In this video we will walk through a sample case study of a couple that were approaching retirement. The husband is 62 and the wife is 61. We will first look at what the chances would be of them running out of money in retirement if they were to retire now.
Then we will take a look at what the impact would be, and how we might be able to improve their retirement plan if they were to incorporate various planning strategies. Specifically we will look at modifying their Social Security claiming strategy, adjusting their investment strategy, and incorporating some tax planning. We will discuss some of the important things to consider, and how implementing these strategies can potentially improve the strength of their retirement plan.
Full Transcript:
This is a sample case study, which is based upon a couple that I had just recently met. They're both in their early sixties and the first thing that we wanted to find out was if in fact they were both to retire right now today, could they? What would be their probability of success? And for these folks, it was seventy-four percent, they had a seventy-four percent probability of having all the money that they would need and want all throughout their retirement years. Now the next thing that we're going to take a look at here is what strategies might we be able to implement in order to further improve the strength of their retirement plan and improve upon that probability of success number. So we're going to talk about Social Security, we're going to talk about updating their investment strategies, and we'll talk about incorporating some tax planning into the mix here as well.
So let me introduce you here to this couple. Now I've changed their names of course, and I've also changed some of the dollar amounts around a little bit, and I'm calling them Fred and Wilma Sample you'll see right here. So Fred is sixty-two years old, and we're going to assume that he lives to be 90. Wilma is sixty-one, and we're assuming that she lives to be ninety-five. Now, their goal if they were to retire right now today is to have $7,000 per month after taxes. And in addition, we also factored in some healthcare costs. I'm not going to go through the details in this card, but just know there's some additional costs for healthcare that are factored in on top of the $7,000 a month.
Now, in order to meet their goals, they have Social Security. If Fred takes at his full retirement age, he would receive thirty-two hundred dollars per month. And if Wilma takes her benefit at full retirement age, she would get $1,400 per month. In addition, they also have twenty-five thousand dollars, which is in a checking account. And then he has $850,000 in an IRA. And then they recently inherited this money, this $400,000 right here. You'll notice the cost basis is also the same. They got a full step up in basis in getting it, and we're planning to now invest this money. So this is what they have in order to make this work at this point. If in fact they were to retire right now today. So again, based upon all this, they have a seventy-four percent probability of success. Now, the first thing that we're going to take a look at here is what if they were to change up their Social Security claiming strategy a little bit.
Their plan, their thinking was, is that they were going to take their Social Security benefits at their full retirement age, which for each of 'em would be age 67. Now, also too, by the way, she was already retired. She wasn't, or she was already retired. He wasn't. He was still planning to work for a few more years. It was really this recent inheritance that's kind of prompted this question to see when in fact could they retire? Were they on track sort of thing. And as he shared with me, if he could retire, he absolutely would. I mean he was burnout, but he just figured realistically he had a few more years to go. So the adjustment that we made here to Social Security, instead of them both taking it at their full retirement age, we made a slight change. And by doing this, we increased their probability of success from a 74% up to 80%. The change that we made is to have him take his benefit at 70. We're still going to have her take her benefit at her full retirement age. We're just changing up when he's going to take his, now remember, he has the much higher benefit in this case. And if we take a look here in the cash flows so we can see how this works,
Here's Wilma's benefit. She takes it at 67. Here's Fred's benefit, he takes it at 70. Now when Fred takes his benefit, notice what happens here. She's going to start to get a little bit more, this is an additional spousal benefit that she's going to get because her benefit is less than half of his. So it works out that she'll end up getting that additional spousal benefit in that amount when she takes it at her full retirement. A now for him, there's no point in taking your Social Security past age 70 because you're not going to earn any more delayed retirement credits by doing it. So that's the longest that you can delay and get any benefit from doing that. Alright, now here's the thing. If they were in fact to retire now right away, and I'm recording this in November of 2023. So if they were going to retire, let's say the very beginning of next year, which is in another month here in 2024, they have all zeros coming in as far as income from Social Security.
So where's that income going to come from if in fact he does retire? Obviously it's going to come from the retirement accounts, which can be very unsettling to take substantial sums of money, as you can see right here from those retirement accounts, because these folks, just like many people have spent a lifetime saving and investing and accumulating money in a 401k or other type of retirement account. And then very quickly they're spending this money now, specifically for them, they're spending first from that taxable money that they had recently inherited. But nevertheless, this is quite a bit, and it can be unsettling to do that. Nevertheless, in their situation, it does improve their probability of success quite a bit by doing this. Now I want to show you one thing here. You may be asking yourself, well, what if they just went ahead and took their Social Security benefits right away?
What might that do? So let's take a peek at how that looks. So here's taking it as early as possible. Here's Wilma taking it as early as possible. Let's see what happens to this number. See that just dropped down now to a 59% probability of success. I mean, it definitely is more comfortable doing that initially because you have the cash flow coming in, the paycheck has stopped, but at least now you have money coming in from the Social Security. And you could see that right here. You could see what they're getting. And now they don't have to withdraw as much, certainly from their retirement accounts, that's now cut in half pretty much. But if they do live until 90 or 95 years old, this is the better choice for them. Okay? Now obviously there's different factors we need to consider, right? If one's life expectancy is much less, it may make sense to take Social Security much earlier for these folks. They had some pretty good longevity in their family and they were both in pretty good health today, so they wanted to make sure that they had that income for at least until 90 and 95 years old for each of them respectively.
So you can see how that looks. So let's change this back to what our plan is is for him again to take it at 70 and for her to take it at her full retirement age.
Now, one other thing you might be asking yourself, well what if, okay, he delays till 70, but what if she takes it as early as possible? How might that look? Well, we're at 76%. So again, still not quite as good, right? So again, the best option after running this through another piece of Social Security planning software really was this right here. The other factor you always have to consider here. Now presumably they would both be retired, but if either one of them were continue to work even on a part-time basis and they were to take that Social Security prior to full retirement age, you got to watch out for the earnings test because due to the earnings test, your benefits could be withheld. Now, potentially you'll get those back at your full retirement age, not in an a lump sum, but they would credit you with a positive adjustment to your monthly benefit going forward.
But nevertheless, again, in their situation here, assuming they were both to retire right now, today, beginning of 2024, they're retired. This is the best option right now for them. And again, assuming that they live until 90 and 95 years old. Alright, so the next thing we're going to take a look at here is the adjustment that we made to their current investment strategy. Now, while they were working, they had a fine portfolio, but now that they were looking to transition into retirement and perhaps much sooner than they had expected and we're going to need this money for income, we wanted to make some modifications here. So right now, their current portfolio, it had an assumed rate of return or assumed average rate of return of 6.3%. The standard deviation was 10.2%. Now, if you're not familiar with standard deviation, that's a measure of risk in a portfolio.
And the higher that number is, the higher the factor I call it, the more the portfolio is going to go up and down, the higher the highs and the lower the lows. So all things being equal, we want that standard deviation figure to be lower, especially in retirement when we're needing that money for income. So what we were able to develop here is a portfolio that had almost the same assumed rate of return, not quite 6.2% instead of 6.3% here. But what we were able to do is create a portfolio that had lower volatility. And you could see that here with the standard deviation of 7.3 as opposed to the 10.2% number over here. And what you're going to see when I go back to the retirement analysis screen is that even though we have a lower assumed rate of return, albeit not by much 0.1%, but by lowering that standard deviation, as we've been able to do that by creating a portfolio that has less volatility, this actually puts them in a much better position. So right now, let's change that to the optimized Social Security. So after optimizing Social Security, they're at 81%. And then once they optimize Social Security and make the adjustment here to their portfolio, that improves them up to a 91% probability of success. So pretty substantial right here.
The next thing that we want to take a look at is a little bit of tax planning. And with these folks, they had an opportunity to incorporate some strategic roth IRA conversions over time. So remember, Fred has that IRA for $850,000. And when he withdraws money from that, that's going to be subject to ordinary income tax. Any of your pre-tax retirement accounts, when you withdraw money from them, that money is subject to ordinary income tax. So one of the things you want to be mindful of in retirement are opportunities to withdraw money from those accounts. And you really want to manage where you are within the tax brackets because if you can withdraw money from those and perhaps pay no tax at all because you haven't even used up your standard deduction, or maybe withdraw some money and just enough to maybe fill up the 10% tax bracket, that might be something you want to take advantage of because eventually that money is going to be taxed whether you have to withdraw that money to live on or whether you need to take that out in the form of a required minimum distribution because the IRS now makes you have to take that money out.
So it's just about being mindful on where you are within the brackets and how much you'll have to pay in tax when you take those distributions. So specifically for them, if they were to fill up that 10% tax bracket, if they were to look for opportunities to only realize just enough income, only convert just enough each year and still stay within that 10% tax bracket, this could help improve the strength of their retirement plan quite a bit. It's projected that at their life expectancy, they'd have about $398,000 more by filling up the 10% tax bracket, identifying these opportunities for them. If they, you'll see right here, they would convert only for the first five years and then they would be done no more conversions after that money. Once they do the conversion, you'll see that's over here into the tax-free account. That's the Roth IRA.
And you know that's going to continue to grow over time, of course. So they'll have that, they'll have the tax deferred account. This is the IRA here, and you'll notice this is the taxable account. That money that they had inherited. They go through this money pretty quickly. And the reason is, if you recall, the plan is for her to take her Social Security at sixty-seven, and for him to take his at 70. So they're having to withdraw quite a bit from here for living expenses. And also they're going to use the money from here to pay the tax on the conversion as well. Okay, now let's take a look at the tax details on this side. So you can see the amount of taxes that they're having to pay in this strategy aren't very high, right? Because they're not having to pay very much in income taxes at all.
If they're just withdrawing money from their newly inherited money that they receive, they get a full step up in basis on that. So we want to take advantage of the opportunity to utilize the standard deduction and also that 10% bracket, get some money out, do some conversions, pay very little in federal income tax. There's a little bit of state tax as well. We're in California here, but that's a very low tax rate, will help put them in a better position again for the long term. So let's take a look at the actual probability of success and what changed there. So again, right now they're at a ninety-one percent chance, or ninety-one percent probability of success just from optimizing the Social Security and updating their investment portfolio. But if we also incorporate these Roth conversions into the mix, that's now going to improve their probability of success up to ninety-four percent.
So definitely an improvement. And the real nice thing with this particular case study was that when these folks came to see me again, she was already retired, but he wasn't thinking that he could retire. Now, he was thinking he'd still have to work for a few more years, but in their situation, they could retire. I mean, I know this is ninety-four percent is not a hundred percent. It's really close. There's other different tweaks and things that we can do to potentially improve upon that plan. Or perhaps later on in life, maybe they would decide to live on a little bit less in order to make this work. Or in their case, what he said is, well, I could quit my main job, my stressful job. Maybe I'll just get something. And so then of course we can take a look at that and see how that might be able to help the plan or what the impact would be there. So I hope this little sample case study was helpful and that you found it beneficial. If you did and you liked this video, make sure that you like the video and that you also subscribe and I'll see you in the next one. Take care.