Troy Sharpe: Do you have enough money to retire? Do you know how much income to pull out so you can comfortably and sustainably retire and stay that way?
Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of The Retirement Income Show. Step two of Oak Harvest Retirement Process is income planning. In step one, we did investment planning. Very, very important video. I encourage you to watch that one if you haven’t seen it yet. The reason we have to do investment planning first is we have to determine your willingness to take risk and also your capacity to take risk. Very important videos there.
Once we’ve determined that, now we can figure out which investments have the appropriate risk profile and return expectation, and how much income we can reasonably expect to generate. This is a very careful process that has to be done in this order in order to get you retired, stay retired, and have the type of retirement that you deserve.
With income planning, once we’ve determined the appropriate amount of risk, the types of investments, at least to the extent that you’re willing to take risk and your portfolio has the capacity to provide income with that same level of risk, income planning at its most basic sense is determining how much income and when to take from each of the respective buckets.
Most of us have savings. This is money that we’ve already paid tax on and when we take it out, we don’t pay any income taxes. IRAs, these are 401(k)s, 403(b)s, individual retirement accounts. Once we get to retirement, we roll that workplace plan into your individual account, so you have more freedom, more flexibility, more access to investments, but when you take money out of there, you have to pay income taxes.
Then, we should have a Roth IRA, or if we don’t have a Roth IRA yet, we need a plan, a tax plan, step three of the Retirement Process process, to figure out how to get money into this tax-free environment. We may pull some from here, some from here, some from here in any given year. If taxes go up in the future, we don’t want to take anything more than we have to from here. We might take from here and here. This is kind of the income planning and how it works with tax planning, but this is in its most basic sense what it is.
Now, I have a case study up here of a retired couple or someone who’s going to retire in about five years, Kevin and Nicole. They saved a little over $1 million. They plan on spending about $70,000 per year, and they want to take Social Security when they both hit full retirement age. For them, it’s age 67. If they spend the $70,000 a year, they have a 91% probability of making it through retirement, but this is how important retirement income planning is.
Let’s say they say, “You know what, we want to spend $82,000 on average per year.” Let’s call it $80,000. The probability of success drops from 91% to 73%. This doesn’t mean that they can’t retire and spend this. We might, for example, build a ladder income plan in retirement, where they do spend this for the first 10 years, but we monitor it more closely, with the intention of tapering down the spending in the slow-go years, which is typically 75 to 85 for most people.
Let’s say they wanted to spend $87,000, let’s put up to $90,000 a year. Now, at $90,000 a year, they don’t have the assets to comfortably retire and expect their money to not run out, so this drops it down to about 55%. Social Security is a very, very big part of determining how much income we can spend in retirement.
Here’s the Social Security module that’s just looking at the probability of success of them taking Social Security at different age points throughout retirement. This was the current plan. They both take it at their full retirement age. It gives them about a 91% probability of success if they spend $70,000 per year.
By the way, Kevin and Nicole, they have around about $1 million saved here for retirement. If they take it too soon at 62, the probability drops to 80%. This is one of the big reasons that the majority of people take Social Security at the wrong time. About 96% of people, according to a recent study, do take Social Security at the wrong time. What happens is when you take it earlier, later in life, you have to pull more from your savings, which makes you more susceptible to market crashes, to inflation, to higher taxes, because having that money in your account, needing to pull out of it larger sums, is possibly a precarious position to be in when you don’t have as much guaranteed lifetime income from Social Security or other sources being received.
Keep in mind, these are based on the initial goal of spending $70,000 a year. If we up the spending to $80,000 or $85,000 here, this is going to drop to 30% or 40% if they took Social Security early. The two best strategies, it looks like them both deferring till age 70, or he until 70, and she until age 67. They come in at 95% and 94%.
This is a snapshot in time. The most important thing is to stay connected to the money through annual reviews, through meetings, through sitting down and saying, this is how retirement is developing, this is how the investments are performing, this is how much income we’re actually spending, and making adjustments as needed. Step two of the Retirement process is income planning that has to come after step one. Then, step three, which is the next video in this series is tax planning because that can increase these numbers as well. It can also decrease the numbers if you do it wrong.
If you like this video, make sure to share it with a friend, to family member, possibly a co-worker, or somebody you know who’s about to retire or just retired. Hit the thumbs-up button and also subscribe to the channel so you can stay connected to your money, learning more about retirement, and having a more successful journey.