Retirement Planning: I’m 58 Years Old With $1.4 Million, Can I Retire?

Our typical client has a few basic questions. And this is what our Oak Harvest Retirement Process process helps to answer. One: do I have enough? Can I retire? How long will my money last? How do I pay less tax? And the big one is: If something happens to me, will my family be okay?

So, I recently read an online blog where this gentleman submitted a question to the editor. And he was 58 years old, with $1.4 million saved. His big question, like many of you [have]: Can I retire?

So, in this video, we’re going to go through an analysis, an income analysis, [and] an overall retirement review — based on the information he submitted — to see what the likelihood of success [is], given the information that we have. We’re also going to look at some possible solutions to help improve his overall retirement probability of success.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner professional and Certified Tax Specialist, and host of the Retirement Income Show.

Okay. So, before we get into the video, I just want to show you the Retirement Income Show here. So, we have this on our website. This is the radio show I’ve been doing for the past 10 years on KTRH 740, here in Houston. If you go to our website — it’s oakharvestfg.com. Right here [is] the Retirement Income Show, (and) you can listen to the past shows. So, take a minute to check out some of the radio shows.
Okay. So, I just made this sample analysis up. This is — I gave them fake names here — so we have Jason and Mary. And he said that he was 58 years old, his wife was a couple years younger. So he’s 58, she’s 56, currently employed making $100,000 a year, living in South Carolina. That’s important because South Carolina has a state income tax on top of the federal taxation. So, basic parameters of the initial (description) of their situation. His big question was: Can I retire?

So, we have them retiring at the beginning of next year in this analysis, him living to 92, Mary living to 94. Now, they said they were in average heath. Right now, in average health, a female is expected to live to about 88, a male about 85. But, with the advent of new technology, and medicine, treatment options, life expectancies have been increasing for a very long time in this country. We’d much rather plan for a little bit longer than average life expectancy, then to plan for [reaching] 82 or 84 and then you’re out of money.

So, this is our first analysis. Now, towards the end of this video, we’re going to look to see: What is the impact of if he retires at 60 or 61 ? How does that improve the overall likelihood of success?

In the article that he submitted, he said, Look, we live a very frugal life. We can get by on about $60,000 per year. So, this is the input that we put. And Mary alone, retired — typically, when there’s one spouse that’s dependent on the retirement income because the other spouse has passed away — needs a little bit less income. Now, overall inflation, we’re looking at around 2% here. So, the $60,000 of income in the future to pull that out of the portfolio, they’re going to need a lot more than $60,000. So, inflation and taxes play a very, very big role in helping to analyze the security of their overall retirement condition.
Now, here is the big one: So, health care expenses. Just because we can get by on $60,000 with our spending levels — so, that’s our fixed expenses, our discretionary going out to eat etc. If you’re going to retire before 65 in this country, health insurance is extremely expensive. But it’s not just health insurance. We have to be concerned about prescription costs possibly, out-of-pocket costs, copays, deductibles, other health related cost items.
So, when they’re both retired, before Medicare, there’s about a five-year period where the average out-of-pocket cost in this country for private health insurance and copays, deductibles, prescriptions, doctor visits, etc. Average is about $23,705 for a couple their age. They have to carry that cost on top of their spending for about five years. Then once Jason is on Medicare, Mary is still two years younger, so now they’re looking at health care costs on average at about $18,000. Then, both on Medicare: $9,400 per year.
Now, it’s important to understand about Medicare is that those premiums, Part B premiums, are increasing about 6%, 7%, 8% per year. The Congressional Budget Office a couple of years ago came out and said you can anticipate Medicare Part B premiums to increase at 8% per year, for the next five years. We actually saw a little bit less than that over the past year, but that’s typically what we’ve seen over many years is a right around 6 to 8% in cost increases to Medicare premiums.

So healthcare big, big expense, we have to take that into consideration.

Okay, so the next thing we need to look at is, what is their current income situation? And where are their current assets? What’s going on with that?

So in the article he submitted, he said, you know what? We’re thinking about taking Social Security early, because that’s going to help reduce the amount of money we have to pull from our savings. So based on his income, current income of $100,000 a year, the software can calculate what the estimated Social Security benefits are. At 62, there is a 25% reduction in your Social Security benefits, compared to if you took it at your full retirement age.

If the spouse also takes Social Security at that time, there is an additional reduction, which reduces her Social Security benefits. So, here are the numbers. At 62, if he takes benefits, it’s $24,806. Her spousal benefits will be $11,517.

Total Assets. So, this was interesting and very good to see. Because, if you’re a fan of the YouTube channel, if you’ve listened to the Retirement Income Show, if you know anything about us at all, I talk about the importance of tax diversification. It’s not just [that] you want to diversify your investment portfolio. It’s very important, when you’re getting towards retirement, that you start planning on what we call a tax diversification strategy. Because, once we get to retirement, we’re going to be pulling income, or you should be at least. We do this for our clients: pulling income from various buckets, doing Roth conversions, because you want to optimize your retirement.
It’s not necessarily about accumulating anymore. It’s about intelligently distributing and optimizing the overall picture — and that means reducing taxes.
So, he had submitted that they had about $700,000 in their company 401(k), but had done a very, very good job saving outside the 401(k), and they have $700,000 in what we call nonqualified investment assets as well.

So [the] total is $1.4 million evenly split between qualified dollars — where [on] every dollar they take out of there, they’re going to have to pay taxes — and then non-qualified dollars — where you have to pay capital gains and dividend taxes. But we can do some harvesting: there are some tax strategies that we can employ to help keep taxes down over time, as well as use some of those dollars to make the 401(k) a tax free account.

So, okay. Net worth about $1.4 million: that’s all I’ve entered here. Okay. So, based on everything that we’ve looked at so far, he’s 58, she’s 56, they have $1.4 million. They want to take Social Security earlier, they want to spend $60,000 a year — but because they’re younger than Medicare age, they also have to plan on paying for health care expenses out-of-pocket, plus health insurance premiums.
So, looking at all of that information so far, the computer — based on their current scenario, their current condition, their life expectancy, everything that we just talked about — this is going to run 1,000 simulations.

This is how I want you to look at retirement. Because it’s not just this one lifetime [scenario] in the theoretical world of making financial decisions. It is an imperfect science, it’s very much an art, and there are so many things beyond our control.

If we go into a recession, if we have massive inflation, if there’s a war for an extended period of time, all of these things [are] beyond our control. [They] impact our retirement account balances. And those things then can impact how much income we can withdraw — which impacts how much tax we pay, which should impact when we take Social Security, which can impact many, many other things. So, retirement is like a set of dominoes.

So, when we look at making decisions in retirement, we have to do so through the lens of probability. And, assuming that it’s not just one retirement, am I making decisions where if I lived 1,000 different times — or 100 different times or 10,000 different times — how many of those would this lead to a successful outcome?
So, this runs 1,000 simulations based on their current situation. 66%. Okay, many of you are looking at this as: Oh, my God, 66% is not good. And it’s not ideal. That’s for sure, because that means there’s a 34% chance that you [will] completely run out of money before you die. But this looks at 1,000 different scenarios as far as hypothetical market returns.
Now, the outliers up here. You can see, on the y axis here, where $20 million, $25 million, $15 million — those are outliers. We don’t want to count on the market performing at 20% per year forever. The red down here: Obviously, these are all the different scenarios where we’re running out of money. And then the green, these are this 66% of times where we die with money.
Now, this is very important: We’re going to look at an individual trial here at different times, different simulations. And I want to show you a really, really cool concept called the sequence of returns risk, because this is one of the biggest determining factors to how long your money will last in retirement.

Okay, so here is the 500th trial. The average return for this 500th trial is 5.94%. And, as we scroll down here, in this scenario, this is Jason and Mary’s estimated account balances over time. So. they’re in pretty good shape here. Okay.

Over here, we have $1 million, $2 million, that’s the total estimated account balances. And we see in the beginning — out of the first 10 years or so — most of them are positive years. They only have one negative year. This would be an ideal scenario. This is actually — if you retired 10 years ago in this country and had your money invested — this is what you experienced. Okay.

The market has averaged 15% per year over the past 10 years, and that’s primarily because the Federal Reserve has been stimulating the economy for 10 years. When all that money is out there, it’s very difficult for the markets to go down. The next 10 years may not be the same, probably won’t be the same.
But now let’s look at a different scenario: So I slide this up. It’s going to look at a different simulation. This is averaging 4.74%, so not quite as good on the average rate of return. But you know what? We still have a pretty good run in the beginning, which typically bodes well for retirement. And as we can see here, in this scenario, they’re not running out of money — although, it does get kind of scary towards the end.

Okay, so here’s a trial where we see some red numbers in the beginning. This means [that] in the beginning years of retirement the portfolio would have experienced some losses. Now, as we can see, not many years beyond we have a good 10-year run here or so, with mostly gains — including some really good ones: 21%, you know, 13%, 13%, on the backend here: 24%, 18%.
But guess what happens? They run out of money. We can see here. It happens pretty quickly, right around this point in 2040. This is about 19 years out, so they are 77 and 75 [years old]. Feeling decent at $1.1 million, but because of inflation — which we’re going to look at in a minute — the portfolio withdrawal need is so much higher. [So,] losses in these years. The portfolio loses value pretty quickly, and by 2051 here, [it s] down to about $94,000. So that’s not an ideal situation.

So, the big difference between some of the ones we looked at earlier in this simulation is what we call the sequence of returns risk. If we’re taking money out of the portfolio, and our portfolio is also losing value, that is the sequence risk: the order in which we realize returns once we start withdrawals. It’s critical to understanding this concept to retirement success.
[For] most people in retirement — and we’ve sat with thousands of families over the course of our careers and built customized retirement income and investment plans — it’s important that the investment plan is customized to generate the income as well as the tax plan. But when we’ve looked at all of these over the years, success is typically found in this range: Where the portfolio is plus 15 to plus 20 on the upside, and minus five to 10 on the downside. If you can have a range of returns in that area, you’re very, very likely to have retirement success.
So, how do you customize that portfolio, but then customize it to generate multiple streams of income while also paying less tax? And that’s what we do for clients. But when we’re looking here — I just want to convey for this particular simulation — if we have some negative years there, it’s not a good, good look.

Okay. So, now what can we do? Well, first and foremost, I want to look at Social Security, because this has a big, big impact on the overall probability of success. Also, I want to look at some solutions to generate multiple streams of income that can help provide much more security — even if the markets don’t cooperate and we go through extended periods of losses.

So, okay. So, I’ve come, I’ve went in and I’ve done a little bit of preplanning here as if Jason and Mary were clients. I said, You know what? There is definitely a concern [about] them running out of money because of health care costs, because they’re retiring soon — and because of inflation increasing the amount of income they need to withdraw from the portfolio annually.

So, I went and did a little bit of planning, and looked at secure income sources. So, for this particular scenario, looking at a secure income source or multiple streams of secure income makes a lot of sense, because even if we run out of money — as you’ll see here in a minute — most people are pretty comfortable knowing that, Hey, I still have — no matter what the market does — I have $100,000 or $120,000 of lifetime paychecks coming in.

So, this is a secure income analysis. Now we see here in the beginning, health care and their spending goal, they need to pull out about $86,000 per year. We see that increasing until Jason goes on Medicare, and then a couple of years later, Mary’s on Medicare, so the health care costs come down. But, looking at around a 2% inflation rate, we see over time, they need to be pulling out on this backend $164,000, $144,000, $123,000, $186,000. And then we have this drought here: This is where Jason passes away, and Mary would be by herself.

So inflation, that $60,000 spending goal, we see what inflation does to that over time. He’s not pulling out $60,000 anymore, it’s $186-grand that needs to be withdrawn to provide that same purchasing power that $60,000 does today.
So what have we done?

Social Security, still. Jason taking it at 62; Mary also taking it at 62. Now, what I’ve done here is: Because they’re taking Social Security younger, because they’re retiring younger, it’s very important in this scenario that they have some type of guaranteed lifetime income to support their lifestyle in case the markets don’t cooperate. So, what we’ve done is we’ve added some strategies here that get them up to about — in about 10 years here — about $100,000 of guaranteed lifetime income no matter what the markets are doing. So, this is just a strategy that’s designed to provide security.
Again, in retirement: It’s not about trying to hit the highest returns. We’re not trying to hit homeruns. We want security. So, most of our clients feel pretty comfortable if I take the goal line out here, this is looking at overall retirement income. Most of our clients are going to feel very secure if the markets crash but they still have $100,000 a year of lifetime income no matter what. Where, if the markets are doing well or bad, it doesn’t matter.
So, this is using a portion of the investment assets, about $600,000, to invest in a deferred income annuity. So, we have a lot of videos on the YouTube channel here about deferred income annuities. I think there’s two or three.

But just a quick rundown: They make the deposit with the life insurance company. The insurance company does not keep your money: If you pass away, [then] all that money goes to your family. How they work is [that] they have guaranteed growth rates of usually 7% or 8% on that money. The catch is [that] whatever it grows to at that guaranteed 7%, 8% rate, you then turn it into a lifetime income.
Again, if you pass away [after] you start receiving your income, your balances go to your family. You have access to your principal while it’s in the deferred stage — even while it’s paying out income over here. Although, the designed purpose is to allow that fixed annuity to defer at those guaranteed compounded rates of return, and then start to provide you a lifetime income.

So, I’ve just built a staggered income strategy, where one gets turned on here, the second one gets turned on here on top of Social Security, then now that gets to — come heck or high water; if the markets are going up [or] the markets are going down — we’re looking at over $100,000 of lifetime paychecks from the time they’re about 69 all the way through life expectancy. So pretty secure strategy.
Now, if we look at the probability of success: This is adding the fixed annuities with guaranteed lifetime income, versus not having the fixed annuities with guaranteed lifetime income. 86% [vs] 59%. So from a mathematical standpoint, adding the fixed annuities with guaranteed lifetime income provides a significant, a very, very strong positive impact to the overall probability of success.

Okay. So, that’s one possible angle they can look at to increase the probabilities. But I want to look at Social Security. This is the big one.
Okay. So, they decided to take Social Security at 62, or at least that was their intention when they submitted the article to the editor. So, this is just a real quick Social Security analysis. We have a couple [of] other software [program]s that do this a lot on a much more granular level. But, looking at 62, both of them taking [Social Security] at 62, the probability of success — given all the other factors — comes in at about 86%. Total lifetime benefit means they’ll receive, in current dollars, about $1.2 million from Social Security.

So, I want to take a second here, because most people don’t realize how much income Social Security actually provides us in retirement. If they both take it at 62, [and if] 94 and 92 are the life expectancies, [then] they’re gonna receive about $1.2 million at that age, and here are the annual income benefits.
Now, if they just wait till full retirement age, which would be 67 for both of them, the probability of success increases to 97%, and it’s about $286,000 in additional income from Social Security.

Now, here is something to look at. If they both wait until 70, look at this, it drops to 91%. So, I want to take a moment here, because so often you’ll read general information — whether it’s through a publication or a video — that says you should all defer your Social Security as long as possible. And a lot of times, that makes sense. But as we can see, given their personal circumstances, and their customized situation, all of us are different. For them, it makes more sense from a probability standpoint, when we take into account their spending, their life expectancy, their assets, their risk level, what other choices they’re making in their retirement plan, probability-wise says, No, we should both take it at full retirement age and not wait until age 70.

Over here, we’re looking at: He takes it at 70, she at full retirement age. So, everything we decide in retirement, it’s like a domino: It knocks over and it impacts another aspect of your retirement. Every single decision you make impacts not only what we have today, and how much income we take today, and how much tax we pay today, [but also] it impacts how much we have and can take and pay tax later in 5, 10, 15, 20, 30 years. It’s very, very critical to understand the interrelation of all these decisions that we make in retirement.

The one limitation of this software is it doesn’t do a good job of tax analysis. It considers the withdrawal sequence to be in what we call the conventional wisdom sequence. Which, again, after sitting with thousands of clients and helping them transition into retirement and prepare for retirement and then make it through retirement, we found that that’s typically the wrong strategy.
So, what is conventional wisdom? Conventional wisdom says: Your non-IRA accounts, you want to take money from them first. And then your retirement accounts, like your IRAs and 401(k)s, you want to let them defer, defer, defer, defer. There’s a lot of problems with that, and I don’t have time in this video to get into it, but if you go through the channel, you’ll see a lot of our tax planning videos. For most people — and [from] my experience, this is about 85% to 90% of people following that strategy — you will pay a lot more taxes over the course of your life and have less security.

Now, that’s not for everyone. But that is for a large majority of people, based on my experience working with thousands of families over the course of my career.

If we were to have time to go through a tax analysis for this plan, you would see that the probability — even if they took Social Security sooner — with tax planning, we would probably get this up to about 93%, 94%, 95%. Looking at full retirement age, [we] easily get this up to 99%.

Hey guys: quick break. I want you to know that if you need help customizing that investment plan to generate income inside of a tax plan. Or, if you’ve never worked with an advisor before. Or, maybe you are, but you don’t have a plan, you just have investments. There’s always a link in the description that you can click on and schedule a time to have a conversation with one of our advisors.
So, retirement is not just about what mutual funds do I own or what stocks do I own or what investments do I have. It’s: Are those investments, [] working in a customized plan to generate the income that you need in conjunction with your tax decisions, with your social security plan, with your health care plan? How are all of those things working together — because everything in retirement is related?

So, we’ve designed our Oak Harvest Retirement Process process to walk clients through the investment planning, the income planning, the tax planning, the healthcare and of course, the estate planning.

Massive changes coming down the pipe when it comes: when we talk about estate taxes with the new administration here. So, all of this needs to be working together. All of this needs to be part of a plan. And of course, you’ve heard me say — if you’ve seen many of these videos, you’ve heard me say — we want to keep you connected to your money.

This is not just about where are we now. This is nothing more than a snapshot in time when we look at the probabilities: that’s today. But being connected means you have online access 24 hours a day to your plan, and your accounts are linked up to your plan. So, as things change and if the markets are down big and you can’t sleep at night, well, guess what? You log in, you don’t look at your investment account balance, what you do is you look at your plan, and you see, Okay, I’m still at 92%, I’m at 94%. Honey, go back to bed, it’s okay. We don’t need to worry about this, we’re in good hands, we have a plan, we’re connected to our money.

So, when you hear me say that, this is what I’m talking about. And then as we go on and review this with you over time, what we’re doing is we’re benchmarking [asking], Where are we now? [And] we record the scenario. So if you retire, we do the planning, we get it up to 95%. On the onboarding process, we simply hit record scenario, and that just creates a snapshot for that date and where you are. Then when we’re doing reviews in six months and we’re looking at the plan and, of course, the investments — but the plan is what’s most important — and we’re still at 92% or 94% or 96%, [then] we’re trending in the right direction.

What being connected does is: If we start to trend down, [then] okay, we’re aware of that. We’re connected to our money so we know we need to make some decisions. We either need to spend less, [or] maybe we need to change the investment portfolio. But instead of that big grey cloud blocking the future, and not knowing if you have enough and how long your money will last By having a plan and having the accounts connected to that plan, we always know where we are so we can make good decisions, which of course helps us sleep better at night and feel more confident about our investments working inside that plan.
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