In this video I share a sample case study. These folks are both 62 and ideally would like to retire at 65 with $6,000 a month available after taxes for living expenses. Unfortunately, they weren't on track to accomplish this so some adjustments needed to be made.
We will look at the impact of some of the different things we looked at including if he were to work longer, if they were to reduce their living expenses in the future, if they were to increase their 401(k) contributions, and more...
Full Transcript:
(00:02):
In this video, I'm going to share with you a sample case study. Now this is based upon a couple that I've been working with recently, but of course I changed their names and I've also changed some of the facts as well just for the sake of simplicity. Now, this was a situation where after I put together the initial planning, I knew that I wasn't going to be able to deliver the great news that I love to deliver, which is you can retire when you want to and you can maintain the standard of living that you want to have all throughout retirement. Instead, this was a situation where we were going to need to make adjustments in order to make this work. And so let me go ahead and share my screen here with you and I'm going to walk you through some of the different things that we talked about and what the impact was on their plan if they were to incorporate these different changes.
(00:51):
So here's Tim and Tammy Sample. They're both 62 years old. Tim has $500,000 and a 401(k). Tammy has $200,000 in her 401(k). Their home is actually paid off. You can ignore that down there. And Tim's making $75,000 a year. Tammy's making 60, and they're each contributing 10% to their 401(k). So here are their goals. They're both 62. They want to retire when they're 65 and when they retire, they would like to have ideally $6,000 a month after taxes and adjusted for inflation all throughout retirement. Now, this is just for living expenses. This does not count healthcare expenses. So I account for that separately here. Now when we look at the analysis, we can see that they only have a 39% probability of success. In other words, they only have a 39% chance of having all the money that they would need and want all throughout retirement.
(01:52):
And we're assuming that Tim lives to be 90 and that Tammy lives to be 95. Now, if I'm going to be the optimist here, what that means is almost two out of five times based upon the simulation here, they're fine. They have all the money that they're going to need. Now that's not good though. That's not where we want to be. In reality, we want to get this probability of success number. I like to see it north of 75%, even better, above 85% or even 90%. If we're too high, then that means that we're probably not spending enough in retirement, but 39% is certainly not where we want to be. So if you take a look right here at this confidence tab, what this is going to show us is the amount of money they're projected to have at different ages. And you'll notice that it's a wide range and how much they might have at different ages, and that's because it depends upon in large part the performance of their portfolio. And so I'm not going to get into their portfolio too deep here at all other than to say they have pretty much a 60/40 portfolio stocks to bonds.
(03:06):
And as you can see, depending upon the performance of their portfolio, they could do really well be up a year in this range in their later years, or they could do really poorly and have actually run out of money perhaps as early as age 78 based on this simulation. So that would not put them in a good situation at all. So we want to certainly now take a look at what they could do to now improve that probability of success. So here's a couple things that we looked at first. The first thing they said was, well, we could contribute a little bit more to our 401(k). What if we each contributed 15%? Would that help? Would that make much of an impact? As I mentioned to them, it wwouldn't.
(03:51):
It took them from a 39% over here to now a 40% probability of success. So not a big improvement really. They only have three more years until retirement. But they said, let's go ahead and do that. We can afford it, let's do it. So I said, okay. I said, A couple of the things that are really going to make the most impact here are either planning to work longer and/or reducing your living expenses in retirement. And they were more keen on working longer, especially Tim, he didn't mind his job. He actually kind of liked working. If he could retire, he would, but he really didn't mind working. And if he had to work a little longer, was all right with him. Tammy, a little bit different story. She was really burned out and she was just kind of holding on, she said, until 65. So I said, okay, let's take a look at that.
(04:39):
But the first thing I want to look at here is on the Social Security side, because they were planning to take their Social Security each when they got to their full retirement age. And I said, let's take a look at making one adjustment. Actually, I said two things. The first thing was, let's take a look at first if Tammy were to take hers at 65, so when she retires and if Tim were to delay and take his at 70, let's see if what the impact might be on the plan here. Now we're getting some money coming in from Social Security with her check and we're delaying his benefit till 70, and that improves them from a 40 to a 41%. Not a huge difference at all, but still helps a little bit. And so what I said next is I said, instead of Tammy taking it at retirement, let's keep her at full retirement age and look at what the impact might be here.
(05:29):
And as we can see, it goes from 41 to 43%. Oftentimes, if your full retirement age is 67, I find that there is a pretty nice benefit to delaying, not for everybody, but in a lot of situations in preparing these types of plans, I can see some nice improvements. So that brings him now to 43%. Again, nothing huge, but it's something a little bit better. And this helps by him delaying his benefit until 70, because when one of them passes away, they're going to lose that smaller Social Security check. His check is higher. And so we are delaying his. And so when one passes away, they'll lose that smaller check. They'll also have to file a single person. So it'll help to have those more Social Security dollars. So that's the impact that we're seeing here.
(06:17):
So the next thing we took a look at is Tim said, yep, all right. Let's say I worked two more years. What does that look like? So we said, okay, you worked till 67. We're now going from a 43% up to a 60% probability of success. So definitely an improvement. He goes, well, what if I did one more year? So 68, I said, okay, so 68, we're now going from a 60 to a 69%. So pretty big jump there. So again, we're not quite where we want to be. I like to get this above 75, maybe above 85, but if we're kind of in this range, one of the things we want to take a look at here is going back to the confidence is based upon the simulation, when might they run out of money? And as we can see here, they don't run out of money perhaps until age 84. Again, that's a very low probability that they run out of money.
(07:09):
There's more of a chance that they're still going to have money here at this stage. But let's assume the worst. Let's say they did run out of money here at age 84. What would that situation look like? Well, remember, even though they have no more money, presumably in their portfolio, they still have Social Security coming in. So at age 84, their expenses are projected to be $156,000 for the year, and they're going to still get $93,000 here from Social Security. Okay, so let's see, how much does that put them short? That's around what, 63, 64,000 short. And so here's the thing, and this is the conversation that we had, and I have this conversation a lot. With these folks their home was paid for and presumably it's going to continue to appreciate over the years. So not necessarily the ideal thing, but even if their portfolio ran out of money, they still have the equity in the home which they could tap, whether they're selling the home and downsizing or whether they're taking a reverse mortgage or whatever it is, they still have that equity that they could tap into to help supplement and give them some additional income.
(08:19):
So that is something to consider. So this was nice just looking at this, going from a 39% originally. And now the only change we made is that they were going to contribute a little bit more to their 401(k)- 15% instead of 10%, adjust their Social Security strategy, and Tim was going to work for another three years right here. So the next thing we took a look at is what if instead of Tim working longer till 65, what if they were willing to reduce their living expenses? So maybe not initially, but maybe over time.
(08:54):
And what I find happens with a lot of people is that people want to spend more money in their early years of retirement, going on different trips, vacations, just going out, doing things more often. And then as people get older into their seventies and eighties and into their nineties, people tend to spend less money on living expenses in today's dollars. Again, healthcare costs are a separate animal, and that's factored in here separately, but we'll still keep it at $6,000 a month right now. But what if we were to reduce those living expenses in the future by 10% at age 75, and then reduce it again by 10% at age 85, what would the impact be there? Well, now we go from a 43% probability of success up to a 60%. And so we said, well, okay, well it's 60. What if Tim works one more year, to 66 instead of 68?
(09:52):
Well, now we're back up to 72%, which is right about, I think where we were if Tim will work till 68. And we kept the expenses inflation adjusted all throughout retirement. And the great thing was, as I explained to them in our conversation, is that none of these decisions have to be made right now. This is a process over time, especially if their investments and everything performs well, they may actually be able to increase their spending in the future. So there's always adjustments that can be made. Now another thing that we took a look at here is what would happen if one of them were to pass away early? It's always important to plan if you're married, to make sure that you're going to have the money that you need to last all throughout retirement if both of you live a long life. But it's also important to take a look at what would happen if one spouse passed away early.
(10:48):
Because remember, one Social Security check will go away, and also you'll now have to file as a single person. So let's take a look at that. So if Tim, instead of passing away at 90, let's say that he passes away next year when he is 63, well, we're going to see that the impact on the plan is a lot. It brings it down to a 33% probability of success because again, not only did she lose a Social Security check here in the future, but also she's filing single and also he was still planning to continue to work. So those dollars aren't coming in. She's now going to have to rely upon that portfolio much sooner. So that's putting her in a much worse situation. And so now the question will be, well, instead of her working only till 65, maybe she has to work. Let's say she works now till 70. What would that do? Well, now she's back up to 70 or up to 63. What if she worked until 75? Assuming that she could, I mean, certainly that'll start getting her up there. And now she's much more
(11:53):
In a solid range. Now, ideally, this is not what she wanted to do. She did not want to work past age 65 if she didn't have to. And so this is where we took a look at just getting some inexpensive term life insurance on each of them just to cover them, especially for their working years, maybe keeping a policy a little bit longer, maybe for 10 or 15 years. And that way if one of them did pass away early, they would have those additional funds. The surviving spouse would have the additional funds they'd need to provide the income that they needed there for the rest of their life. And yet, another thing that would need to be considered would be if either one of them needed long-term care and how much that might cost, and what the impact would be on their plan that they did need long-term care. So hope this has been helpful. If you like the video, make sure that you like it. Make sure that you subscribe, and I'll see you soon.