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[Video]How Much Can I Spend in Retirement from a $1 Million Portfolio? Thumbnail

[Video]How Much Can I Spend in Retirement from a $1 Million Portfolio?

Tim presents a retirement plan for a couple with $1.285 million in savings. He analyzes their cash flows, expenses, taxes, and withdrawal rates over time to determine if their savings will last through retirement.

In a recent video, I discussed what it would be like to retire today at age 65 with a million-dollar nest egg and what you could expect from that million-dollar nest egg to see whether or not you might be able to make it work. I think a lot of people could, even though what started that conversation was an actual client that said, you know Tim, I have a million dollars, but I don't think it's enough.

In that video, we discussed that topic at a very high level view. In today's video I'm going to discuss using our planning software down in the weeds of a different couple that has about the same situation getting ready to retire and what they can expect. 

We have Jack and Sue Sample and they have a net worth of $1,285,000. They're both 63, and Jack has a 401(k) with about $500,000 in it, Sue has a 401(k) with $400,000 in it, and usually we might see a little bit in some Roth accounts, but they didn't have any here. That's fine because that's what we're going to do - try to get as much money into the Roth as we can. 

I made some other videos about that, so we're not going to go into that today. We're going to focus more on the income that we can actually have from their nest egg. They also have a joint bank account with $35,000 in it, and they have a joint investment account with $100,000, and  they have a primary home worth $250,000.

The main screen that I like to look at in our planning software is the cash flows because it has so much information. It shows all the inflows and outflows of a client's situation in retirement. The spouses of our sample couple are both 63, they want to retire at 65, and then they just want to live life similar to the way they have been. They have a little property with a lake, so they're planning on spending a lot of time there. 

They said they would need about $6,000 a month in retirement. Now that is not going to include health care or their property taxes. The property is paid for, but we went ahead and input property tax as  an expense because property taxes are kind of high in Illinois, as I've mentioned in other articles and videos.

Once we have the inputs put in of what they expect to spend and collect and what their nest egg is, we can make some assumptions and we can see what their situation is going to be.

In this scenario, they're both 63, they're going to work another year, and together they're making $170,000 a year. They're still going to have some company matches going on and they're still going to contribute to the retirement plans, so we have planned savings of $9,500. 

Then  they're going to retire and their income is going to go down. In this example,  we have Sue flipping on her Social Security at a young age of 65, which gives them $25,000 for the year. Then we're going to push Jack's out to age 70.

We like to do that a lot so you're getting some money from Social Security, but then you're also maxing out the higher earner. By pushing his out to age 70, he can maximize what he's going to get because Social Security is  basically  insurance in case you live too long. That's how I always like to frame it. 

Looking at expenses, while they're still working their company is paying for healthcare, so that's zero right now. At age 65, when they have retired, they start paying Parts B and D premium for Medicare, and they will likely be paying some stuff out of pocket. 

Another change is they have gone from having income taxes and retirement savings come out of their paycheck. Once they retire, they'll have Social Security income coming in. Planned expenses are going to be about $6,000 a month. Then with healthcare and property taxes on top of that, total expenses add up to about $89,000 a year. For future years of expenses, the software is  adjusting for inflation of about 2%.

So we only have income coming from Social Security and we need total outflows of $89,000 this year, with both increasing each year due to cost of living adjustments for Social Security and inflation for expenses. The difference between cash inflows and outflows will come from their nest egg.

The software also calculates the annual income tax payment, Obviously we would do some tax planning because a great time to do some good tax planning moves with pre-tax money, or tax deferred accounts, is in the gap years between retirement and RMD age. 

While this couple is living off of Social Security and their joint brokerage account, their tax payment may go down to almost nothing. Then when they run out of the joint account money and have to start pulling money from their tax deferred account, their tax payment jumps back up for a couple of years. When the other spouse's Social Security kicks in at age 70, they will need less money from their pre-tax accounts. 

Then at age 75 they have to start taking RMDs out, and it's a big enough payment that they're not going to use all that to live on because, at that point, their total inflows will be about $160K and their total outflows are only $131K, so that excess is going to be put back into their joint investment account because they'll have to take it out of the tax deferred account. 

Now let's take a look at the withdrawal rate because that's what's most important in retirement when you're living on part of your nest egg as an income stream. We have to  make sure we have a safe withdrawal rate, and a typical rule of thumb is between 4% and 5%. We do a little bit higher withdrawal rate at my firm because we use a guardrail withdrawal strategy, so it's typically between 5 and 6%.

Most of our clients really like this because we can show them in dollars and cents what we can do and how much we can send them. Basically it's a dynamic withdrawal process, which means it can change with the market. That way we have a plan if the proverbial you-know-what hits the fan.

The assumptions on returns are about 7.3% per year for this nest egg. Now obviously the software is linear; it just shows numbers and probabilities. We're going to have very lumpy returns in the market, so it's not going to be a consistent 7.3% every year. We might have one year where we're down 10 or 15%. We might have another year where we're up 30%. But the software is going to just show a steady what to expect over 5, 10, 20, 30 years because over time the lumpy returns of the S&P 500 or the total stock market of the United States typically has a pretty good pattern of going up.

We can also show them that, while they are expecting to spend $6,000 per month plus property taxes and healthcare, they could actually increase their spending and still be in good shape because their portfolio is continuing to grow while they are making withdrawals. 

In the software, the very end of plan shows long-term care expenses for the last 2 years based on statistics. 

With this software, we can take all these numbers and we can  move them around to predict different situations for what'll happen over time. Now with any plan, as soon as we walk out the door things are going to change, right? That is why we have all this information that we are continuously updating  all the time, and that is why we choose to walk with our clients through retirement so we can keep an eye on everything.

A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation. 

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