Matt provides an in-depth exploration of retirement planning amidst a volatile market through a hypothetical case study involving “Mike and Sally”. With a million dollars saved in a 401K and additional assets accrued, the couple aims to retire and sustain themselves for possibly 30-40 years or more without depleting their resources. He answers a question asked by many people daily: Can you retire with 1 million?
Matt underscores the importance of considering factors such as longevity, especially given that Sally is five years Mike’s junior, and elaborates on planning for sustained lifestyle expenses, addressing health care costs, managing investments tactically to minimize risks and ensure consistent growth, and smartly navigating social security benefits. Additionally, he emphasizes the importance of integrating a thoughtful tax strategy, especially concerning 401K withdrawals and Roth IRA conversions.
Can You Retire with 1 Million Dollars?
In today’s unpredictable financial landscape, many individuals approaching retirement are grappling with the question of whether they can comfortably retire and maintain their desired lifestyle without the security of a steady paycheck. To shed light on this concern, we present the hypothetical case of Mike and Sally, a couple who have saved one million dollars in their 401(k) plan. Our objective is to determine whether Mike and Sally can retire now and sustain their lifestyle for the next 20 to 30 years, if not longer, without depleting their nest egg.
Planning for Longevity
One of the primary considerations in any retirement plan is longevity. Mike is five years older than Sally, which means their retirement planning should factor in a potential time horizon of 40 years or more for Sally. This extended planning horizon is critical for ensuring that their financial resources can withstand unexpected expenses, long-term care needs, and provide a comfortable standard of living for both spouses well into their golden years.
Setting Financial Goals
To build a comprehensive retirement plan, we establish several key financial goals that Mike and Sally aim to achieve throughout their retirement journey:
Mike and Sally aspire to spend approximately $70,000 annually, net of taxes, during the initial 10 to 15 years of their retirement, often referred to as the “Go-Go years.” These early years in retirement typically involve higher spending as individuals pursue their desired activities and adventures.
As they transition into the later years, known as the “Slo-Go years,” their annual expenses are anticipated to decrease slightly to around $60,000.
Health Care Costs
One significant challenge Mike and Sally face is the gap between their retirement age and eligibility for Medicare. This gap stretches over five years for Mike and ten years for Sally. To address this, we allocate $15,000 per year for health care expenses in the initial five years of retirement. Afterward, these costs taper down to an extra $10,000 per year until Sally reaches Medicare age.
These additional health care expenses must be accounted for to ensure their financial plan remains resilient.
A Tactical Approach to Investing
Mike and Sally’s retirement plan involves a tactical approach to investing, distinct from traditional market-based strategies. The objective is to minimize risk and reduce potential losses in their investment portfolio. This approach aims to provide consistent growth to support their retirement income needs.
Over the plan’s timeline, the expected annualized return is nearly 7.5%, with a risk profile approximately half that of the overall market. This approach becomes slightly more conservative as they move further into retirement and their spending patterns adjust.
Income Sources and Social Security
Mike and Sally’s retirement income stems from various sources:
Mike has diligently saved one million dollars in his 401(k) account, while both spouses have accumulated $250,000 in after-tax savings. These combined assets will serve as their primary income stream during retirement.
Social Security Benefits
Strategically planning for Social Security benefits is crucial in retirement. In this scenario, Mike plans to claim his Social Security benefit at his full retirement age, which is 67, resulting in approximately $35,575 per year. At age 62, Sally intends to claim a spousal benefit equal to half of Mike’s benefit, adjusted for claiming early.
Considering the possibility that Sally may outlive Mike by a significant margin, we also account for the Survivor benefit Sally would receive in case Mike passes away earlier than expected.
A vital component of Mike and Sally’s retirement plan is a tax strategy, particularly concerning Social Security benefits and the utilization of pre-tax and after-tax assets. By delaying Social Security benefits and using pre-tax assets to fund expenses while converting them to Roth IRAs, they can potentially minimize their future tax burden and create a tax-efficient income stream.
A Robust Financial Plan
To assess the viability of their retirement plan, we utilize a Monte Carlo simulation, which provides a probability of success. In this case, Mike and Sally’s plan demonstrates an impressive 89% probability of meeting their financial goals throughout their retirement.
This high probability indicates that, out of a thousand simulated scenarios, Mike and Sally achieved their financial objectives in 890 of them, highlighting the robustness of their plan.
The Range of Outcomes
Finally, it’s essential to consider various outcomes in retirement planning. We present a range of expectations, from a best-case scenario to a worst-case scenario. The worst-case scenario accounts for adverse market conditions over the next 30 to 40 years and still projects an 89% likelihood of achieving their income goals until Sally reaches age 90.
In summary, Mike and Sally’s case exemplifies the importance of thorough retirement planning. By addressing factors such as longevity, investment strategy, Social Security optimization, health care costs, and tax efficiency, they have created a retirement plan with a high probability of success. While every individual’s situation is unique, careful consideration of these elements can help you confidently embark on your retirement journey with a well-prepared financial plan.
Also read: How To Navigate Market Volatility
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