Many people can actually afford to retire that don't think they can. Others think they need to work much longer than they actually to or need to save up a lot more money than they actually need.
Life is short. Do you work at a job that you really don't like or are burnt out and would love to retire but don't feel you can afford to so? Then this video is for you.
How's it going, everybody? It's Ryan here. Okay, so I want to talk about something that I think is really important, and that is is that I talk to a lot of people that either they don't think that they could actually retire, but they actually probably could afford to retire now, or I'll talk to people that think that they need to work for maybe another six or eight years, something like that, but the reality is they could probably afford to retire in another two or three years. I say this is important because I've talked to many people over the years that had felt like, "I just don't know that I've saved enough. I feel guilty. I feel like I probably should have saved more."
It's kind of like the guy that I talked about last week. He basically expressed to me his guilt about not saving and investing as much as he probably should have over the years and now feels like he just needs to continue working because he just doesn't have enough for him and his wife and he feels some guilt about that, like he should have been putting more money away, and now they're not going to be able to enjoy their younger years, perhaps, of retirement.
I say this also because it's important because let's say you're 65, just as a round number, and let's say you actually could afford to retire, but you don't feel like you can. Life's short, right? There's only so many years that we have on this Earth, and so if we can afford to do it and you want to do it, like I talk to some people that are in a job that they really don't like, or they're just burnt out, or whatever it is, if they won the lottery, they would retire, and so if you can and you want to, then it makes sense to really take a deep dive under the hood and see if it can be a possibility.
I mentioned I was talking to this guy last week and that's what made me want to put together this video because he expressed to me his guilt about not saving and investing as much as he probably should over the years, and now he's probably going to continue to work much longer. It has a happy ending, so that's the good news, but let me go ahead and share my screen here with you and I'll walk you through exactly what we looked at together.
We'll bring me over. Here's the setup. Now, this isn't his exact situation I did. It's based off of him. He actually is 66. I actually don't know his wife's age, but I just made her the same age as him, so we've got a hypothetical couple. I like to use the names "John" and "Jane," so I've got John and Jane's sample. They're both 66 years old. What we wanted to take a look at was if he were to retire, and she's already retired, she's been retired for several years, so if he were to retire next year, so he's going to continue to work for one more year and retire when he's 67, and it was interesting because what I asked him, I said, "When you retire, how much would you want to be able to live on?" and he said, "Well, my salary is $75,000 here today." You can see that right here, 75,000. "I'd really like to be able to live on that amount today."
As I explained to him, and I'll say here as well, is it really doesn't matter. Move me around here. It really doesn't matter what you're looking for gross, in other words, before tax. What really matters is the after-tax, because while you're working, you also have to pay FICA taxes, right, for Social Security, Medicare, that sort of thing, so all we really need to take a look at is how much do you need on an after-tax basis, and so that's where he said, "If I can have $5,000 a month, if we can," him and his wife, "that ideally is what we would want. But again, I don't think we can do it, Ryan." I said, "Okay, well, let's take a look." That's the 5,000. Then what we also did on top of the 5,000 is we factored in some additional costs for healthcare. My program automatically calculates the cost for a Medicare part B and D and then we factor an extra $1,000 a year for out-of-pocket healthcare costs on top of the 5,000, okay? All right, so that was the goal, retire next year on 5,000 bucks.
Let me see if there's anything else that I need to show you. Oh, yeah. Net worth. This is what he had accumulated. They've got $15,000 in a checking account and he's got about $350,000 in a 401(k), okay, so basically, for retirement, he's going to be able to draw money from the 401(k), and then they're going to have money coming from their Social Security as well. Let's take a look and see how it looked. Based on their goals, they have a 35% probability of success.
This is the software that I use. If you've watched any of my other videos, it's based on over a thousand different Monte Carlo simulations and stress tests and that sort of thing. Based on what he said, or what he thought, he was absolutely correct. I mean, they've only got a 35% chance of their retirement plan working out. In other words, for them to have enough money until their life expectancy, or their planning horizon. In their case, he said, "I want to be able to make sure that I've got enough money until we're 90, at least. After that, if we're on Social Security, okay, but I want to make sure we have enough, at least until we're 90," so that was the goal.
This is what we have to get to work because 35% is not going to be acceptable, right? We've got roughly a two-thirds chance that we're going to run out of money during retirement, so let's take a look and see what we could do. The first thing is Social Security, so the plan right now is to take Social Security at 67. That's the current strategy. Let me just see if I change that to 70, if that improves it or not. Nope, that does not. We can see there's only a 23% probability of success, so I want to keep that the current strategy just for now.
Okay, now, here's the thing, and this is what I think is really important is that what I do typically find is that when people are in retirement, they don't spend in a straight line. What I mean by that is that with most people, they want to spend most of their money that they have available to them in their earlier years of retirement. Then as they get into their later years of retirement, they're going to start to spend less. I refer to this as and other people have referred to this as well as "the go-go years," "the slow-go years," and "the no-go years."
The go-go years are usually, like in his case, let's say they retired next year when they're 67, so it could be from 67 to, like I did in this example, until they're 75. Let's say during that time period, those next eight years, they're going to maybe do some traveling, go out to eat more often. Whatever it is, they're going to be active and out there and just doing things. Then typically, what happens is after that, we call it the "slow-go years." Maybe you're now done doing the big traveling, the big vacation to Europe you've been wanting to do, or whatever it is, and now you just want to slow it down a little bit and you're not going to spend as much, so now, like based on the example I've got for them you'll see here in a second, I've got the slow-go years starting at 76 going to age 85. Then after the age of 85, they're going to get into their no-go years, so they're going to continue to spend even less.
Okay, so let's see how this looks. 35% probability of success. Let's go back over to the goals here. What you can see is we've got the $5,000 expense that they want and I'm also adjusting that for inflation, but instead of this, here's the go-go years, and I'm going to factor in the amount on the next screen that's going to show how much they're going to have in the go-go years between ages 67 to 75, and then the slow-go years between 76 to 85, and again, the no-go years are going to be from 86 to a hundred. Now, this is your plan. We can obviously make any adjustments to those ages and such, but this seemed like a real good starting point for what we were looking at.
Let's go back over here and let's plug in some numbers. Some numbers that we had started with, remember, they wanted to be able to spend 5,000 a month, so I'm going to move that down to zero and instead of just looking at it as we're going to do 5,000 a month and then we're going to increase that for inflation for the rest of our life, instead, what if they did 5,000 a month initially during the go-go years? I have to put an annual amount into this, so that's 60,000, okay, 5,000 times 12. 60,000. Whoops, wrong line. Right here. Then in the slow-go years, what if we scale that down to 54,000? Now, again, that's in today's dollars. This is still going to factor in inflation and it's going to increase that. Then in the no-go years, what if we went down to 48,000?
Yeah, let's take a look and see how this looks. What I'm going to do is I'm going to press Refresh. Big difference, right? They just went from 35% probability of success up to a 74% probability of success. Now, still not happy at 74, we've got to increase that, but that made a huge difference and they would still be able to spend the amount they'd want to spend for the next eight years and then start scaling it back a little bit, as you saw right there.
Now, the other thing that came up is I asked John, I said, "I know you would love to be able to stop working at your job. Is there a part-time job or anything like that that you may want to do or ...? For instance, because I have many people that they don't actually need to work, but they just want to work, maybe part-time, whatever the case might be, just because a little extra income definitely helps, but it also just fills the time," and so he said, "Absolutely. If I can get out just for a few hours doing something, that would be great." I said, "Well, let's just factor in a part-time job. I mean, what if you just made $10,000 a year? Nothing big, just 10,000 bucks in a year." That now brought the probability of success from 74% to 91%. By the way, that part-time job, we assumed that he would do that until he was 75 years old, so that's going all through the go-go years, basically, but just making 10 grand, so it's just a part-time job.
I mean, maybe he made 15,000, whoops, during that period of time. What would that do? That would increase it up to 94%. He actually said, "Yeah, let's assume that I make that $15,000, I find something." Then I said, "Okay." I said, "We're at 94%. That's a pretty high probability of success. It's not a hundred, but we can always make little tweaks along the way." Anything 90%-plus, typically I feel very confident in, and so I said, "Well, what if we could increase the amount of money here?" and so we took a look at increasing the go-go years a little bit, and so we said, "Okay, instead of 60, what if we get 65,000 that first year? How would that look?" 88%. Okay, brought it down a little bit, not a ton.
But the key thing is here is that, and again, this is going to be on a case-by-case basis, so your situation is going to vary from your neighbor, from your friend, everything else, but it makes sense not just to look at your expenses in retirement as just something based on a straight line. Again, a lot of people like to spend more of their money sooner and then scale down how much they spend over the years.
The other thing is when you're accounting for your expenses in retirement, which is important to do when making the decision to retire that know what your expenses are, oftentimes, I will find that people that have a mortgage, such as a 30-year fixed-rate mortgage don't factor in that the payment is fixed and just factor that in as a part of the expenses, so we need to itemize that out so we know how much is fixed, those costs versus how much the costs that are actually going to go up with the overall inflation rate and such, or at least projected inflation rate that we can assume.
Hopefully, this made sense. Just know there's a lot of different levers, there's a lot of different things that we can do, not just from the budgeting, but also from the strategy standpoint and things like that. If you would like to retire, don't think you can retire, oftentimes, it at least makes sense to have a conversation. If I can help, get in touch with me. I look forward to seeing you in the next video. Take care.