Can We Spend $10,000 per Month in Retirement?
See how Tim recently helped a couple with $1.5 million retire comfortably through tax planning, analyzing expenses, and determining probabilities. Check out this case study for insights on determining sustainable spending, maximizing savings, and balancing lifestyle goals in retirement planning.
Case Study
Today we're going to do a case study on a couple that has about $1.5 million in investable assets and a $400,000 house paid for. They had two main questions.
They are 65 and 60, and of course, I've changed some numbers and some names. They're going to be Charlie and Lucy Brown again, but they had two main questions when they came to me.
- Can we continue spending about $10,000 a month in our retirement because that's what we're currently spending and we want to keep our lifestyle the same when we retire. That was from Charlie who's about 5 years older at 65.
- Can I retire now? Lucy, age 60, said I don't mind working a couple more years, but if I can retire now and live the same quality of life throughout retirement that we've been living and not have a huge worry, then why would I want to keep working?
So those are the two main questions. Let's take a look at the software and their situation.
We have the data entered and they have a large tax-deferred balance. I think there's around $1.2 or $1.3 million in a 401(k) and then another $100,000 in an IRA.
Tax-deferred Accounts
Any time we have a large tax-deferred asset, I know there's going to be a good probability of being able to do some good tax planning in their gap years (the years between retirement and RMDs kicking in) because, whether or not they want to take that income, that is a pre-tax account, and that is over $1.4 million, not even counting if the account grows over time.
That is $1.4 million that is going to be income at some point in the future, whether it's now they're taking it out to live on or when required minimum distributions (RMDs) kick in, or even if their legacy were to inherit the assets.
So that's how you need to look at that, because Uncle Sam is, of course, the silent partner there, and he's going to get his pound of flesh.
This couple has about $400,000 in real estate and a large money market with about $225,000 in addition to the $1.4 million in tax-deferred assets.
Can We Spend $10,000/ Month?
To review their first question, they're spending about $10,000 a month now and they want to continue that in retirement.
I want to note, Charlie does have a $50,000 pension that's going to last throughout their lifetime, so that is a big part of their income. It's important to note that because, obviously, not everyone has pensions anymore.
So beyond their Social Security, which they're both going to receive at different times, he also has a $50,000 pension on top of what they're going to pull out of their over $1.5 million nest egg.
If we look at the retirement tab in the planning software, they're in pretty good shape with an 88% probability of success. I know that sometimes people say, "oh that sounds good, Tim, but what does that even mean?" Basically, it means that all things being equal, there's a very good likelihood that you will finish your plan with a good amount of assets.
Withdrawal Rate
Now let's take a look at what their withdrawal rate would be.
Charlie's pension helps the income stability ratio, which is pretty good at almost 50%.
Then for Social Security, we're going to have Lucy collect hers as soon as possible, as the lower earning spouse. Then we're going to have Charlie push his Social Security out to age 70 because he's the higher earning spouse. Then, God forbid, if one of them passes, the higher Social Security amount remains.
We have an initial withdrawal rate of 4.6%, then it goes to 4.7%, 4.4%, and we have a couple of years where it's a little bit higher, but still well within the norm. I usually try to keep it between 5% and 6% as a healthy withdrawal rate throughout retirement.
Then as Charlie's Social Security kicks in, the withdrawal rate goes down quite a bit. Then it comes back up gradually as expenses are going up over time, but they're still in pretty good shape.
Spending
So can they continue spending $10,000 a month? That answer is yes. Actually, instead of $10,000 a month, it's actually a little bit higher because the software automatically puts in healthcare, which I could have deducted but I just went ahead and left that there for a little bit of a buffer.
So we have expenses, and they're going up over time because these are inflation-adjusted numbers. The net flows are what they're taking out of their accounts.
Roth Conversions
Since they are sitting on a large tax-deferred account, I know that we could probably do Roth conversions, so I went ahead and ran the numbers. If we fill up the 22% tax bracket with Roth conversions, that will help them have almost $800,000 more in their nest egg at the end of their retirement.
To show that a different way, if you look at their total RMDs, they're going to be able to save quite a bit in taxes. If they do nothing, they're going to have about $2 million in RMDs, and then if they do the Roth conversion strategy that we're recommending, then they're going to have about $222,000 of RMDs. Obviously RMDs alone don't make the difference, but it's how much tax you're paying on each RMD over time.
If we do nothing, they're going to have about $1.4 million in taxes paid over their retirement. Then if we do the Roth conversions, they're going to have about $800,000 in taxes paid. That's over $600,000 in taxes saved.
If we implement the Roth conversions, their probability of success increases by 1%, so it goes from 88% to 89%, not a huge difference. But at the same time, they'll have peace of mind that they're going to be paying Uncle Sam about $600,000 less than they would have.
And of course, the remaining assets will go to their legacy, their two kids. Hopefully as much as they can will be in a Roth account so their heirs won't have to worry about the 10-year distribution rule and taking money out when they're in their peak earning years themselves.
Travel Goal
Another thing that Lucy had said was that she wanted to be able to travel. Well, a lot of times people plan to travel but maybe not throughout the next 20 or 30 years of their retirement if they're around 60 or 65 and we plan for them to live to 90 or 95.
So what I did was say, how about we plan on spending about $12,000 a year for the first 10 years of your retirement and then we take that off. Of course these are dynamic plans. They're always changing. So when we got close to that, we could adjust the numbers again.
If we add an expense for $12,000 per year for travel for the first 10 years, what does that do to the probability of success for them. Well it drops it down but they're still in pretty good shape. So instead of an 88% probability of success, we have an 83% probability.
That probability of success still includes the Roth conversions, but that only added 1%. So even with this plan of spending more on travel, at the end of the plan they're going to end up with over $3 million, and they would have ended up with over $4 million, so still a pretty good.
They're still in a pretty good situation with a high probability of success - the more money you take out of the plan, of course, the lower the probability of success is going to get.
Bottom Line:
This was a real quick down-in-the-weeds case study of this couple, Charlie and Lucy Brown. They had two questions that we were able to answer for them:
- Yes, they're going to be able to continue to spend about $10,000 a month in retirement
- And yes, Lucy could go ahead and retire right now and have a great retirement
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