look at some individual trials, and the purpose here is going to be to help you visualize, we’re going to look at it on the graph, what retirement could look like as far as your account balances. How, based on different investment returns over time, your account balances could go up and you could be feeling really good; but then they could come down, but then they could go back up, or they could go down and then back up. We start to visualize what this means, it helps us a little bit, I believe, to help prepare for the volatility of various investment account balances over many years in retirement.
First, we look at, this is a breakdown in percentile of the various simulations. After year 5, 10, 15, 20, and 25. The 99th percentile means very, very, very good investment returns. This would be pretty similar to what we’ve actually experienced over the past 5 and 10 years. Not likely to happen over the next 10 years. The markets have averaged somewhere around 14% to 15% over the past 10 years. The markets have done tremendously well, primarily because the federal reserve has created so much stimulus into the marketplace. It provides a lot of support, and all that money out there, ultimately, has made its way into the financial markets.
The 75th, 50th, and 25th, I want to focus our energy on these three because they’re the most probable of outcomes. At the end of year five, these would be our account balances. We might not be feeling good about our retirement if five years later, after saving, this is what we have. Again, I want you to keep the focus on the long term. By the end of year 10, these same three scenarios, now we’re at 1.3, 722, and 750. Okay, now you’re probably feeling a little bit better about retirement.
Year 15, this is once we’ve started the distribution phase, then year 20. Now, this conversation is not complete. Looking at these numbers, it’s not complete unless we bring inflation into the picture. Even though we have– This is looking at the end of the plan, so this is life expectancy. These three scenarios, we could have 231 to 7.3 based on various investment returns. That’s not the point.
I want you to look over here. This is in current dollars what that means for today. Meaning, if we have 2.5 in the future, that’s how much dollars, that’s the quantity of dollars that we have inside of our accounts. Just like the quantity of dollars you have now in this scenario was 500,000. That’s the quantity, but in today’s purchasing power, 2.5 is equivalent to 965,000. 231 is equivalent to 86,000. Again, keep in mind, please do not underestimate the power of inflation in retirement. Taxes is another component because taxes destroy wealth as well. They destroy income. Keep this in mind.
Now, visualizing, this is the 500th trial. Starting with 500, we have 1 million, 2 million, 3 million over here on the axis. We see in the 500th scenario what our account balances look like. They actually really start to accelerate later in life, unfortunately, which is good for medical expenses and end-of-life care. In this simulation, we have a lot of positive investment returns on the backend. This is just one simulation where the markets happen to perform a lot better later in life than they do earlier in life.
Put this up to the 697th trial. We have some pretty good returns here. We have some bad years. Pretty good, bad, pretty good, bad. This is what it looks like. Our account balances, we have 500, a million, 1.5. They go up. We’re feeling pretty good here, but even when things are going well, we still have to keep our perspective on the long term. We see from here, they start to go down a little bit. These are the returns.
Here is another. This is what I talked about. Emotionally getting prepared for what our accounts possibly could do. We just don’t want to be too stuck in the moment when this happens. We just want to be mentally aware. We want to be prepared for if our accounts are going up or down. Today doesn’t necessarily matter so much. What matters is compounding good decisions year after year after year to give us the best probability of success. We see a bell curve structure here.
Again, by this time, we’re feeling really good about ourselves, but down here, we realize that it does come down as well. Again, that’s a function of about 12, 13 years here of really positive investment returns. Is that going to happen? I don’t know.
Now Social Security. This is a fun part for me because the decision is so critical and your Social Security decision can impact your investment, your income, and your tax plan. Social Security is an extremely critical decision when it comes to retirement. I believe it’s far too much taken for granted, or at least, far too often taken for granted.
All things being equal, I would prefer to see someone defer their Social Security because, in my experience, there is nothing more secure than knowing that you have a significant amount of income being deposited into your bank account every single month.
Now, with that said, not everyone that’s the right strategy for. Some people it may make sense to take it sooner; some people later, but as a general rule, the more guaranteed lifetime income that we have later in life, the happier we are, the more secure we are, and the less dependent on the market performing well we are.
This is an interesting analysis. At 67, the first-year benefit is $27,203. Keep in mind, that is in current dollars because, remember, the spreadsheet, it said $39,000, but $39,000 in the future is equal to $27,000 today. Take it at 62, it’s $19,000 in today’s dollars. At age 70, it is $33,000 in today’s dollars, but if we look at the probabilities, all things being equal, at 67 and 70, the probabilities aren’t that different as far as the probability of success.
Even at 62, it’s not that different, but let’s say we took it at 62, that should change our tax plan. The reason it should change our tax plan is because we are going to have larger required minimum distributions later in life. Here’s the first chart I want to show you. It is taking Social Security at 67, so the light blue is portfolio withdrawals, so we’re spending down that portfolio. The dark blue is Social Security at 67. Then we have the dark green, which is required minimum distributions, so $57,165 in 2043, $58,000 in 2044. This is how much we must distribute out of our portfolio.
Here is the chart that corresponds to that graph we just looked at, so RMD start at 72, 2043, 2044. This simulation, again, because of the investment returns, this is just one simulation, the retirement account has grown to $1.8 to $5 million. That is the balance that we have to take a distribution out and pay taxes on, but if we would have taken Social Security earlier in this same scenario, we would’ve had to take less money out of the retirement account. Therefore, theoretically, it would have grown to a much larger balance. Now our RMDs are much higher, which means we have a bigger tax problem.
When we take Social Security, understand that that’s a domino that we tip over. If you take it, the domino chain goes this way. If you don’t take it, the domino chain goes this way. It triggers a series of events that impact your taxes, your income, your account balances, everything. This is what I mean when I say we have to make good decisions. We have to compound good decisions year after year, but we have to do so in the context of how every decision we make impacts our security today and in the future.
Now, just because I’m doing this video for a single female, 50 years old, I talk about important retirement concepts in this video. If you’re not single, if you’re not 50, if you’re not a female, it doesn’t mean this video doesn’t apply to you. The concepts are very pertinent to everyone’s retirement. There’s just a few things that are more specific to someone who’s single and someone who’s female.
Couple of things to really take out of this video, I covered a lot of material, but one of the most important things is I wanted you to prepare mentally for that period heading into retirement. Once you get into retirement, for what those account balances could do, try to stay in the here and now.
Let’s not overreact to the market going down, we’re two years, three years away from retirement. Understand that if we keep that perspective, like I went through and say, “Okay, our accounts are down today, but long term, if I can have that vision, if I can have that foresight, I can make better decisions, hopefully, today.” That’s a big one. I want us to be mentally prepared for what our account balances might do heading into retirement and then also once you enter retirement.
Social Security. When you take Social Security, that will impact your income plan, where we’re taking money from. It should impact your tax plan and all of those decisions need to be made together with context of not just how they improve your security today, but how they improve your security long term.
Then, last but not least, I have to cover this one more time, inflation erodes your purchasing power. If you need $50,000 today, that’s in today’s dollars. 20 years from now, to spend that same $50,000, you’re probably going to need around $100,000. Understand that when I pose these questions, can I retire? How much can I retire with? When can I retire? We have to understand that if we need a certain amount, that we have to pull more and more and more out over time.
One more thing I want to look at is what happens if we want to retire at a different age or we want to spend a different level of income, how does that impact our probabilities? Here we have, the simulation has run another thousand different scenarios, it comes in at 81% this time. That’s an important concept. Just because that one showed 77, it doesn’t mean every time I hit that simulation button, it’s going to come back at 77. Different simulations create different results.
I like to think of a range of 5% to the downside, 5% to the upside. That’s a reasonable quick way to estimate what your real probabilities are. If it comes in at 80, I’d say you’re 75 to 85. That’s a pretty good basis.
Now let’s say Jane wants to work another two years because this is completely unacceptable. Pretty nice jump right there. That’s probably helping her to feel a little bit better. What if she says, “Troy, you know what? $50,000 sounds great, but I’m not going to spend that much in retirement. I live a pretty simple life, but I do want to retire sooner. 59 spending $40,000 a year.”
That makes a huge difference because the number one reason is we’re spending $10,000 less per year. In estimated 35 years, that’s $350 000, in simple calculation, that we don’t need. When you take into consideration inflation, that’s probably well over $600,000, $700,000, possibly that’s not needed at spending $40,000 a year versus $50,000 per year.
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