What The Wealth Retirement Podcast

Retirement on $625K: A Real-World Case Study (109)

• Jonathan Bednar II, CFP • Episode 109

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In this episode I'll walk you through a detailed retirement case study for David (73) and Tammy (65) who have $625,000 in retirement savings plus a $180,000 business stake to sell, examining if they can retire comfortably with these assets.

• Will their combined SS benefits of approximately $61,000 annually cover their basic annual expenses?
• Monte Carlo simulation shows an 81-83% probability of retirement plan success, even with a $30,000 European trip and $50,000 home repairs—will that work?
• Taking SS at 65 instead of 70, what's the impact?
• Will the plan remain viable even if markets perform below average for the next 30 years?
• Long-term care expenses represent the biggest threat, dropping their success probability
• Will their modest retirement savings support a comfortable retirement with proper planning?
• Inflation needs to be factored in

If you're curious about your own financial plan or how to turn your nest egg into a reliable retirement paycheck, reach out to us at Paradigm Wealth Partners. We provide full-service investment management and financial planning to help you be confident in your retirement.

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If you or someone you care about could use the help of a financial advisor and sees the value in establishing a financial plan, please reach out to me.

Thanks for Listening!

Jonathan

Speaker 1:

In this episode we're going to talk quite a bit about numbers and there's going to be some visual concepts on the screen that, if you're following along on YouTube, it might make it a little easier to follow versus listening here on the podcast. But I want to encourage you that listening still may be a good medium of choice, and so I just want to say if you're having trouble following or you want to see the visuals that we're illustrating here with these examples, you can go to the Paradigm Wealth Partners YouTube channel and watch these episodes there. And if not, if you want to just listen here on the audio version on the podcast, you can continue to do so. But I did want to make sure that you have that arrow in your quiver and you have that ability to take advantage. But I did want to make sure that you have that arrow in your quiver and you have that ability to take advantage of that if you wanted to. As always. Thank you for listening and I hope you enjoy this podcast. Can they retire comfortably with $625,000 and a business to sell?

Speaker 1:

David and Tammy came to me and wanted to discuss their retirement. She's 65, he's 73, and with $625,000 and a partial stake in a small business worth around $180,000,. Retirement is imminent. They're ready to quit working and move into retirement and enjoy the next phase of life. They want to know if that's possible. So in today's case study I'm going to walk through how we present financial planning, how we think about financial plan, so that they can make informed decisions as they moved into, in this case, their retirement. So I'm going to share my screen and walk you through this case study here now. All right, we are in the David and Tammy case study and I'm going to start here at the facts. David is 73. Tammy, 64, will be 65 in November. I have both of them living to 65 years old and I have a life expectancy of 90 for David and 95 for Tammy.

Speaker 1:

Financial priorities are retirement Goals, are to retire. They're estimated they need about $60,000 a year to live in just to cover the basics. That would be their mortgage, their Medicare, insurance, utilities, property taxes, cable, cell phone bill, those sort of things. So they think they need at least $60,000. They want to travel. They want to spend about $15,000 a year traveling from 2027 to 2037. And they don't necessarily want to leave any money to heirs, if there's any money left over at the end of their life. Of course they would love for their children to have it, but it's not a priority for them. Their priority right now is a comfortable retirement and enjoying travel their last remaining years.

Speaker 1:

Their net worth Tammy has a non-retirement, a non-qualified account. Tammy also has a 401k at work worth about $180,000. And she has an IRA that has about $368,000. David has his stake in the small business AV Consultants that he'll sell upon retirement. That's also worth about $180,000. They have a $475,000 home that has a little bit of a mortgage remaining on it. Mortgage payments around $1,000 or $1,100 a month. So they've owned this home for a long time. It's something that they've owned. They haven't moved a lot and so it'll be paid off in the next couple of years and their payment is small.

Speaker 1:

Their income I did not put any working income now, although Tammy is working for the next several months. I'm just gonna factor and pretend they're already retired. David's Social Security he started at 65, so he's already been collecting this for a few years and he is currently taking $32,820 a year, which is about $2,700 a month. Tammy, if she takes Social Security at full retirement age of 67, would be taking 28, almost $29,000 a year, which is about $2,400 a month. So right out of the gate, it appears like just their social security will cover their base needs, so that's a good sign. They have, again, current expenses of right at $60,000, with planned travel of around $15 thousand dollars a year. They are Tennessee residents. We have no state income tax and we are accounting for federal taxes using the 1040 form. I've turned off contributions and savings. At this point, as we head into retirement, we're not doing an additional retirement savings. We have no life insurance left and we have no long-term care insurance in place. So we really just have a little more than $600,000 in assets plus a business sale that's going to take place.

Speaker 1:

So let's look at how we can make this happen in their retirement plan. So I pull up Decision Center this is a great tool for me and clients that we work with at Paradigm Wealth Partners to look and see are we on track, what levers can we pull and knobs can we twist in order to give us kind of that confidence to move into retirement or other goals that we want to accomplish. So the first thing I'm going to do I'm going to turn on this plan that I kind of built out called Retire, hooray. And then I'm going to change this linear projections to show an average market. We're just going to look at what if the market is average from now through the rest of their life. And then I'm also going to show future value of money. I'm going to change that to present value of money.

Speaker 1:

I have their expenses the $60,000 a year of expenses growing by about 3% a year for the rest of their life. So we are accounting for inflation in this plan. I think that's very important. We don't think inflation is going away, and so we are accounting for inflation in this plan. I think that's very important. We don't think inflation is going away, and so we are, you know, accounting for that. And so we're going to have increased cost of living expenses over time, which is natural and anyone would expect. So as it stands now, you can see that if we do nothing and there's no health scenario meaning there's no long-term care need, there's no premature death, nothing like that then it looks like they've got a pretty good, healthy probability of success 83%.

Speaker 1:

When we think about financial planning and we're thinking about these conversations around can someone retire? Can someone meet some of their objectives, longer-term goals? The Monte Carlo tool is a great indicator. It's not the end-all, be-all answer, and so one of the things that we look at is where does this tool rank? From 80% to 100% probability of success? It's almost like a green arrow or green light for traffic light. If it's between 70% and 80, think of that as a caution light, the yellow light, and if it's below 70, think of it as a red light. We need to make some major changes and adjustments in your plan to make sure that you are on track to meet your objectives. So at 83, things look pretty good.

Speaker 1:

By the way, I don't ever like to see 98, 99, 100. If I see those numbers then I start to feel like maybe we could retire sooner, maybe we're saving too much, maybe we could spend a little bit more and do some more travel or more house repairs or gift or donate to charity. There's other things we could do with the money if we're scoring that high. So I really think the sweet spot is somewhere between 85 and 95, but that doesn't fit every case. So right now we're showing 83% probability of success and there'll be somewhere around $592,000 estimated to be left over at the end of the plan. So, barring any major upsets or any major events. Things look good. So what I want to show is first, we sell AV consultants. We know that as David phases out of work and moves into retirement he needs to sell his 7% stake in AV consultants and so that will create about $180,000 windfall into their plan. It will be a taxable event at long-term capital gain, so there will lose some of that proceeds right out of the gate to taxes, but they're still going to have a pretty healthy chunk of that cash flow or cash that goes right into their plan. So that's great.

Speaker 1:

Tammy had mentioned wanting to take a really kind of big, extravagant trip to Europe, really kind of big, extravagant trip to Europe soon after they retire. This is a trip to kind of congratulate them on successful working careers, raising their family, and really just kind of taking a big, you know a big trip, something that they've always dreamed of but haven't been able to do, to be able to do now because they've had to raise their family and pay for college and, you know, work, and so it's just been something that really they want to have, kind of the big, the big, big, big trip. So we put in here $30,000 Europe trip for retirement. You can see that that leaves us at an $86,000 probability of success. The AV consultant cell will immediately cover the trip to Europe, so really no big issue there. The next thing is their home's a little old. It's 25 years old. It's not that old, but it's time for some repairs and some updates, especially as they get older, to make it a little bit more friendly for their age and potential future needs. So we put in $50,000 of home repairs, which brought our probability of success down to 81% from 86. Still gives us an ending value of about $565,000 at the end of their life, which means their two kids so far would inherit about $250,000, $280,000 a piece, which is fantastic news. So there's money left over, currently at the end of the plan.

Speaker 1:

Now I mentioned earlier that I would love to see somewhere between 85% and 95% and of course you know I could make this happen with a few tweaks. We could lower some of their expenses. They need to watch what they spend a little bit more, or maybe they work an extra year. Ultimately, I think at 81 for them we're really really close. I wouldn't say that they should put off retirement any longer. It's not like they're retiring at 59 or 60 or 61. They've worked those extra years. David's still working today at 73. Tammy's 64, turning 65 and still working. So we are still committed to their plan. And at 81, I think them working to where they have today has helped actually increase that probability of success to 81%. Had they not been working this long, I think we would see this plan in the 60s or maybe even low 70s. So it would be a failure and I think their willingness to work has been able to extend the probability of this money lasting through retirement. So I think they've done a good job.

Speaker 1:

Now one thing I did notice, or I did kind of suggest here, is what if we delay Tammy Social Security from full retirement age at 67 to 70? What kind of impact does that make? Now you would think that that might be a positive impact. When I ran this, surprisingly, delaying that Social Security for three more years actually dropped the probability of success to 78, which tells me let's go ahead and start using that money now to offset our expenses. And that keeps our cash buckets or our investment buckets in their control so that they can use those as they see fit for the trips, for the extra travel, for increased home costs, increased living expenses in the future.

Speaker 1:

So it really doesn't make sense in this situation to delay HERSL security any longer than full retirement age. So what I would do is say we don't need to delay till 70. What I'm actually going to do is say, okay, what if we don't delay till 70? What if we change this here and say we're going to delay or not delay, but we're just going to start at 65. We're going to start taking this right at 65. And when we do that I didn't retitle that. This should say now 65. So when I do that, we drop from 81 to 80%.

Speaker 1:

I would say there's probably not much difference there between the two. Obviously, the 1% helps, but that means we're also taking income or taking more money from our investment accounts for those first two years, Because David sold his business. Those first couple of years are going to be funded from the extra cash that wasn't used for home repairs, for the big Europe trip and for taxes. So we've got about two, maybe three years there that we can utilize the sell of that business and that's why we don't see a huge differentiator between taking it 67 or 65, because we've already got some cash there to help cover those years. I would say let's start taking it 65 in this situation and start utilizing the assets or the income provided from Social Security to help offset the minimum expenses that we know we have, which is $60,000 a year, starting out Again, inflation adjusted at 3% a year, again inflation adjusted at 3% a year.

Speaker 1:

So I think that when we walk through this and I get these questions from people all the time that says you know, I've got $500,000, I've got $600,000, you know, I don't know if I can retire, absolutely you can retire, but I think you're going to have to be careful about what you spend, maybe have to work a little longer than you intended, you're going to have to be careful of your nest egg and how we turn that nest egg into a paycheck. But absolutely, I've done these many times where someone has $500,000 to $800,000 and are able to retire very comfortably without a lot of additional stress. Now the real hiccup to this plan would be if we have a kind of a significant event that may cause a long-term care need. So if we say long-term care is needed for David and I'll come in here and plug this in put in this health event, we say David needs $50,000 for assisted living from 86 to 90 when he passes away, and let's say that's $50,000 a year. When we save that and we go back to the plan now, we see that their probability of success drops to 62%. Now they still have money at the end of life, but again we're running a Monte Carlo.

Speaker 1:

So this is many simulations to see. Are you going to make it? And so this is a situation where I'm not comfortable with. You know, if there's a health event, would they have enough money to continue through their life? Depends on how you look at this. Again, one says $313,000 left over. So if it does, it would still have three or four years of assets that could cover either assisted living if Tammy needed it, or if David lives longer than 90.

Speaker 1:

But the plan starts to get a little hairy here if we have a premature death or some sort of assisted living type of need. So that's something to be cautious about. We could go out and look at acquiring some sort of long-term care plan. The problem at 73 and 65 is it's going to be very, very expensive. So you know, in my situation, you know my recommendation here would be we continue to just kind of operate as is and, you know, maybe have a child that we can move in with or a child can be a caregiver. Maybe we have in-home help. That would be less expensive. So I think there would be some options here, but that would be the big risk that blows this plan up.

Speaker 1:

One other thing that I want to kind of show here is what if we assume that there's a below average market for the next 30 years, what does that look like? That still gives us an 80% probability of success, meaning we should have money for as long as we live. But again, there's no guarantees here. But you can see that instead of having you know several hundred thousand dollars left over, we only have $32,000 left over, meaning if one, if, if Tammy lives to 96, then uh, we're probably not going to have investment assets left over. We're going to be only living on Social Security.

Speaker 1:

So longevity, which is one of the five big risks in retirement that I wrote about in my book, is also a major issue in a situation like this. As long as they're alive and they're collecting Social Security, things look great and they can spend money. If they live a long time and have longevity, then that's where things may or have an assisted living or health event. That's where things may start to get a little wonky. So I definitely think David and Tammy can retire. I think that you know they can move into that next phase of life. Is it going to be as rosy as some other people? No, but it's something that I would absolutely feel comfortable them moving forward with. So that is really what I have for today's case study. That is really what I have for today's case study and I appreciate you joining me today and listening. It's been a wonderful. You know communications that I've had with David and Tammy. These conversations I've had with them have been wonderful. I think they're great people and look forward to continue working with them.

Speaker 1:

If you're curious about your financial plan your retirement picture, maybe how do you turn your nest egg into a paycheck I would love to help. I would love to walk through a financial planning scenario with you and see what that looks like. We do this all the time at Paradigm Wealth Partners. We are a full service investment management team and also financial planning, and we do this all the time. So again, thank you for watching. If you haven't already liked and subscribe, please do so. It helps me more than you know. Be confident in your retirement. Have a wonderful day. Thanks for joining me on another episode of what the Wealth. If you enjoyed the episode today, smash that subscribe button. It helps me more than you think. Also, if you found this episode insightful and a light bulb went off, share it your friend, aunt Judy, the random guy in the office who's always talking about investments. Wealth isn't about just the cha chain. It's about our choices, chances and changing our financial futures.

Speaker 1:

The information in this podcast is informational in general in nature and does not take into consideration the listener's personal circumstances. This podcast is not intended to be a substitute for specific and financial legal or tax advice. You should consult the approved qualified professional prior to making a final decision. Tax advice you should consult the approved qualified professional prior to making a final decision. Securities offered through LPL Financial member. Finra SIPC. Paradigm Wealth Partners is the other business name for Independent Advisor Alliance. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Paradigm Wealth Partners are separate entities from LPL Financial.