Retirement Planning at 60: I’m Single with $1 Million, Do I Have Enough to Retire?

You’re 60 and single with $1 million. Is that enough to retire? We’re going to look at a few different scenarios in today’s video, specifically the income planning, including Social Security, health care planning, which is extremely important if you retire at age 60, and the allocation of your investments. We’re also going to cover what could go wrong and what you should be aware of if this is you.

Single vs. Married Retirement: Key Differences

Now, the principles in this video apply whether you’re single or married. A lot of times we do videos about being married, and we get comments from people that are single, so we’re fulfilling that request right now and doing a single video. It doesn’t mean the concepts don’t apply to you if you are married. The big differences, of course, would be your tax bracket because married filing jointly versus single tax brackets. Also you have more Social Security checks, typically more expenses, two health cares to worry about prior to Medicare age. The overall concepts I’m going to cover today definitely apply to you whether you’re single or married.

Critical Components of Retirement Spending

We’re going to start with the 4% rule with a go-go spending plan. What most people also forget about is the health care expense and including that in the $40,000. At first, I’m going to throw that on top of the $40,000, on top of the go-go spending, and we’re going to see just where that is. We have $40,000 as our baseline living expenses throughout retirement. This is going to inflate as we go throughout the years. We have it at 2.5%. The go-go, that is $20,000 a year each year for a total of 10 years. If you like to golf, if you like to fish, if you like to travel from 60 to 70, and you want to spend a little bit more than that $40,000 baseline withdrawal amount, we’re including that in here.

Then the health care. This has two components. The $13,000, that is the cost of health insurance plus the average out-of-pocket expenses for someone in this country that’s 60 years old. Health insurance is tremendously expensive. You’re looking at $800, $900, maybe $1,000 per month, just for health insurance at age 60. $5,102, that is once you’re on Medicare, that’s the average cost of the out-of-pocket expenses that someone in that situation typically faces annually.

The big question that I would have if I was just on the phone with someone having this conversation, and they told me they had $1 million and wanted to have those spending parameters that I just went through, is what is the composition of the $1 million dollars?

Deciphering the Composition of $1 Million

Here we have $750,000 inside the IRA, $250,000 inside the non-qualified account. Non-qualified is outside of your IRA. It could be your investment, it could be savings, it could be CDs, it could be whatever, but it’s non-qualified. Retirement accounts are considered qualified dollars.

An easy way to think about this is that you qualify to pay taxes whenever you make a withdrawal. Sarcastic, of course, but when I first got into the business a long time ago, that’s how I remembered what qualified versus non-qualified dollars were. The first thing that would come to mind for me if I was having a conversation with you in this situation would be, “Okay, what is the composition of this $1 million?” Because health care, that is a big out-of-pocket expense for someone who’s retiring at age 60. We need to start to look at, how can we have a distribution plan in those first five years that helps to reduce those health care costs.

Now, I’m not going to go through this whole calculation and show you how to do it. We have other videos on the website, but I can tell you where to go. The Kaiser Family Foundation website, they have a really good healthcare subsidy calculator. If you go to that website, you can input your state, you can input your personal information, and look at what’s called your modified adjusted gross income. Now, it’s important here is that some states are on the federal exchange, and some states have set up their own exchange. I want to say there’s 13 states that have their own exchange. Don’t hold me to that, but it’s somewhere around that number.

Then you have other states that actually have their own exchange, but they run it through the federal health care system. Why does this matter? Because the calculation for modified adjusted gross income may be a little bit different in your state. Now, modified adjusted gross income is very important because when we add all of your income together, that determines if you qualify for a subsidy or not. What we would do in this particular planning situation is recommend, most likely, we would look at tax analysis as far as Roth conversion. What we do with that tax analysis is we want to have visibility into the future. We would really want to compare the two different scenarios.

Those two scenarios are, one, if I withdraw from my non-qualified account because I’ve already paid taxes on that money, it doesn’t go on my tax return. My modified adjusted gross income is actually zero. At a zero modified adjusted gross income, you would pay zero dollars for health insurance if you went through the exchange. Now, the second scenario we want to compare that to is longer term. If we looked at doing Roth conversions, does that put us into a much better situation?

Meaning if we took money out of that retirement account and converted it to a tax-free Roth and used some of the non-qualified dollars to pay taxes on that conversion, would that put us in a better situation long-term? Based on the spending levels here, my gut tells me that the Roth conversion strategy, at least a full one, probably is not the best way to go, although it may make sense to do a partial Roth conversion strategy and target a modified adjusted gross income level where you still qualify for a subsidy. Maybe it would cut the premium by 50% or 60% or 30%, somewhere in that range, and we would look at a few different situations there. Now, that’s a whole video in and of itself. That’s step four of the retirement success plan here at Oak Harvest Financial Group. It’s health care planning.

Simulating Retirement Scenarios: Health Insurance Planning

The purpose of this video is to not get into health care, but the purpose of this conversation is to help you understand what I would be thinking as a retirement planner when I look at the composition of these assets. $750 in IRA, $250 in non-qual. That would be the first part that we really have to dig into. Where are we going to get your income from? Do we benefit more by saving costs on health insurance premiums by going for the subsidy, or would we benefit more long-term by looking at a Roth conversion strategy or a partial Roth conversion strategy where we try to knock out both one and two? Have a lower health insurance premium, but also get some dollars over into that Roth IRA.

Our first simulation here is going to assume that we carry those health insurance costs, that we don’t do any planning to qualify for the subsidy. Now, one variable I forgot to mention in the beginning was the life expectancy. We’re looking at age 92 here. If you’re over the age of 60 and a male, your average life expectancy is about 85. If you’re female, your average life expectancy is about age 88 in this country.

We always want to plan for a little bit longer because if we plan for too long and you die, well, that’s okay, you die with money. If we plan for too little and you live longer, that’s a bad situation to be in. Your health, your genetics, those are personal variables that can, of course, influence the age to which we’re expecting you to live, but for this planning scenario, we’re going out to age 92.

We have 75%. That means out of 1,000 simulations and 750 of them, you pass away with money. Now, to go back through those parameters, $40,000 baseline spending throughout retirement, which is inflation, an additional $20,000 per year for the first 10 years. Then health insurance costs of about $13,000 per year prior to Medicare, which includes your health insurance premium, as well as your average out-of-pocket costs for someone that age.

The first thing we’re going to do is now assume that we had planned for the health insurance costs. We withdrew money from the non-qualified accounts, kept the IRAs deferring, therefore, we qualify for a 100% subsidy for the health insurance premium, and we are going to change this. Instead of $13,584, we’re going to change the cost assumption for private insurance prior to Medicare. We’re going to keep the out-of-pocket expenses, but for insurance, we’re going to put it at zero. This means that we have planned for achieving the subsidy, and now our expenses prior to Medicare are just about $3,600.

Now, something very important here. When you’re doing planning for health care, you have to have a minimum level of income in order to qualify for the subsidy. Let’s say you do all this planning and you get zero income on your tax return for your modified adjusted gross income. You could be shocked to find out that you actually still pay 100% of your health insurance costs because you didn’t have, I believe it’s at least, the federal poverty limit for income. It’s around $18,000 or $19,000, I believe, but don’t hold me to that number because when I last looked at it, that was an analysis for a married couple with two people in the household.

If you’re single or have three people, those are things that can change, but you can get that information on, as well as just Googling federal poverty limit and qualifying for a subsidy. Do a little bit of research here. If you have a CPA or if you have someone you work with that can help you here but make sure– what I want you to know is that if you do planning so well that you get down to a zero modified adjusted gross income, you’ll actually end up paying 100% of your health insurance costs, and you won’t find out until the end of the next year because you have to self-report your income first to qualify for that subsidy, usually in November. I think it’s November 15th, open enrollment.

Then, once your tax return gets filed for the following year, if it doesn’t match up to what you reported and you actually have zero income because you’ve taken it off from the non-qualified, you could get hit with a tax bill for that full, let’s call it, $10,000, $11,000, $12,000, $13,000. Make sure to be aware of that one.

We haven’t changed anything except that health insurance premium. We were at 75% previously. Now, we are up to 82%.

Increase the probability, not a ton, but definitely, it’s a step in the right direction. Then what we would do is we would compare the overall probability from some type of medium approach to where, okay, we’re doing a tax analysis now, possibly we’re doing some Roth conversions, and reducing the health insurance premium maybe by 40% or 60%. Again, we’re not going to go through all that today because this video would turn into an extra 15 or 20 minutes, but we just want to make you aware of some of the choices. Again, this isn’t black and white, a lot of the decisions that you have to make in retirement. There’s much more of an art to it sometimes than just a science. We gather the information, help you make the best decision possible, have conversations about it, discuss the benefits, the things that you should consider, and together, with all of that information, we hope that you can make a better decision.

Now we want to look at the risk tolerance and how possibly adjusting the portfolio, even at the slightest amount, can impact the probability of success. I’ve set the risk tolerance, or willingness to take risk, at a moderate level, which is pretty common. We started out at a 60-40 portfolio. The software is saying, mathematically, if we increase ever so slightly the exposure to equities over this 32-year period of time, the probability of success jumps up to 85. This is only 1% more stock. Now that seems like a very small adjustment, something that maybe is irrelevant, but when you look at mathematically just 1% more stock, so 61 instead of 60, it is super tiny. I get that.

Over a 32-year period, it’s tens of thousands of dollars, maybe $15,000, $20,000, $25,000, if you just look at the average rate of return. All that’s doing is, again, mathematically it’s jumping our probability from 82 to 85. In reality, this is just a snapshot in time. If the markets perform a little bit worse than expected, it could actually drop it. If they perform better, it could maybe slightly increase it. The point is that when we change even the smallest allocation to our investments, it has a consequence on our long-term success probability.

When we look at the difference between averaging 6% versus 5.5%, oh, it’s just 0.5% percent per year. Well, that could be, again, tens of thousands, hundreds of thousands of dollars. How you allocate your money is tremendously important. Even the smallest adjustments or increase or decrease in performance or exposure to equity or bonds or commodities or other asset classes, over a very long period of time, like retirement, can have a tremendously consequential impact on your retirement.

Social Security: A Key Player in Retirement Income

All right, we want to look at Social Security now. In the original analysis, we assumed Social Security was taken at age 67, which is full retirement age, and it was $2,800 a month. We see here the probability of success. This is what we would most often see in this scenario. If someone had $1 million and they wanted to retire at age 60, they start doing all this thinking, “Well, I want to preserve my savings. I don’t want to pull out from there, so I’m going to go ahead and turn on Social Security.”

I actually just had a conversation with a client just yesterday where he comes in, and I hopped in to say hello. I haven’t seen him in about a year or so. He’s working with one of our other advisors, and the first thing he says is, “Oh, I went and turned my Social Security on.” I was like, “Well, did you want to give us a call so we could run through that analysis and show some of the benefits and considerations?” Now he was at 99% no matter what he did, but still, we like to do that analysis to help understand what the impact of that decision is. That’s what all of this is about, understanding the impact of your decisions.

Little side story, back on track here. That’s often what we see, though, especially if you want to retire at 60 with about $1 million saved. The thought process naturally is, “I need to preserve my money and take Social Security sooner.” We see here, it drops to about 77%, versus if we defer to age 70, it jumps up to age 88%. The difference between taking Social Security at 62 versus age 70, if we just look at the numbers, 62, $729,000 of income, age 70, $958,000 of income.

Remember, this is for a single person. If you had two spouses that were both in the workforce and qualified for their own Social Security, that’s about a $220,000, $230,000 difference. That would be multiplied by two, so almost a %500,000 difference in those two income levels, just from taking Social Security at a different time. If we look at full retirement age, it’s about $873,000. Again, this is living to age 92. If you live less, if you live longer, of course those numbers will change.

Social Security

is a significant source of income in retirement. Again, I’m not telling you to defer it all the way to age 70. What I am telling you is, based on your particular situation, you should understand the impact of taking it at 62 versus 67 versus 70, and those other ages in between. Once you have that information, you can make a more intelligent decision. Also, you don’t have to decide at 60 that you’re going to take it at 67.

We could build a plan that is the tentative framework that we’re operating within, but then once we get to 63, let’s say the market goes down 30% and you suffer some damage in the portfolio, we may sit down and have a conversation and say, “You know what? Let’s go ahead and turn that Social Security on now. Let’s give that account time to rebound.” We would have built some other sources where you can get income from, but that’s one example of why you might want to take it earlier. You’re not stuck to any particular decision. It’s really a year-to-year analysis and conversation, and then with that information, you make the best decision possible.

Now we want to look at the sequence of returns risk. If you’re a normal viewer to this channel, you’ve heard me talk about this before. If not, sequence of returns risk is a big deal. It’s the combination of withdrawals and portfolio declines in the first few years of retirement. It’s almost like if you’re digging a hole. You are digging a hole, essentially, by taking money out of your accounts. If the portfolio also goes down substantially in the first couple of years, it just makes that hole go so much deeper.

The concern is, you dig such a deep hole in the first couple of years, when the market rebounds or your portfolio starts to increase in value, it’s decreased to such a point that the interest you’re earning on that lower amount isn’t enough to get you out of that hole, possibly. It definitely reduces your probability of success to a large extent.

Here’s what we see. Looking at first two years of retirement, down 20%, down 8%, while taking those withdrawals, the green line versus the red line. Look at the hole that we’ve dug here. Even though we’re earning positive returns in the rest of the retirement in this particular analysis, we’ve dug such a big hole that we never rebound. It’s because we’re still taking that same level of income, and that same level of income represents a larger percentage of the overall account. If you’re taking a larger percentage, it’s going to deteriorate in value much more rapidly.

This is really important. One of the things that could go wrong is, either you have too aggressive of a portfolio in retirement relative to your income needs. We call this your portfolio’s capacity for risk. If you have a large capacity for risk, that means the percentage of income that you need to withdraw is small relative to your account balance. It means you have a large capacity for risk because if the markets go down, you won’t be jeopardizing the security in your retirement with sequence of returns risk. If you have a low capacity for risk, you are absolutely exposed to something like this happening.

Now, this situation that we’re looking at, remember the parameters from the beginning, 4% rule was the baseline spending throughout retirement. We fixed the health care, so that’s virtually non-existent during the first few years of retirement because we qualified for the subsidy, but I put the go-go spending, the $20,000 per year for the first 10 years. Now, in reality, if someone wanted that go-go spending in this plan, this would be the number one thing that we’re paying attention to when we did the same annual reviews or quarterly reviews or however those are set up because this would be the biggest risk at that point.

Now, if we had a good first year, a good second year of retirement, it significantly takes the risk of this out of the picture. One, you have two less years that your money has to last, but you’ve made money in those years, assuming the market had went up. Just keep in mind how all of this is tied together. This concept is so important for your retirement. I want to show you it in another way. All of these squiggly lines represent different paths of potential returns of your investment portfolio throughout retirement. The thing to point out is these are 14 trials that all of these average between 5.3% and 5.4%, negligible difference mathematically here between these returns.

We see in about 20 years, in 2044, even though we’ve averaged 5.3%, 5.4% in all of these simulations, in 20 years, one of them will end up with $1.7 million. This other one down here, we have $636,000. The averages are virtually the same. What’s different is the sequence of returns when combined with taking withdrawals from the portfolio with this go-go spending plan.

Risk-Adjusted Returns: Smooth vs. Volatile Retirement

This is why we have to create visibility with our decisions into the future. This is why everything that we do here, and I’m showing you, is so important, but it’s also why you have to stay connected to your money, connected to your plan, and connected to that visibility over time throughout retirement.

This is why relationships are so important because we could start out going down a really good path here but all of a sudden, three years in, four years in, five years in, that path has changed significantly and now we’re on a trajectory to be way down here. If we don’t have that visibility to see the new trajectory based on what’s developed over the first three, four, five years of retirement, we may be feeling pretty good sitting rosy over here but have no idea that we’re actually on a bad path.

Now I want to look at changing the allocation. This is step one of the retirement success plan determining your allocation. This is very important. As we saw earlier just that slight increase of the exposure to equities increase the probability of success from 82% to 85%. In this column, we actually have the original 60-40 portfolio, and over here just that 1% increase in equity exposure changed us from a 5.63% long-term expected rate of return to about 5.57%. Just that little bit changed it from 82% to 85%. Again, it’s small example, not that big of a deal, but it does open up our eyes to how these changes in allocations.

Next time you’re thinking about buying a stock or selling a stock or making movements inside the portfolio, understand that these do have significant long-term ramifications. What we want to do with this? This was the current, the 60-40, this was that slight adjustment, now I’ve created a very aggressive portfolio in a very conservative portfolio and we are going to run these numbers. I haven’t run the numbers yet. Composite return here, 7% versus 4.65% but standard deviation.

Without getting too complex here, think of standard deviation is the ride that you experience in retirement as far as your portfolio returns. A bigger standard deviation means it’s a more volatile experience. Smaller standard deviation means it’s a more smooth experience. This starts to get into a concept called risk-adjusted returns where, for every unit of risk that we take, we want to have more and more reward at least relatively speaking.

We’re going to calculate all these scenarios. This is really interesting to me. The more aggressive portfolio actually drops our probability of success to 80%. That’s not surprising because the more aggressive we get, the introduction of more not-good scenarios we bring into the picture. In some of these 1,000 simulations when things go really bad in the portfolio, it’s going to be reflected because we have such a bigger standard deviation. We took some big dives in certain years, the portfolio wasn’t able to recover. Not surprising at all.

What is a bit surprising to me though is, the more conservative portfolio than our 60-40, actually increased the probability of success the same way that just a slight increase to the equity exposure did in this simulation here. Now, one thing to point out is all of the simulations are using the same return, so it might be -5% minus, -10%, +22%, +25%, that sequence, it’s the same across all of these simulations. Now, what I take from this is the more conservative portfolio is, probability-wise, the same here just simply because there was a more smooth ride throughout retirement. When the market went down the portfolio hits weren’t that large.

Of course, when the market went up the gains weren’t as big either but it just evened out over time in the simulation, to result in the same probability. The experience that, let’s say these are two different people, two different investors, even though the probability of success is the same, their experience is going to be a lot different throughout retirement. This one is going to be a lot more smooth, think first-class and Delta or United or American, and this one, okay, it might be a little prop plane, a little bit more volatile.

Strategies for Improving Retirement Success

The last module I want to go through with you is the play zone. If you don’t 85%– and 85 is a good number. I would feel comfortable with somebody retiring with an 85% probability. I’d feel comfortable even a little bit below that. Now, it doesn’t mean that we would want to improve that. We absolutely would, and again, this is without us doing any planning. This is just the initial analysis. It’s not the end of the world at 85% because that still means 850 out of 1,000. We’re fine.

We’re passing away with money, but at the same time I know, through the ongoing relationship, staying connected to the plan, having visibility into the future based on performance of the portfolio, how much money is actually withdrawn, making adjustments, having those Conversations adding tax planning in, those things are going to increase the probability, theoretically, over time. I personally would be comfortable with this.

Let’s say you’re not. You say, “Okay, Troy, maybe I don’t need $20,000 of go-go spending.” That was just a number I told you because I wanted to see if it was possible, but really I think

maybe just one trip a year. I also do a lot of, maybe, woodwork in the garage, so I’m not going to spend too much money. I’m not going to travel too many places. How does this just really quickly, if we bring this down to $12,000? How does that impact my probability of success? Well, it gets us up to 90. Let’s say just a little bit less, maybe $10,000. 92%. The cool thing about the Play Zone scenario is all of our clients have access to it. We can put different goals that we have in here, and they get to go in and do exactly what it says, play around with those numbers using the sliders. Base living expenses, we started with $40,000. This should have a bigger consequence because it’s forever, where the go-go is just the first 10 years. Now look at that, jumping from 40% to 50%, even with the reduced go-go, drops us to 63%. All of these decisions, year to year to year, that we make have a pretty big impact on our retirement.

Most important things, let’s have a plan, let’s stay connected to that plan that creates visibility into the future of how these decisions are affecting our security, and then make adjustments as time goes on. The original question was, is $1 million enough to retire at age 60? Of course, it is, but it depends on what lifestyle you want to have. If you don’t want to spend $40,000 a year or $60,000 a year, of course. A lot of people can live on their Social Security. You’ve worked hard for a very long period of time, is it enough to retire and provide the lifestyle that you want in retirement? That’s the better question.

A couple of things we covered here, health care planning, which is step four of the retirement success plan. It’s important to have IRA dollars because that’s where most of your money probably is, but also non-IRA dollars, non-qualified money. That’s because, two reasons primarily. One, we can use those non-qualified dollars to pay taxes on doing Roth conversions, so we can move money out of that tax-infested IRA into the Roth IRA, use the non-qualified dollars to pay tax preferably. Or, as we went through in this video, use those non-qualified dollars, in conjunction with the IRA or a partial conversion strategy, to provide income.

We target a modified adjusted gross income level that allows you to qualify for a subsidy to get your health insurance premiums cut by 40% or 60%, possibly even 100%. Second thing we covered here was Social Security. Understanding that the impact of taking it at 62 versus 64, 66, 70, whenever you take it, just understand that typically the difference is in the hundreds of thousands of dollars of lifetime income that you’ll receive and how that impacts your overall probability of success. That’s income planning as part of the retirement success plan, step two.

Step one, of course, is allocation planning, and we went through that a couple of different ways, but understanding that every tweak or adjustment that you make to your investment portfolio, changes these probability of success numbers. Just understand that concept. That’s the main thing we wanted to communicate here. Then, the last thing is just staying connected, having visibility, and understanding the choices that you make, the actions that you take, how they impact your overall probability of success.


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