May 27, 2025 • 18 mins
In this episode, we walk through a retirement planning scenario involving a couple in their early 60s with a $4 million investment portfolio. Their financial plan reveals something surprising: they may not need to wait until 65 to retire. Instead, thoughtful planning opens the door to retiring earlier—without compromising the lifestyle they value.
What we cover:
• A breakdown of how a $4 million portfolio can support early retirement
• Income sources, spending needs, and sustainable withdrawal strategies
• The impact of delaying Social Security to age 70 on long-term portfolio health
• How adjusting travel or discretionary expenses affects financial longevity
• Why the right financial plan is less about hitting a number—and more about designing a life
Whether you're working toward financial independence or already approaching retirement, this episode offers insight into how personalized planning can unlock real flexibility—regardless of your portfolio size.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Imagine you're 60 years old and you have a little
more than $4 million in yourretirement portfolio.
You're probably feeling likeyou're on track for a good
retirement, but you might beasking yourself how much can you
actually spend once you getthere and what can you do to
maximize this portfolio thatyou've worked so hard for over
the course of your lifetime?
That's the exact situation thatTommy and Monica find
themselves in today.
We're going to go through theirplan because Tommy and Monica
have been so focused on saving,on working on putting money away
(00:23):
, they've forgotten to thinkabout what do we actually want
this to do for us?
What can retirement look likeif we take the right steps today
to get there?
So let's go through theirfinancial plan together to show
you where they are, what theirgoals are, what strategies exist
, so that you can see howthey're optimizing this and
might be able to do the same foryour portfolio.
Now, whether you have $4million in your portfolio, way
(00:43):
more, way less, the principlesthat we're going to talk about
today are what I want you tofocus on, Not the numbers, but
the principles and the framework.
So let's jump into Tommy andMonica's plan.
As you can see here, tommy is61,.
Monica is 62.
They have $4 million in theirportfolio.
They have their jointinvestment account.
(01:03):
They have 401ks IRAs and then aRoth IRA for Monica.
They also have property, sothey have their property that
they own.
$925,000 is the value.
The annual property taxes are$7,000.
And they have a mortgage thatthey're continuing to pay down
on that property.
So this is a snapshot of wherethey are today.
What they're wondering, though,is are we on track and yes, it
(01:25):
might seem like this is a bignumber they have in their
portfolio?
Of course they're on track, butuntil you've actually gone
through the planning process,until you've actually worked
through what do you want to dowith this money and when do you
want to be done working, it'ssometimes difficult to know
exactly what this money can dofor you.
So let's do that for Tommy andfor Monica right now.
Here's the goals that they'veexplained, or here's the goals
that they've laid out.
They want to be done by 65.
There's nothing magical aboutthat number.
(01:45):
In fact, they don't actuallylove what they're doing for work
today.
They just always thoughtthey're supposed to work until
65.
It's what their parents did.
It's what the people they workwith are doing.
It seems odd to be done beforethat age because everyone else
around them is working until 65.
When they do retire, they wantto be able to spend $12,000 per
month.
So this is after taxes.
This is money that's in theirbank account for groceries, for
(02:05):
utilities, for entertainment,for living the life that they
want to live.
On top of that, they want to beable to travel.
They want to have an extra$40,000 per year to travel.
That's not going to be forevery single year after they
retire, but for the first 10years.
So retire at 65 and untilthey're 75, they want an extra
amount to travel.
Annual health care costs so ifthey retire they will be at
Medicare age already if theyretire at 65.
(02:27):
But what we're planning for isPart B and Part D premiums.
They will have those expensesand an additional $4,000 per
year of out-of-pocket expensesfor the both of them at age 65.
Next, home improvement.
They love where they live andthey want to make sure they have
an extra $20,000 per yearbudgeted in either for
renovation or home improvements,home maintenance things to make
(02:47):
sure they can continue topreserve this home that they
really love and really want tostay in for as long as they can.
And then finally, a new car.
They want to allocate $60,000every five years.
So maybe this is every 10 yearsfor each of them, but every
five years one of them isgetting a new vehicle and that
cost is $60,000.
Their question is can we makethis happen?
(03:08):
They know they're saving, theyknow they're putting money away,
they know they think they're ona good track.
But what they're wondering iswhat can that actually do for
them?
How can they translate thesuccess they've had financially,
the savings they put away, intothe retirement that they want
to maintain?
The next thing we want tounderstand is what is their
income?
Tommy works in tech and hissalary is $182,000 per year.
Monica is an attorney.
(03:29):
She's making two hundred andfifteen thousand dollars per
year.
They both have bonuses abovethis, but those bonuses aren't
guaranteed, so we're not goingto assume that they're going to
happen every year that they keepworking.
We're just reflecting theirbase salaries.
Then they both have SocialSecurity Tommy's benefit at his
full retirement age.
So if you were to collect atsixty, seven would be four
thousand per month.
But he's planning to collect atage 70, which means he'll get
(03:50):
three years of delayedretirement credits, which means
he'll actually get 24% more thanthis on a monthly basis if he
waits until 70.
Monica, at 70, will do the same.
Her full retirement age benefitis $3,900 per month, but if she
waits three more years 68, 69,70, she'll get an 8% increase on
that every single year.
That is called delayedretirement credits.
And then they also expect aninheritance.
(04:11):
They're expecting, in aboutfive years, to receive about
$600,000 from Monica's parents,who are getting older, and they
think that when they sellMonica's parents' home, they
would end up with about $600,000.
So these are some of the incomesources that they will have, and
what they really wanted helpdoing is not knowing.
Are we okay?
Are we going to have enough tospend something in retirement?
They were beyond that.
They were wondering what can wedo with all this?
(04:33):
When you factor in socialsecurity and inheritance and our
home and our 401ks and ourinvestment accounts, what can
this actually create for us?
So think of this as some of theresources that can help create
and the goals is what weactually want that to look like.
This is the tangible impact ofwhat we're doing Now savings
(04:56):
they are both saving.
They're both maxing their 401kbetween now and retirement.
So, with all this in mind.
Let's now look at what can thisall do for them?
And what I always like to do isgo through the retirement cash
flows first.
Before looking at investmentallocation, before looking at
tax strategy, before looking atsome of these other things to
optimize, let's first have aclear understanding of where are
Tommy and Monica in relation totheir goals.
So this is their retirementcash flows, and what this is
gonna show you is, every singleyear, what income can they
expect?
(05:16):
Income, as you can see, isgonna start out as salary.
They'll have salaries for thenext few years until they fully
retire, and then there's a gap.
There's no outside incomesources because there's no
salary anymore.
They will have social securityonce they turn 70.
And you see, those benefits arepretty strong, very strong
social security benefits, butthere's a gap of a few years
between the time they retire andsocial security kicking in,
(05:38):
that they actually won't haveanything coming in.
So that's one income source.
Another flow right here.
This is their inheritance.
We're expecting a $600,000inheritance when Monica's
parents pass and her proceedsfrom the sale of their home.
That's something that we'regoing to expect in 2030.
So those are income sourcescoming in, but that's only half
the equation.
(05:58):
The other half, arguably themore important half, is what do
we want that to do for us?
What are the expenses thatwe're going to have?
Not just because these thingsare expenses, but because these
expenses allow us to do thethings we actually want to do.
So if we look at thatspecifically, starting when they
retire, here are their livingexpenses of 162,000 per year.
Where that comes from is theysaid that they wanna spend
(06:19):
$12,000 per month.
That's $144,000 per year, butthat isn't today's dollars.
We need to assume thatinflation is continuing to grow.
So by the time that theyactually retire, it would take
$162,000 per year to buy thesame basket of goods and
services that today they couldpurchase with $144,000 per year
or $12,000 per month.
(06:40):
So that's what this number is.
This number here allows them tomaintain their monthly
lifestyle that they want tomaintain.
Now, in addition to that, theyalso have housing expenses.
As you can see here.
Here's a projected mortgageprincipal and interest payment.
Now that goes away at somepoint.
They're projected to have theirmortgage paid off by the age of
70.
If some of these bonuses comein, they'd actually probably
have this paid off by the timethat they retire.
(07:00):
We're playing it a little bitsafe and a little bit
conservative, assuming nobonuses.
Assuming it a little bit safeand a little bit conservative,
assuming no bonuses, assumingthis isn't actually paid off by
the time that they retire.
So they would have a fullmortgage payment up until the
age of 70.
And after that the principaland interest portion goes away.
But their property taxes, theirinsurance, that remains, and so
you can see how their totalhousing expense is going to
change year by year.
Now, by the way, if you want tobe able to plug your numbers
(07:22):
into something like this, youcan get access to this very same
software.
It's in the Retirement PlanningAcademy.
Link is in the notes below, butyou can run this with your own
numbers in the same way thatwe're doing this for Tommy and
for Monica.
So those were their expenses.
Now, beyond that, they haveother goals, the other goals
starting when they retire.
Every five years they need topurchase a vehicle, or they want
to purchase a vehicle.
They have a vacation goal, notevery year throughout retirement
(07:45):
, but for the first 10 years ofretirement.
You can see that goes awayafter.
And then property.
This property is their homemaintenance and renovation
expenses.
They want to have an extra$20,000 per year in today's
dollars to make sure they cankeep their home in the condition
they want it to, to make surethey're doing the things with
their home.
So that's all of that.
And then, finally, the taxpayment.
What's the expected amount thatwe need to pay in taxes to have
(08:07):
enough leftover for these goals, for these expenses, so on and
so forth.
So why do we go through allthat?
We go through all that, everysingle number, from the day they
retired till the day that weexpect that they pass away.
We want to know what income doyou have coming in?
What expenses are you going tohave?
We really need to model thisout, because what this shows us
is this shows us, tommy andMonica, now we can get a very
(08:28):
clear picture of what yourportfolio needs to do for you,
meaning this isn't just some $4million portfolio or whatever it
happens to be in your case.
We don't need to know thenumber.
We need to know what's requiredfrom that portfolio.
How does that portfoliosupplement social security,
other income sources and allowyou to do everything that you
want to do?
Supplement social security,other income sources and allow
you to do everything that youwant to do.
(08:49):
That's what this number givesus.
This net flows shows us whatdoes your portfolio need to do.
How much are we taking out ofit every single year to
supplement social security andallow you to live your life?
So you can see this first fullyear of retirement here, their
total outflows are $400,000.
Again, as a reminder, this is acombination of their tax
payment plus their goals, plustheir core expenses.
That all adds up to $400,000.
(09:09):
They have zero in income flows,no social security, no salary.
Aka, that full $400,000 needsto be fully pulled from their
portfolio.
The following year they have$600,000 of inheritance.
That $600,000 compared to theirtotal outflows, you can see
some of that would be spent.
The remainder would be saved,would be something that's
(09:30):
actually building theirportfolio.
Then, the following year, youcan see, year by year, what
their actual net flow is, whattheir actual portfolio liability
is, and that number is veryimportant.
This isn't important from anabsolute sense.
There's not a good or badnumber here but what we want to
do is compare this number totheir total portfolio value.
So what does this represent asa withdrawal rate?
Well, the final thing we needto do is we need to understand
(09:52):
what is their portfolio expectedto look like by the time that
they retire.
Well, if we go through this andwe go through their total
portfolio today, their plannedsavings, their total, match an
average portfolio return here.
Now, this is in no way aguarantee Every single year
you're going to see a positiveportfolio return, because we're
simply looking at averages.
The reality is, in many yearsthat number will be a lot higher
.
In many years that number willbe a lot lower.
(10:13):
We're simply starting with anaverage in this projection.
But if we look at this, if theyget these average returns,
their $4 million portfolio today, by the time they're both fully
retired, is closer to to 5.4million.
So what we can do is we want tocompare.
How do these net cash flows,what does this represent of
their portfolio balance as awithdrawal rate, and that's
going to tell us what theexpected withdrawal rate is.
(10:35):
So here that is on this page.
Here this withdrawal rate oftheir portfolio.
You see that first year it'salmost 7%, taking 400,000 out,
and that's before socialsecurity has started.
So there's a lot of pressure ontheir portfolio.
The following year there's nowithdrawal rate.
That's simply because theinheritance comes in and they
have a net positive flow totheir portfolio more money
coming in and income thanthey're spending.
(10:56):
But once things start tonormalize, that withdrawal
rate's in the 5% for a couple ofyears.
Then it's down to 4%, then itdrops again to less than 3%.
And the reason it drops lessthan 3% is at this point Tommy
and Monica both have socialsecurity coming in.
They both have strong socialsecurity benefits.
So every dollar coming fromsocial security is one fewer
(11:17):
dollar that needs to come fromtheir portfolio.
That explains why thiswithdrawal rate is so low.
So if we look at this across theboard of assuming these
withdrawal rates from their planall the way across their
retirement, you can see thathere they are today.
They're continuing to workuntil the age of 65.
Their portfolio balance isexpected to reach about $5.4
million or so under theseassumptions.
(11:37):
Again, these assumptions arenot guarantees.
It's just an average rate ofreturn that we're going to start
with.
After that point you can seetheir portfolio levels off a
little bit as they startspending it for the first few
years and then it starts to pickup again as social security
kicks in and less pressures onour portfolio because social
security income is coming in andtheir portfolio continues
(11:57):
growing.
One thing that's difficult hereis this is looking at dollars in
nominal terms.
Yes, $14, $15 million is a lotof money at that point, but
let's actually look at that intoday's dollars.
Today's dollars allows us tosee what does that actually feel
like today?
What does that represent today?
And what you can see is itmeans their portfolio is staying
about the same in terms of itsreal value throughout their
(12:18):
retirement.
Okay, so all that's great, butso what?
What is this actually tellingus?
What are the actual changesthat Tommy and Monica can make?
Well, really, the goal offinancial planning is to give
you a very clear sense of whereyou're headed in your baseline
plan Before you actually makeany changes.
What are you on track for?
And, as we see, tommy andMonica are on track for a very
healthy retirement, a highprobability of success, the
(12:39):
ability to do a lot of things,but this doesn't mean this is
what their plan should be.
I mentioned that Tommy's intech and Monica's an attorney
Two very stressful jobs, jobsthat are not necessarily sure
they want to do until 65.
If you recall, I mentionedthey're working until 65 because
they almost feel this sense ofyou're supposed to.
Everyone else is doing it.
So why not?
But once we start to look atthis, we want to explore options
(13:00):
.
What if we don't just take yourplan for what it already is?
What if, or what would thislook like if we don't just take
your plan for what it already is?
What if or what would this looklike if we were to retire
earlier, monica?
What if you were to retire at62?
And tell me what if you were todo the same?
Let's say do it, let's justexplore what would the impact on
your plan be?
The impact would, of course, befewer dollars, because that's
fewer years of saving, it'sfewer years of compound growth,
(13:24):
it's more years of drawing downyour portfolio, but you're in a
position where that's notsomething that is off the table.
This was very reassuring forTommy and Monica to know.
It's very reassuring to knowthat you could potentially do
this much sooner than age 65.
If you're starting to feel alittle burned out, it's good to
know that you're a few bad daysaway from being able to tell
your boss, being able to tellyour company, that you are out.
(13:45):
So that was incrediblyreassuring to them.
Now they would like to see thisnumber a little bit larger, not
necessarily because I thought itneeded to be, because keep in
mind probability of success 80%.
What happens in that 20% ofcases Well, that's 20% of cases
where they quote unquote fail.
They still have a home worthseven figures.
They still have two socialsecurity benefits coming in.
(14:05):
The combination of those twobenefits in the first year, when
they're both 70, is about$150,000 per year.
So even failure in this case isnot the end of the world,
because of their strong socialsecurity benefits and because of
the equity they have in theirhome.
However, if they want to seewhat are some changes they could
make to drive this number backup higher, I want to show them
that.
So I said what if you simplytook $1,000 per month of that
(14:33):
$12,000 and you said we're goingto back that out, we're going
to cut expenses by $1,000 permonth in retirement, you've made
up a pretty significant chunkof that drop that you
experienced from 95 to 88%.
So that was, of course, veryreassuring for them to see that
there's relatively small thingsthey could do to get back to
this confidence zone that Ididn't necessarily think they
needed to be in, but it at leastwas reassuring to them to see
that they could be Again as areminder.
If you want to see what this islike for you, check this out in
(14:55):
the Retirement Planning Academy.
You can get access to the samesoftware and also subscribe, if
you've not already done so.
We go through lots of thesecase studies and I want to make
sure that you don't miss them.
The next thing here is what ifthey do want to work until 65?
Sometimes just knowing that youcan retire is enough of a mood
booster.
It's enough of an energizer tosay you know, I will keep
working because I know I don'tneed this job anymore to meet my
(15:16):
needs.
I could retire anytime I wantbecause I'm now financially
independent.
So what if, because of that,they almost have this new lease
on life, this new lease on work,to say, you know what?
I'm going to keep going, butI'm not going to let myself feel
the intense pressure and feelthe intense stress if I need to
have this income so that getsthem through to 65.
Well, if they're going to dothat, we're going to go back to
the base case here.
We don't necessarily need fortheir probability of success to
(15:38):
be 95%.
We don't need for them to bepassing If I go back to future
dollars.
We don't need for them to bepassing away with $15 million,
if you recall, in theirportfolio.
So we said what are some otherthings that we could look at
doing?
Well, one of them is you couldincrease your lifestyle.
Do you want to travel more?
What if this, instead of being$40,000 per year?
What if this was $60,000 peryear?
(16:01):
What other amazing things couldyou do with another $20,000 per
year in traveling?
And, by the way, what's thecost of this?
This cost is relativelyinsignificant.
I don't want to say a milliondollars is insignificant it's
not at all.
But when you see where they'regoing to be versus where they
were going to be, it's not goingto make that much of a dent in
terms of their actual portfoliovalue or their livelihood.
(16:21):
So that's something that Iwould encourage them to do.
Maybe they don't want to travelmore, but maybe they do want to
increase this.
What if they want to increasetheir normal monthly expenses?
That's something that they canlook at doing.
If they end up doing that samething, they're going to have
less money, they're going tohave fewer dollars at the end of
the day, but they're stillgoing to be in a position where
they have enough to meet theirneeds over the course of their
(16:43):
lifetime, their probability ofsuccess is certainly lower, but
that would just be somethingthat they need to monitor.
So this was very telling forMonica and for Tommy.
And whether you have $4 millionin your portfolio a lot less, a
lot more the key is when youactually have this projection,
when you actually have this plan, you start to live with some
degree of intentionality.
You know the impact of workinglonger or shorter, you know the
(17:05):
impact of saving more or less.
You know the impact of how muchyou spend in retirement.
All of these things start to bemuch more quantifiable, which
allows you to live life withthis degree of intentionality.
Because, at the end of the day,for Tommy and Monica, it's not
about their portfolio size, it'snot about their social security
income, it's not about theirwork.
It's about what can thosethings support for them in terms
(17:25):
of what they actually wanttheir life to look like.
Root Financial has not providedany compensation for and has
not influenced the content ofany testimonials and
endorsements shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
(17:46):
regarding these testimonials andendorsements.
Once again, I'm James Canole,founder of Root Financial, and
if you're interested in seeinghow we help our clients at Root
Financial get the most out oflife with their money, be sure
to visit us atwwwrootfinancialpartnerscom.
Imagine you're 60 years old and you have a little
more than $4 million in yourretirement portfolio.
You're probably feeling likeyou're on track for a good
retirement, but you might beasking yourself how much can you
actually spend once you getthere and what can you do to
maximize this portfolio thatyou've worked so hard for over
the course of your lifetime?
That's the exact situation thatTommy and Monica find
themselves in today.
We're going to go through theirplan because Tommy and Monica
have been so focused on saving,on working on putting money away
(00:23):
, they've forgotten to thinkabout what do we actually want
this to do for us?
What can retirement look likeif we take the right steps today
to get there?
So let's go through theirfinancial plan together to show
you where they are, what theirgoals are, what strategies exist
, so that you can see howthey're optimizing this and
might be able to do the same foryour portfolio.
Now, whether you have $4million in your portfolio, way
(00:43):
more, way less, the principlesthat we're going to talk about
today are what I want you tofocus on, Not the numbers, but
the principles and the framework.
So let's jump into Tommy andMonica's plan.
As you can see here, tommy is61,.
Monica is 62.
They have $4 million in theirportfolio.
They have their jointinvestment account.
(01:03):
They have 401ks IRAs and then aRoth IRA for Monica.
They also have property, sothey have their property that
they own.
$925,000 is the value.
The annual property taxes are$7,000.
And they have a mortgage thatthey're continuing to pay down
on that property.
So this is a snapshot of wherethey are today.
What they're wondering, though,is are we on track and yes, it
(01:25):
might seem like this is a bignumber they have in their
portfolio?
Of course they're on track, butuntil you've actually gone
through the planning process,until you've actually worked
through what do you want to dowith this money and when do you
want to be done working, it'ssometimes difficult to know
exactly what this money can dofor you.
So let's do that for Tommy andfor Monica right now.
Here's the goals that they'veexplained, or here's the goals
that they've laid out.
They want to be done by 65.
There's nothing magical aboutthat number.
(01:45):
In fact, they don't actuallylove what they're doing for work
today.
They just always thoughtthey're supposed to work until
65.
It's what their parents did.
It's what the people they workwith are doing.
It seems odd to be done beforethat age because everyone else
around them is working until 65.
When they do retire, they wantto be able to spend $12,000 per
month.
So this is after taxes.
This is money that's in theirbank account for groceries, for
(02:05):
utilities, for entertainment,for living the life that they
want to live.
On top of that, they want to beable to travel.
They want to have an extra$40,000 per year to travel.
That's not going to be forevery single year after they
retire, but for the first 10years.
So retire at 65 and untilthey're 75, they want an extra
amount to travel.
Annual health care costs so ifthey retire they will be at
Medicare age already if theyretire at 65.
(02:27):
But what we're planning for isPart B and Part D premiums.
They will have those expensesand an additional $4,000 per
year of out-of-pocket expensesfor the both of them at age 65.
Next, home improvement.
They love where they live andthey want to make sure they have
an extra $20,000 per yearbudgeted in either for
renovation or home improvements,home maintenance things to make
(02:47):
sure they can continue topreserve this home that they
really love and really want tostay in for as long as they can.
And then finally, a new car.
They want to allocate $60,000every five years.
So maybe this is every 10 yearsfor each of them, but every
five years one of them isgetting a new vehicle and that
cost is $60,000.
Their question is can we makethis happen?
(03:08):
They know they're saving, theyknow they're putting money away,
they know they think they're ona good track.
But what they're wondering iswhat can that actually do for
them?
How can they translate thesuccess they've had financially,
the savings they put away, intothe retirement that they want
to maintain?
The next thing we want tounderstand is what is their
income?
Tommy works in tech and hissalary is $182,000 per year.
Monica is an attorney.
(03:29):
She's making two hundred andfifteen thousand dollars per
year.
They both have bonuses abovethis, but those bonuses aren't
guaranteed, so we're not goingto assume that they're going to
happen every year that they keepworking.
We're just reflecting theirbase salaries.
Then they both have SocialSecurity Tommy's benefit at his
full retirement age.
So if you were to collect atsixty, seven would be four
thousand per month.
But he's planning to collect atage 70, which means he'll get
(03:50):
three years of delayedretirement credits, which means
he'll actually get 24% more thanthis on a monthly basis if he
waits until 70.
Monica, at 70, will do the same.
Her full retirement age benefitis $3,900 per month, but if she
waits three more years 68, 69,70, she'll get an 8% increase on
that every single year.
That is called delayedretirement credits.
And then they also expect aninheritance.
(04:11):
They're expecting, in aboutfive years, to receive about
$600,000 from Monica's parents,who are getting older, and they
think that when they sellMonica's parents' home, they
would end up with about $600,000.
So these are some of the incomesources that they will have, and
what they really wanted helpdoing is not knowing.
Are we okay?
Are we going to have enough tospend something in retirement?
They were beyond that.
They were wondering what can wedo with all this?
(04:33):
When you factor in socialsecurity and inheritance and our
home and our 401ks and ourinvestment accounts, what can
this actually create for us?
So think of this as some of theresources that can help create
and the goals is what weactually want that to look like.
This is the tangible impact ofwhat we're doing Now savings
(04:56):
they are both saving.
They're both maxing their 401kbetween now and retirement.
So, with all this in mind.
Let's now look at what can thisall do for them?
And what I always like to do isgo through the retirement cash
flows first.
Before looking at investmentallocation, before looking at
tax strategy, before looking atsome of these other things to
optimize, let's first have aclear understanding of where are
Tommy and Monica in relation totheir goals.
So this is their retirementcash flows, and what this is
gonna show you is, every singleyear, what income can they
expect?
(05:16):
Income, as you can see, isgonna start out as salary.
They'll have salaries for thenext few years until they fully
retire, and then there's a gap.
There's no outside incomesources because there's no
salary anymore.
They will have social securityonce they turn 70.
And you see, those benefits arepretty strong, very strong
social security benefits, butthere's a gap of a few years
between the time they retire andsocial security kicking in,
(05:38):
that they actually won't haveanything coming in.
So that's one income source.
Another flow right here.
This is their inheritance.
We're expecting a $600,000inheritance when Monica's
parents pass and her proceedsfrom the sale of their home.
That's something that we'regoing to expect in 2030.
So those are income sourcescoming in, but that's only half
the equation.
(05:58):
The other half, arguably themore important half, is what do
we want that to do for us?
What are the expenses thatwe're going to have?
Not just because these thingsare expenses, but because these
expenses allow us to do thethings we actually want to do.
So if we look at thatspecifically, starting when they
retire, here are their livingexpenses of 162,000 per year.
Where that comes from is theysaid that they wanna spend
(06:19):
$12,000 per month.
That's $144,000 per year, butthat isn't today's dollars.
We need to assume thatinflation is continuing to grow.
So by the time that theyactually retire, it would take
$162,000 per year to buy thesame basket of goods and
services that today they couldpurchase with $144,000 per year
or $12,000 per month.
(06:40):
So that's what this number is.
This number here allows them tomaintain their monthly
lifestyle that they want tomaintain.
Now, in addition to that, theyalso have housing expenses.
As you can see here.
Here's a projected mortgageprincipal and interest payment.
Now that goes away at somepoint.
They're projected to have theirmortgage paid off by the age of
70.
If some of these bonuses comein, they'd actually probably
have this paid off by the timethat they retire.
(07:00):
We're playing it a little bitsafe and a little bit
conservative, assuming nobonuses.
Assuming it a little bit safeand a little bit conservative,
assuming no bonuses, assumingthis isn't actually paid off by
the time that they retire.
So they would have a fullmortgage payment up until the
age of 70.
And after that the principaland interest portion goes away.
But their property taxes, theirinsurance, that remains, and so
you can see how their totalhousing expense is going to
change year by year.
Now, by the way, if you want tobe able to plug your numbers
(07:22):
into something like this, youcan get access to this very same
software.
It's in the Retirement PlanningAcademy.
Link is in the notes below, butyou can run this with your own
numbers in the same way thatwe're doing this for Tommy and
for Monica.
So those were their expenses.
Now, beyond that, they haveother goals, the other goals
starting when they retire.
Every five years they need topurchase a vehicle, or they want
to purchase a vehicle.
They have a vacation goal, notevery year throughout retirement
(07:45):
, but for the first 10 years ofretirement.
You can see that goes awayafter.
And then property.
This property is their homemaintenance and renovation
expenses.
They want to have an extra$20,000 per year in today's
dollars to make sure they cankeep their home in the condition
they want it to, to make surethey're doing the things with
their home.
So that's all of that.
And then, finally, the taxpayment.
What's the expected amount thatwe need to pay in taxes to have
(08:07):
enough leftover for these goals, for these expenses, so on and
so forth.
So why do we go through allthat?
We go through all that, everysingle number, from the day they
retired till the day that weexpect that they pass away.
We want to know what income doyou have coming in?
What expenses are you going tohave?
We really need to model thisout, because what this shows us
is this shows us, tommy andMonica, now we can get a very
(08:28):
clear picture of what yourportfolio needs to do for you,
meaning this isn't just some $4million portfolio or whatever it
happens to be in your case.
We don't need to know thenumber.
We need to know what's requiredfrom that portfolio.
How does that portfoliosupplement social security,
other income sources and allowyou to do everything that you
want to do?
Supplement social security,other income sources and allow
you to do everything that youwant to do.
(08:49):
That's what this number givesus.
This net flows shows us whatdoes your portfolio need to do.
How much are we taking out ofit every single year to
supplement social security andallow you to live your life?
So you can see this first fullyear of retirement here, their
total outflows are $400,000.
Again, as a reminder, this is acombination of their tax
payment plus their goals, plustheir core expenses.
That all adds up to $400,000.
(09:09):
They have zero in income flows,no social security, no salary.
Aka, that full $400,000 needsto be fully pulled from their
portfolio.
The following year they have$600,000 of inheritance.
That $600,000 compared to theirtotal outflows, you can see
some of that would be spent.
The remainder would be saved,would be something that's
(09:30):
actually building theirportfolio.
Then, the following year, youcan see, year by year, what
their actual net flow is, whattheir actual portfolio liability
is, and that number is veryimportant.
This isn't important from anabsolute sense.
There's not a good or badnumber here but what we want to
do is compare this number totheir total portfolio value.
So what does this represent asa withdrawal rate?
Well, the final thing we needto do is we need to understand
(09:52):
what is their portfolio expectedto look like by the time that
they retire.
Well, if we go through this andwe go through their total
portfolio today, their plannedsavings, their total, match an
average portfolio return here.
Now, this is in no way aguarantee Every single year
you're going to see a positiveportfolio return, because we're
simply looking at averages.
The reality is, in many yearsthat number will be a lot higher
.
In many years that number willbe a lot lower.
(10:13):
We're simply starting with anaverage in this projection.
But if we look at this, if theyget these average returns,
their $4 million portfolio today, by the time they're both fully
retired, is closer to to 5.4million.
So what we can do is we want tocompare.
How do these net cash flows,what does this represent of
their portfolio balance as awithdrawal rate, and that's
going to tell us what theexpected withdrawal rate is.
(10:35):
So here that is on this page.
Here this withdrawal rate oftheir portfolio.
You see that first year it'salmost 7%, taking 400,000 out,
and that's before socialsecurity has started.
So there's a lot of pressure ontheir portfolio.
The following year there's nowithdrawal rate.
That's simply because theinheritance comes in and they
have a net positive flow totheir portfolio more money
coming in and income thanthey're spending.
(10:56):
But once things start tonormalize, that withdrawal
rate's in the 5% for a couple ofyears.
Then it's down to 4%, then itdrops again to less than 3%.
And the reason it drops lessthan 3% is at this point Tommy
and Monica both have socialsecurity coming in.
They both have strong socialsecurity benefits.
So every dollar coming fromsocial security is one fewer
(11:17):
dollar that needs to come fromtheir portfolio.
That explains why thiswithdrawal rate is so low.
So if we look at this across theboard of assuming these
withdrawal rates from their planall the way across their
retirement, you can see thathere they are today.
They're continuing to workuntil the age of 65.
Their portfolio balance isexpected to reach about $5.4
million or so under theseassumptions.
(11:37):
Again, these assumptions arenot guarantees.
It's just an average rate ofreturn that we're going to start
with.
After that point you can seetheir portfolio levels off a
little bit as they startspending it for the first few
years and then it starts to pickup again as social security
kicks in and less pressures onour portfolio because social
security income is coming in andtheir portfolio continues
(11:57):
growing.
One thing that's difficult hereis this is looking at dollars in
nominal terms.
Yes, $14, $15 million is a lotof money at that point, but
let's actually look at that intoday's dollars.
Today's dollars allows us tosee what does that actually feel
like today?
What does that represent today?
And what you can see is itmeans their portfolio is staying
about the same in terms of itsreal value throughout their
(12:18):
retirement.
Okay, so all that's great, butso what?
What is this actually tellingus?
What are the actual changesthat Tommy and Monica can make?
Well, really, the goal offinancial planning is to give
you a very clear sense of whereyou're headed in your baseline
plan Before you actually makeany changes.
What are you on track for?
And, as we see, tommy andMonica are on track for a very
healthy retirement, a highprobability of success, the
(12:39):
ability to do a lot of things,but this doesn't mean this is
what their plan should be.
I mentioned that Tommy's intech and Monica's an attorney
Two very stressful jobs, jobsthat are not necessarily sure
they want to do until 65.
If you recall, I mentionedthey're working until 65 because
they almost feel this sense ofyou're supposed to.
Everyone else is doing it.
So why not?
But once we start to look atthis, we want to explore options
(13:00):
.
What if we don't just take yourplan for what it already is?
What if, or what would thislook like if we don't just take
your plan for what it already is?
What if or what would this looklike if we were to retire
earlier, monica?
What if you were to retire at62?
And tell me what if you were todo the same?
Let's say do it, let's justexplore what would the impact on
your plan be?
The impact would, of course, befewer dollars, because that's
fewer years of saving, it'sfewer years of compound growth,
(13:24):
it's more years of drawing downyour portfolio, but you're in a
position where that's notsomething that is off the table.
This was very reassuring forTommy and Monica to know.
It's very reassuring to knowthat you could potentially do
this much sooner than age 65.
If you're starting to feel alittle burned out, it's good to
know that you're a few bad daysaway from being able to tell
your boss, being able to tellyour company, that you are out.
(13:45):
So that was incrediblyreassuring to them.
Now they would like to see thisnumber a little bit larger, not
necessarily because I thought itneeded to be, because keep in
mind probability of success 80%.
What happens in that 20% ofcases Well, that's 20% of cases
where they quote unquote fail.
They still have a home worthseven figures.
They still have two socialsecurity benefits coming in.
(14:05):
The combination of those twobenefits in the first year, when
they're both 70, is about$150,000 per year.
So even failure in this case isnot the end of the world,
because of their strong socialsecurity benefits and because of
the equity they have in theirhome.
However, if they want to seewhat are some changes they could
make to drive this number backup higher, I want to show them
that.
So I said what if you simplytook $1,000 per month of that
(14:33):
$12,000 and you said we're goingto back that out, we're going
to cut expenses by $1,000 permonth in retirement, you've made
up a pretty significant chunkof that drop that you
experienced from 95 to 88%.
So that was, of course, veryreassuring for them to see that
there's relatively small thingsthey could do to get back to
this confidence zone that Ididn't necessarily think they
needed to be in, but it at leastwas reassuring to them to see
that they could be Again as areminder.
If you want to see what this islike for you, check this out in
(14:55):
the Retirement Planning Academy.
You can get access to the samesoftware and also subscribe, if
you've not already done so.
We go through lots of thesecase studies and I want to make
sure that you don't miss them.
The next thing here is what ifthey do want to work until 65?
Sometimes just knowing that youcan retire is enough of a mood
booster.
It's enough of an energizer tosay you know, I will keep
working because I know I don'tneed this job anymore to meet my
(15:16):
needs.
I could retire anytime I wantbecause I'm now financially
independent.
So what if, because of that,they almost have this new lease
on life, this new lease on work,to say, you know what?
I'm going to keep going, butI'm not going to let myself feel
the intense pressure and feelthe intense stress if I need to
have this income so that getsthem through to 65.
Well, if they're going to dothat, we're going to go back to
the base case here.
We don't necessarily need fortheir probability of success to
(15:38):
be 95%.
We don't need for them to bepassing If I go back to future
dollars.
We don't need for them to bepassing away with $15 million,
if you recall, in theirportfolio.
So we said what are some otherthings that we could look at
doing?
Well, one of them is you couldincrease your lifestyle.
Do you want to travel more?
What if this, instead of being$40,000 per year?
What if this was $60,000 peryear?
(16:01):
What other amazing things couldyou do with another $20,000 per
year in traveling?
And, by the way, what's thecost of this?
This cost is relativelyinsignificant.
I don't want to say a milliondollars is insignificant it's
not at all.
But when you see where they'regoing to be versus where they
were going to be, it's not goingto make that much of a dent in
terms of their actual portfoliovalue or their livelihood.
(16:21):
So that's something that Iwould encourage them to do.
Maybe they don't want to travelmore, but maybe they do want to
increase this.
What if they want to increasetheir normal monthly expenses?
That's something that they canlook at doing.
If they end up doing that samething, they're going to have
less money, they're going tohave fewer dollars at the end of
the day, but they're stillgoing to be in a position where
they have enough to meet theirneeds over the course of their
(16:43):
lifetime, their probability ofsuccess is certainly lower, but
that would just be somethingthat they need to monitor.
So this was very telling forMonica and for Tommy.
And whether you have $4 millionin your portfolio a lot less, a
lot more the key is when youactually have this projection,
when you actually have this plan, you start to live with some
degree of intentionality.
You know the impact of workinglonger or shorter, you know the
(17:05):
impact of saving more or less.
You know the impact of how muchyou spend in retirement.
All of these things start to bemuch more quantifiable, which
allows you to live life withthis degree of intentionality.
Because, at the end of the day,for Tommy and Monica, it's not
about their portfolio size, it'snot about their social security
income, it's not about theirwork.
It's about what can thosethings support for them in terms
(17:25):
of what they actually wanttheir life to look like.
Root Financial has not providedany compensation for and has
not influenced the content ofany testimonials and
endorsements shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
(17:46):
regarding these testimonials andendorsements.
Once again, I'm James Canole,founder of Root Financial, and
if you're interested in seeinghow we help our clients at Root
Financial get the most out oflife with their money, be sure
to visit us atwwwrootfinancialpartnerscom.
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