July 1, 2025 • 19 mins
A seven-figure portfolio can feel like a green light for retirement—but the numbers don’t always tell the full story. In one case study, a couple with over $1 million saved faced a withdrawal rate close to 14% based on their desired lifestyle. That’s nearly three times higher than what’s typically considered sustainable.
This story is a reminder that retirement success isn’t just about hitting a number, it’s about how your money is structured to support your life.
A solid plan makes the difference between retiring with confidence and retiring with uncertainty.
Let’s help you build the kind of plan that lasts.
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The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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Speaker 1 (00:00):
Can you retire at 65 with a million dollars in your
portfolio?
Today I'm going to walk youthrough a case study of a couple
in that exact situation.
We're going to run the numbers,we're going to test different
scenarios and ultimately, whatwe're going to do is see what do
they need to do to retire withconfidence, not just with hope.
So if you're in that situationand if you've ever wondered if
your savings are enough, this isa video you need to see.
So let's jump right into thiscase study here.
(00:21):
This is Jim and this is Sallyand, as you can see, both of
them are 65 years old.
They want to retire now.
We're going to get to what theywant their retirement to look
like in just a minute, buthere's a brief overview of their
situation.
You can see they both have IRAs, they have a joint account and
the combined value of theirinvestments is just over a
million dollars and beyond that.
They have their primary homewith a mortgage remaining of
about $145,000 on it.
(00:42):
You can see the payment ontheir mortgage is a little over
$1,500 per month.
That's just the principal andinterest portion.
Then, of course, they haveproperty taxes as well on their
primary home.
So more on that later, but thisis a snapshot of where they are
.
A total net worth about 2.1million, split pretty evenly
between liquid investmentaccounts and their primary home.
When we look at their goals,what we see is they want to
(01:03):
retire.
Right now they're both 65.
They're getting pretty tired.
They want to move on and startliving and start doing the
things that they're so excitedto do in retirement.
We work through an exercise ofhow much is it going to cost to
do all those different thingsand when we add up the different
things whether it's just payingthe bills today, things like
utilities, things like groceries, things like fuel what does
(01:25):
that cost?
As well as what does it cost tolive comfortably, to be able to
go out and do fun things, to beable to travel, to be able to
make retirement not justsomething where you're able to
survive, but something whereyou're able to thrive, something
where you're able to treat thisas a blank canvas and you're
able to design the life you wantto live for the rest of your
life.
So these are those numbers andwhat that looked like.
We budgeted $6,500 per month.
So this is after taxes.
This is how much do they needcoming into their bank account
(01:47):
every month for utilities.
This is for groceries, this isfor clothes.
This is for the monthly basics.
What this does not include isproperty taxes.
We're going to account for thatseparately, and this does not
include their monthly mortgagepayment.
We're also going to includethat separately, and I'll show
you why in just a second.
Beyond that, though, there'salso going to be healthcare
costs.
So they're working today, andtheir coverage is provided
(02:07):
through their employers.
They're not going to have anypre-Medicare healthcare costs
because they're both 65 already,but what we are doing is, when
they retire, we're estimatingwhat their Medicare Part B and
Part D premiums will be basedupon their adjusted gross income
, and we're assuming anadditional $3,600 per year for
each of them of out-of-pocketcosts.
So those are their healthcarecosts.
(02:28):
And then, finally, they want tobudget an extra $2,000 per
month, or $24,000 per year, totravel.
They shared some really funtravel goals with me, and as we
worked this out, we knew thatthey weren't going to be
traveling forever, but we didwant them to be able to have
this amount for the first 10years upon retiring.
So, from 65 to 75, on top oftheir normal expenses, which are
(02:48):
right here, could we allocatean additional $24,000 per year
to take the types of trips thatthey wanted to take.
So these are their goals.
This is essentially what we'reaiming for.
This is what success looks likefor them, and then what we
wanted to do is understand whatincome sources will they have to
meet some of those goals.
They both have their salariestoday, technically, but they're
just retiring, so those salariesare about to go away.
(03:08):
So we have these here listed,but we're not planning on any
additional income, unless, ofcourse, we determine that Jim
and Sally need to keep working.
What we do have is Sally'ssocial security.
She was planning to collect atage 67, which is her full
retirement age.
She would receive $2,300 permonth if she collected at that
age Jim's social securitybenefit.
He was planning to defer untilage 70.
(03:30):
His benefit at age 70, becausehe would then have three years
or so of delayed retirementcredits, his benefit would
increase over what it otherwisewould have been at age 67, and
his monthly benefit would be$3,900 per month.
So those are two income sourcesthat will kick in, not
immediately upon retirement, buta couple years into retirement
for Sally's benefit and fiveyears into retirement for Jim's
(03:53):
benefit Savings.
We're not planning on themsaving any additional amounts to
401ks or IRAs or Roth IRAs,because we are assuming they're
retiring right now, so we're notgonna save anything else.
And ultimately, what we want tosee is are they on track?
Can they do this?
So you've probably seen me gothrough this before.
If you're subscribed to thischannel and if you're not
subscribed, make sure that youdo so, because we run these same
(04:13):
case studies for people with afew hundred thousand dollars to
people several million dollars,and what planning points exist
at each stage of the way or eachstep of the way.
So make sure you subscribe ifyou've not done so already.
And this is always where we liketo start.
So this is the cash flowsection of their plan.
This cash flow section is thelifeblood of anybody's
retirement strategy.
It helps us to understand whatare the expenses that we're
(04:34):
going to have in retirement.
Let's project those out andadjust it for inflation over
time, and then what incomesources will we have coming in?
What will the cash inflows beto meet those cash outflows?
So on this left-hand side, thisis our cash inflows.
Typically, what you might seehere is salaries.
You might see rental income ifthey have a rental property.
You might see pension, youmight see social security.
(04:55):
These are the income sourcespeople have coming in if we
exclude any income from theirinvestments.
So what we're going to see herefor Jim and Sally is no more
salary, because we're assumingthat they retire and they will
have social security, but notright away.
You can see here there's twoyears of zero because Sally's
not going to collect until age67 and Jim's not going to
collect until age 70.
(05:16):
So here's what those numbersare, and those numbers are
adjusted for inflation each yearand we can see what their total
social security benefit will bein this far right-hand column.
That's only half the equation.
That shows what income flowsthey'll have or what income
sources they'll have.
What we needed to do is comparethat to what will their expenses
be.
So their expenses you can seeright here Everything from
(05:36):
living expenses which, if yourecall, we assumed $6,500 per
month, but that's in today'sdollars.
$6,500 per month is $78,000 peryear.
If we adjust that for inflationevery single year, what that's
doing is us telling Jim andSally here's the increasing
dollar amount every single year.
We need to plan to be able togenerate so that you can take
(05:57):
this lifestyle that today wouldcost $6,500 per month and keep
that up even as inflationcontinues to go up.
So that's what we're projectingfor living expenses.
But then there's housing.
As I mentioned before, we'reincluding their principal and
interest payment.
We're including their propertytaxes separately, and that's for
a couple of reasons.
Number one their mortgagepayment, at least the principal
(06:18):
interest portion of it that goesaway at some point.
So we're not just going togroup that into their overall
expenses and project that outforever.
That would be exaggerating whattheir expenses will actually be
.
What we need to do is we needto separate those two so we can
understand when is this mortgagepayment going to be gone, so we
no longer have to plan for thatas another expense.
We do the same with propertytaxes because, depending upon
(06:39):
the county you're in, theremight be a limit on how much
property taxes can increase orhow much we want to project it.
Increasing doesn't alwaysincrease exactly with inflation.
So this is their total housingpayment and you can see it
starts at about $26,000 per yearand that's going to drop off in
their early to mid-70s once theprincipal and interest portion
of their mortgage is paid off.
So if we then go back toexpenses, the final one is
(07:01):
healthcare.
So healthcare here, this isthat expense, of course, that
you need to have coming in, andwhat we're going to do is break
it down between what they'reprojected part B, premium B for
Medicare, their part D premiumplus their out-of-pocket
expenses and we do that everysingle year, projecting out what
will that look like.
And that's all grouped underexpenses.
The next is goals.
Now, goals could be a wholebunch of different things.
(07:23):
This could be anything from Iwant to travel, and why are we
planning for this separately?
Well, we're planning for thisseparately because, again, this
is not an expense that's goingto last forever.
So if we just group this$24,000 per year or this $2,000
per month into their overallexpenses and, by the way, I see
too many people doing this whenthey plan for their retirement
their $6,500 per month of basicexpenses now balloons to $8,500
(07:45):
per month.
That's accurate for the first10 years here, but what about in
their later 70s and early 80sand beyond?
They're not traveling as much,if at all.
So to continue planning forthat is to over-exaggerate the
actual cost of retirement andyou're going to have a skewed
output.
So we plan for this separately.
Goals could be things like homepurchase.
It could be things like youwant to pay for a wedding for a
(08:07):
child, you want to fund a 529plan for grandchildren, any of
those one-time expenses, ormaybe those expenses that aren't
recurring every single year forthe rest of your life.
Those are great things to planfor and goals.
I mentioned that because, if youwant to walk through your own
scenario, you can actually getaccess to the same software via
the Retirement Planning Academy.
Check out the link below.
You can walk through this.
You can plug in your ownnumbers and see the output for
(08:29):
you.
And then, finally, is taxpayment here?
So taxes are going to be anexpense and you can see there's
zero projected taxes.
And that's because the waywe're modeling this out for Jim
and Sally, they're going to liveon their brokerage account the
first couple of years.
That keeps their tax benefitdown, and then they start living
on their IRA funds after thatand that's why their tax payment
goes up here.
But when we add all this up,what you get is a total outflows
(08:52):
.
Total outflows is us answeringthe question what are the total
expenses that we need to projectso that Jim and Sally can pay
their taxes, pay for their goals, which in this case is travel,
and then have enough left overto pay for healthcare, housing
and core basic expenses, and doso for the rest of their
retirement.
So that's what we're showinghere in the final piece.
(09:12):
Really, what we're trying toback into here is what this
number is going to look like.
What are their net flows goingto be?
The net flows is telling us howmuch of this, how much of this
expense that we're going toincur, needs to be funded from
our retirement portfolio.
Because, keep in mind, some ofthose expenses, depending on
your situation, will be fundedby social security, rental
(09:32):
income, pension, part-time work,all these various potential
income sources.
This is saying what role doesyour portfolio play in this?
And so this net flow here youcan see, is our projection of
what we think their portfolio isgoing to need to do.
Now you can take a look at thisand say, okay, if you have a
million dollars and you'repulling out 140,000 per year and
increasing, you can do somebasic math to understand that's
(09:56):
probably not going to be verysustainable.
If we go to this page righthere, you can see what that
represents as an actualwithdrawal rate If we want to
plug that in the withdrawal ratestarts in the 13 to 14% range
and that withdrawal rate isgoing to continue going up.
In other words, this probablyis not, almost certainly is not
going to be, a very sustainableplan for Jim and Sally, at least
(10:17):
not yet.
So we're going to exploredifferent options.
We're going to explore somefairly simple things that they
can do to improve their odds ofsuccess.
But if you have a withdrawalrate in the teens, that's not a
recipe for success.
We ideally want to have thatsomewhere in the four to 5%
range as a general rule of thumb, as a starting point.
It's not a universal law.
There's a whole bunch ofdifferent things that can impact
(10:38):
that, but as a basic rule ofthumb, something that starts,
there is a great place to start.
So if we look at this, here'sthe outcome of this.
Jim and Sally, if you were toretire today, here's your
million dollars or so you'regoing to spend right through
that.
Why is that?
Well, you're spending 13, 14,15% per year of your portfolio.
If you're getting by the way,we're projecting an average
(10:59):
return of 6.5% here for Jim andfor Sally.
Not a guarantee, simply sayingwe need to project something so
we can project this out here.
But if they are to grow at 6.5%and if they are to be drawing
13, 14, 15%, the math just worksout that you're going to spend
that portfolio down.
And they still have SocialSecurity.
They still have equity fullequity in a million-plus dollar
(11:22):
home at this point, but theydon't have any other liquid
savings at this point tocontinue, allowing them to do
what they want to do.
So this is where the planningcomes in.
Anytime someone does their firstretirement projection, don't
get too attached to what theoutcome actually looks like.
Very rarely is it the perfectoutcome.
Typically, we either need to dosomething to make it work In
other words, do we cut spending,do we work longer, do we save
(11:44):
more?
We need this to work or, inmany cases, in many cases with
clients we work with, they'veactually saved so much and it's
difficult for them to spend.
So some of our encouragement isto actually say how can we
spend more?
How can we give more?
How can we do more with whatyou have?
Because if you don't, this isjust going to continue growing,
this being your portfolio, andthere's an opportunity cost to
(12:05):
never actually using it.
But for Jim and Sally thatwasn't the case For Jim and
Sally.
The case was how do we preservethis, how do we save this to
make sure that you don't go intoretirement with this as an
outcome?
That is very likely.
So there's a few things wecould do.
The first thing was well, thesimple option is do you work
longer?
They didn't really want to dothis, as I mentioned, they're
tired, they're ready forretirement, they want to do
(12:28):
something else, but this is notan outcome that's acceptable
here.
So we look at this and say well, what if you work three extra
years?
Working three extra years?
Now that's no small feat.
I'm not saying that it's assimple as just continuing to do
this, but if they were to dothat, all of a sudden their
projections look very different.
Their probability of successgoes from 13% in that initial
scenario, which is definitelynot something you want to go
into retirement with theprobability of success at that
(12:49):
rate up to closer to 70% here,which there's no universal.
This is the right number, but anumber that we would feel much
more comfortable with, at leastas compared to 13%.
So that was an option.
Now, real quickly, we're goingto table that, because that's
not the ideal option for Jim orSally.
So let's go back here and goback to what if they only work
until age 65.
(13:10):
As I mentioned, if you want torun these projections on your
own with your own numbers, getaccess to this in the Retirement
Planning Academy.
Link is in the show notes below.
The next thing that they coulddo is if they don't want to work
longer.
There would have to besomething pretty dramatic of can
we cut some expenses?
The first thing that we did issaid what if you didn't take any
of these trips?
I don't like this option.
But what if you didn't take anytrips?
Would that alone be the thingthat would allow you to be able
(13:34):
to retire right now and be okay?
Maybe possibly you see thatthere's, technically, dollars
left at the end of thisprojection, but if we want to
see what's the likelihood ofsuccess here, it's still only
about 50-50.
So, yes, if you cut out thevacations, that might be one
thing.
You probably need to alsoreduce monthly expenses in this
case.
So if I drop that from $,500per month to 6,200 per month,
(13:58):
what we see is we get aprobability of success that's
starting to inch closer towardswhat we'd feel more comfortable
with.
Their projection is starting tolook a bit better Now.
These aren't great solutions.
Cutting out travel, cuttingyour budget, working three years
longer when you're alreadypretty burned out these aren't
ideal, but it was just givingJim and Sally some perspective
of it is helpful to know whatare your options If you're at
(14:20):
the point where you can't workany longer.
What could you spend today ifyou were to retire?
Retirement's all abouttrade-offs.
Or if you do not want tosacrifice, how much you're
spending?
How much longer do you need towork to make this happen?
Now, sometimes people look atthis and say, well, what about
the right tax strategy?
What about the right investmentstrategy?
Can that solve the gap?
Can that solve the problem forus?
And the answer is typically no.
Meaning if I go here and if Iplug all these numbers back in
(14:43):
to get back to the base case.
So this is right where westarted from and we refresh this
here.
This is going to where westarted for Jim and for Sally,
and where we started was not agreat place If all we did was
said, well, let's implement theright tax strategy.
And, by the way, I went on theback end and programmed a Roth
conversion strategy that'sprojected to save them a good
amount of money in taxes If theywere to run that.
(15:04):
That's going to help them alittle bit, but not much,
meaning their probability ofsuccess goes from 13% to 16%.
In other words, the right taxstrategy is very important, but
it's more of a way to optimize aplan that already works to
squeeze even more out of it.
It's not going to typically bethe thing that takes you from no
chance of success to all of asudden, now you can retire.
(15:25):
So keep that in mind.
You need to have that.
But that's not a foundationalthing as much as it's an
optimization thing.
They also want to know well,what if we invest differently?
They said well, what if you did?
What if we could assume thatyou're going to get a growth
rate closer to 9%?
Not a guarantee, but justillustrating to them.
What would the actual impact ofthat be on your projection, on
(15:50):
your plan?
Even if you could do that, whatthey're going to see is sure it
stretches your portfolio alittle bit, but that gets you
one extra year, maybe two extrayears of living expenses.
Your portfolio a little bit,but that gets you one extra year
, maybe two extra years ofliving expenses.
It's not really moving theneedle.
So I illustrate that, becausesometimes people think that
magically, an investmentstrategy can save them or a tax
strategy can save them.
Those are two criticalcomponents to a plan, but
typically those are thingsdesigned to optimize, protect,
preserve, do better once youalready have the foundational
(16:14):
plan in place.
So, going back to thefoundational plan, that is
things like how long you work,how much you save, how much you
spend in retirement and as we gothrough this, none of those
things were truly appealing toJim and to Sally.
So here's where the thirdoption came in for them.
I put down here downsized home.
They have about a milliondollars of equity in their home.
This is a home that they raisedtheir family in.
It's probably bigger than theyneed right now.
(16:34):
Beautiful home.
They have about a milliondollars of equity in their home.
This is a home that they raisedtheir family in.
It's probably bigger than theyneed right now.
Beautiful home.
But one thing that we exploredis what if you did downsize?
And what if you downsized thisnext year?
And, by the way, what I'mlooking at for downsizing is
purchasing a $700,000 home.
They're staying in Colorado,which is where they are right
now.
Property taxes go down, they payoff their mortgage and now they
(16:56):
have a lump sum of money thedifference between what they
sell their home for, afterbroker fees, after taxes, and
what they buy the new home for.
There's a little bit of moneythey now get to invest to live
on.
So there's three benefits tothis.
Number one, that mortgagepayment that they had, the
$1,500 in change that they weregoing to have for the next
several years.
That goes away.
Number two, the property taxesthat they have, that tax bill
(17:18):
that they have starting todayfor the rest of their life.
That gets cut by a couple fewthousand dollars every single
year.
So it's lowering their lifetimeexpenses.
And then, finally, number three, there's a little bit of money.
There's a couple hundredthousand dollars of money, of
cash that they would then haveafter selling this property that
they could invest to createmore income for themselves.
So there's this triple benefitof lower short to medium-term
(17:41):
expenses in the form of gettingrid of the mortgage, lower
long-term expenses in terms oflowering the property taxes and
higher portfolio assets toactually create income for them
for the rest of their life.
So when we look at this righthere, if we were to illustrate
this, so keep in mind.
This is not working any longer.
This is not cutting savings orcutting spending in retirement.
They're still traveling.
They're still spending thatamount per month.
(18:03):
That move, as you can see,dramatically changes what their
potential outcome looks like.
It changes their probability ofsuccess from 13% to almost 80%
a pretty dramatic, a verydramatic increase.
So what this is showing thisisn't saying that your situation
is going to be exactly like Jimand Sally's.
(18:24):
What this is showing, though, isretirement is all about
trade-offs.
Some of those trade-offs arewhat are the things that we need
to do today to cut back, tosave more, to downsize, to be in
a position to retire?
Other times?
Those trade-offs are we havemore than enough to meet our
needs?
What do we do to spend more, togive more, to optimize more and
have more quality of life givenwhat we've done?
This is the importance ofplanning.
This is why you have a strategy.
(18:45):
This is why, even if you don'tknow exactly what retirement is
going to look like, get startedcreating a plan, see what the
initial projection looks like,because then that gives you some
real clarity on what are thethings you can do to optimize
this and make sure you'repreparing for the retirement you
dreamed of Once again.
(19:08):
I'm James Canole, founder ofRoot Financial, and if you're
interested in seeing how we helpour clients at Root Financial
get the most out of life withtheir money, be sure to visit us
at wwwrootfinancialpartnerscom.
Can you retire at 65 with a million dollars in your
portfolio?
Today I'm going to walk youthrough a case study of a couple
in that exact situation.
We're going to run the numbers,we're going to test different
scenarios and ultimately, whatwe're going to do is see what do
they need to do to retire withconfidence, not just with hope.
So if you're in that situationand if you've ever wondered if
your savings are enough, this isa video you need to see.
So let's jump right into thiscase study here.
(00:21):
This is Jim and this is Sallyand, as you can see, both of
them are 65 years old.
They want to retire now.
We're going to get to what theywant their retirement to look
like in just a minute, buthere's a brief overview of their
situation.
You can see they both have IRAs, they have a joint account and
the combined value of theirinvestments is just over a
million dollars and beyond that.
They have their primary homewith a mortgage remaining of
about $145,000 on it.
(00:42):
You can see the payment ontheir mortgage is a little over
$1,500 per month.
That's just the principal andinterest portion.
Then, of course, they haveproperty taxes as well on their
primary home.
So more on that later, but thisis a snapshot of where they are
.
A total net worth about 2.1million, split pretty evenly
between liquid investmentaccounts and their primary home.
When we look at their goals,what we see is they want to
(01:03):
retire.
Right now they're both 65.
They're getting pretty tired.
They want to move on and startliving and start doing the
things that they're so excitedto do in retirement.
We work through an exercise ofhow much is it going to cost to
do all those different thingsand when we add up the different
things whether it's just payingthe bills today, things like
utilities, things like groceries, things like fuel what does
(01:25):
that cost?
As well as what does it cost tolive comfortably, to be able to
go out and do fun things, to beable to travel, to be able to
make retirement not justsomething where you're able to
survive, but something whereyou're able to thrive, something
where you're able to treat thisas a blank canvas and you're
able to design the life you wantto live for the rest of your
life.
So these are those numbers andwhat that looked like.
We budgeted $6,500 per month.
So this is after taxes.
This is how much do they needcoming into their bank account
(01:47):
every month for utilities.
This is for groceries, this isfor clothes.
This is for the monthly basics.
What this does not include isproperty taxes.
We're going to account for thatseparately, and this does not
include their monthly mortgagepayment.
We're also going to includethat separately, and I'll show
you why in just a second.
Beyond that, though, there'salso going to be healthcare
costs.
So they're working today, andtheir coverage is provided
(02:07):
through their employers.
They're not going to have anypre-Medicare healthcare costs
because they're both 65 already,but what we are doing is, when
they retire, we're estimatingwhat their Medicare Part B and
Part D premiums will be basedupon their adjusted gross income
, and we're assuming anadditional $3,600 per year for
each of them of out-of-pocketcosts.
So those are their healthcarecosts.
(02:28):
And then, finally, they want tobudget an extra $2,000 per
month, or $24,000 per year, totravel.
They shared some really funtravel goals with me, and as we
worked this out, we knew thatthey weren't going to be
traveling forever, but we didwant them to be able to have
this amount for the first 10years upon retiring.
So, from 65 to 75, on top oftheir normal expenses, which are
(02:48):
right here, could we allocatean additional $24,000 per year
to take the types of trips thatthey wanted to take.
So these are their goals.
This is essentially what we'reaiming for.
This is what success looks likefor them, and then what we
wanted to do is understand whatincome sources will they have to
meet some of those goals.
They both have their salariestoday, technically, but they're
just retiring, so those salariesare about to go away.
(03:08):
So we have these here listed,but we're not planning on any
additional income, unless, ofcourse, we determine that Jim
and Sally need to keep working.
What we do have is Sally'ssocial security.
She was planning to collect atage 67, which is her full
retirement age.
She would receive $2,300 permonth if she collected at that
age Jim's social securitybenefit.
He was planning to defer untilage 70.
(03:30):
His benefit at age 70, becausehe would then have three years
or so of delayed retirementcredits, his benefit would
increase over what it otherwisewould have been at age 67, and
his monthly benefit would be$3,900 per month.
So those are two income sourcesthat will kick in, not
immediately upon retirement, buta couple years into retirement
for Sally's benefit and fiveyears into retirement for Jim's
(03:53):
benefit Savings.
We're not planning on themsaving any additional amounts to
401ks or IRAs or Roth IRAs,because we are assuming they're
retiring right now, so we're notgonna save anything else.
And ultimately, what we want tosee is are they on track?
Can they do this?
So you've probably seen me gothrough this before.
If you're subscribed to thischannel and if you're not
subscribed, make sure that youdo so, because we run these same
(04:13):
case studies for people with afew hundred thousand dollars to
people several million dollars,and what planning points exist
at each stage of the way or eachstep of the way.
So make sure you subscribe ifyou've not done so already.
And this is always where we liketo start.
So this is the cash flowsection of their plan.
This cash flow section is thelifeblood of anybody's
retirement strategy.
It helps us to understand whatare the expenses that we're
(04:34):
going to have in retirement.
Let's project those out andadjust it for inflation over
time, and then what incomesources will we have coming in?
What will the cash inflows beto meet those cash outflows?
So on this left-hand side, thisis our cash inflows.
Typically, what you might seehere is salaries.
You might see rental income ifthey have a rental property.
You might see pension, youmight see social security.
(04:55):
These are the income sourcespeople have coming in if we
exclude any income from theirinvestments.
So what we're going to see herefor Jim and Sally is no more
salary, because we're assumingthat they retire and they will
have social security, but notright away.
You can see here there's twoyears of zero because Sally's
not going to collect until age67 and Jim's not going to
collect until age 70.
(05:16):
So here's what those numbersare, and those numbers are
adjusted for inflation each yearand we can see what their total
social security benefit will bein this far right-hand column.
That's only half the equation.
That shows what income flowsthey'll have or what income
sources they'll have.
What we needed to do is comparethat to what will their expenses
be.
So their expenses you can seeright here Everything from
(05:36):
living expenses which, if yourecall, we assumed $6,500 per
month, but that's in today'sdollars.
$6,500 per month is $78,000 peryear.
If we adjust that for inflationevery single year, what that's
doing is us telling Jim andSally here's the increasing
dollar amount every single year.
We need to plan to be able togenerate so that you can take
(05:57):
this lifestyle that today wouldcost $6,500 per month and keep
that up even as inflationcontinues to go up.
So that's what we're projectingfor living expenses.
But then there's housing.
As I mentioned before, we'reincluding their principal and
interest payment.
We're including their propertytaxes separately, and that's for
a couple of reasons.
Number one their mortgagepayment, at least the principal
(06:18):
interest portion of it that goesaway at some point.
So we're not just going togroup that into their overall
expenses and project that outforever.
That would be exaggerating whattheir expenses will actually be
.
What we need to do is we needto separate those two so we can
understand when is this mortgagepayment going to be gone, so we
no longer have to plan for thatas another expense.
We do the same with propertytaxes because, depending upon
(06:39):
the county you're in, theremight be a limit on how much
property taxes can increase orhow much we want to project it.
Increasing doesn't alwaysincrease exactly with inflation.
So this is their total housingpayment and you can see it
starts at about $26,000 per yearand that's going to drop off in
their early to mid-70s once theprincipal and interest portion
of their mortgage is paid off.
So if we then go back toexpenses, the final one is
(07:01):
healthcare.
So healthcare here, this isthat expense, of course, that
you need to have coming in, andwhat we're going to do is break
it down between what they'reprojected part B, premium B for
Medicare, their part D premiumplus their out-of-pocket
expenses and we do that everysingle year, projecting out what
will that look like.
And that's all grouped underexpenses.
The next is goals.
Now, goals could be a wholebunch of different things.
(07:23):
This could be anything from Iwant to travel, and why are we
planning for this separately?
Well, we're planning for thisseparately because, again, this
is not an expense that's goingto last forever.
So if we just group this$24,000 per year or this $2,000
per month into their overallexpenses and, by the way, I see
too many people doing this whenthey plan for their retirement
their $6,500 per month of basicexpenses now balloons to $8,500
(07:45):
per month.
That's accurate for the first10 years here, but what about in
their later 70s and early 80sand beyond?
They're not traveling as much,if at all.
So to continue planning forthat is to over-exaggerate the
actual cost of retirement andyou're going to have a skewed
output.
So we plan for this separately.
Goals could be things like homepurchase.
It could be things like youwant to pay for a wedding for a
(08:07):
child, you want to fund a 529plan for grandchildren, any of
those one-time expenses, ormaybe those expenses that aren't
recurring every single year forthe rest of your life.
Those are great things to planfor and goals.
I mentioned that because, if youwant to walk through your own
scenario, you can actually getaccess to the same software via
the Retirement Planning Academy.
Check out the link below.
You can walk through this.
You can plug in your ownnumbers and see the output for
(08:29):
you.
And then, finally, is taxpayment here?
So taxes are going to be anexpense and you can see there's
zero projected taxes.
And that's because the waywe're modeling this out for Jim
and Sally, they're going to liveon their brokerage account the
first couple of years.
That keeps their tax benefitdown, and then they start living
on their IRA funds after thatand that's why their tax payment
goes up here.
But when we add all this up,what you get is a total outflows
(08:52):
.
Total outflows is us answeringthe question what are the total
expenses that we need to projectso that Jim and Sally can pay
their taxes, pay for their goals, which in this case is travel,
and then have enough left overto pay for healthcare, housing
and core basic expenses, and doso for the rest of their
retirement.
So that's what we're showinghere in the final piece.
(09:12):
Really, what we're trying toback into here is what this
number is going to look like.
What are their net flows goingto be?
The net flows is telling us howmuch of this, how much of this
expense that we're going toincur, needs to be funded from
our retirement portfolio.
Because, keep in mind, some ofthose expenses, depending on
your situation, will be fundedby social security, rental
(09:32):
income, pension, part-time work,all these various potential
income sources.
This is saying what role doesyour portfolio play in this?
And so this net flow here youcan see, is our projection of
what we think their portfolio isgoing to need to do.
Now you can take a look at thisand say, okay, if you have a
million dollars and you'repulling out 140,000 per year and
increasing, you can do somebasic math to understand that's
(09:56):
probably not going to be verysustainable.
If we go to this page righthere, you can see what that
represents as an actualwithdrawal rate If we want to
plug that in the withdrawal ratestarts in the 13 to 14% range
and that withdrawal rate isgoing to continue going up.
In other words, this probablyis not, almost certainly is not
going to be, a very sustainableplan for Jim and Sally, at least
(10:17):
not yet.
So we're going to exploredifferent options.
We're going to explore somefairly simple things that they
can do to improve their odds ofsuccess.
But if you have a withdrawalrate in the teens, that's not a
recipe for success.
We ideally want to have thatsomewhere in the four to 5%
range as a general rule of thumb, as a starting point.
It's not a universal law.
There's a whole bunch ofdifferent things that can impact
(10:38):
that, but as a basic rule ofthumb, something that starts,
there is a great place to start.
So if we look at this, here'sthe outcome of this.
Jim and Sally, if you were toretire today, here's your
million dollars or so you'regoing to spend right through
that.
Why is that?
Well, you're spending 13, 14,15% per year of your portfolio.
If you're getting by the way,we're projecting an average
(10:59):
return of 6.5% here for Jim andfor Sally.
Not a guarantee, simply sayingwe need to project something so
we can project this out here.
But if they are to grow at 6.5%and if they are to be drawing
13, 14, 15%, the math just worksout that you're going to spend
that portfolio down.
And they still have SocialSecurity.
They still have equity fullequity in a million-plus dollar
(11:22):
home at this point, but theydon't have any other liquid
savings at this point tocontinue, allowing them to do
what they want to do.
So this is where the planningcomes in.
Anytime someone does their firstretirement projection, don't
get too attached to what theoutcome actually looks like.
Very rarely is it the perfectoutcome.
Typically, we either need to dosomething to make it work In
other words, do we cut spending,do we work longer, do we save
(11:44):
more?
We need this to work or, inmany cases, in many cases with
clients we work with, they'veactually saved so much and it's
difficult for them to spend.
So some of our encouragement isto actually say how can we
spend more?
How can we give more?
How can we do more with whatyou have?
Because if you don't, this isjust going to continue growing,
this being your portfolio, andthere's an opportunity cost to
(12:05):
never actually using it.
But for Jim and Sally thatwasn't the case For Jim and
Sally.
The case was how do we preservethis, how do we save this to
make sure that you don't go intoretirement with this as an
outcome?
That is very likely.
So there's a few things wecould do.
The first thing was well, thesimple option is do you work
longer?
They didn't really want to dothis, as I mentioned, they're
tired, they're ready forretirement, they want to do
(12:28):
something else, but this is notan outcome that's acceptable
here.
So we look at this and say well, what if you work three extra
years?
Working three extra years?
Now that's no small feat.
I'm not saying that it's assimple as just continuing to do
this, but if they were to dothat, all of a sudden their
projections look very different.
Their probability of successgoes from 13% in that initial
scenario, which is definitelynot something you want to go
into retirement with theprobability of success at that
(12:49):
rate up to closer to 70% here,which there's no universal.
This is the right number, but anumber that we would feel much
more comfortable with, at leastas compared to 13%.
So that was an option.
Now, real quickly, we're goingto table that, because that's
not the ideal option for Jim orSally.
So let's go back here and goback to what if they only work
until age 65.
(13:10):
As I mentioned, if you want torun these projections on your
own with your own numbers, getaccess to this in the Retirement
Planning Academy.
Link is in the show notes below.
The next thing that they coulddo is if they don't want to work
longer.
There would have to besomething pretty dramatic of can
we cut some expenses?
The first thing that we did issaid what if you didn't take any
of these trips?
I don't like this option.
But what if you didn't take anytrips?
Would that alone be the thingthat would allow you to be able
(13:34):
to retire right now and be okay?
Maybe possibly you see thatthere's, technically, dollars
left at the end of thisprojection, but if we want to
see what's the likelihood ofsuccess here, it's still only
about 50-50.
So, yes, if you cut out thevacations, that might be one
thing.
You probably need to alsoreduce monthly expenses in this
case.
So if I drop that from $,500per month to 6,200 per month,
(13:58):
what we see is we get aprobability of success that's
starting to inch closer towardswhat we'd feel more comfortable
with.
Their projection is starting tolook a bit better Now.
These aren't great solutions.
Cutting out travel, cuttingyour budget, working three years
longer when you're alreadypretty burned out these aren't
ideal, but it was just givingJim and Sally some perspective
of it is helpful to know whatare your options If you're at
(14:20):
the point where you can't workany longer.
What could you spend today ifyou were to retire?
Retirement's all abouttrade-offs.
Or if you do not want tosacrifice, how much you're
spending?
How much longer do you need towork to make this happen?
Now, sometimes people look atthis and say, well, what about
the right tax strategy?
What about the right investmentstrategy?
Can that solve the gap?
Can that solve the problem forus?
And the answer is typically no.
Meaning if I go here and if Iplug all these numbers back in
(14:43):
to get back to the base case.
So this is right where westarted from and we refresh this
here.
This is going to where westarted for Jim and for Sally,
and where we started was not agreat place If all we did was
said, well, let's implement theright tax strategy.
And, by the way, I went on theback end and programmed a Roth
conversion strategy that'sprojected to save them a good
amount of money in taxes If theywere to run that.
(15:04):
That's going to help them alittle bit, but not much,
meaning their probability ofsuccess goes from 13% to 16%.
In other words, the right taxstrategy is very important, but
it's more of a way to optimize aplan that already works to
squeeze even more out of it.
It's not going to typically bethe thing that takes you from no
chance of success to all of asudden, now you can retire.
(15:25):
So keep that in mind.
You need to have that.
But that's not a foundationalthing as much as it's an
optimization thing.
They also want to know well,what if we invest differently?
They said well, what if you did?
What if we could assume thatyou're going to get a growth
rate closer to 9%?
Not a guarantee, but justillustrating to them.
What would the actual impact ofthat be on your projection, on
(15:50):
your plan?
Even if you could do that, whatthey're going to see is sure it
stretches your portfolio alittle bit, but that gets you
one extra year, maybe two extrayears of living expenses.
Your portfolio a little bit,but that gets you one extra year
, maybe two extra years ofliving expenses.
It's not really moving theneedle.
So I illustrate that, becausesometimes people think that
magically, an investmentstrategy can save them or a tax
strategy can save them.
Those are two criticalcomponents to a plan, but
typically those are thingsdesigned to optimize, protect,
preserve, do better once youalready have the foundational
(16:14):
plan in place.
So, going back to thefoundational plan, that is
things like how long you work,how much you save, how much you
spend in retirement and as we gothrough this, none of those
things were truly appealing toJim and to Sally.
So here's where the thirdoption came in for them.
I put down here downsized home.
They have about a milliondollars of equity in their home.
This is a home that they raisedtheir family in.
It's probably bigger than theyneed right now.
(16:34):
Beautiful home.
They have about a milliondollars of equity in their home.
This is a home that they raisedtheir family in.
It's probably bigger than theyneed right now.
Beautiful home.
But one thing that we exploredis what if you did downsize?
And what if you downsized thisnext year?
And, by the way, what I'mlooking at for downsizing is
purchasing a $700,000 home.
They're staying in Colorado,which is where they are right
now.
Property taxes go down, they payoff their mortgage and now they
(16:56):
have a lump sum of money thedifference between what they
sell their home for, afterbroker fees, after taxes, and
what they buy the new home for.
There's a little bit of moneythey now get to invest to live
on.
So there's three benefits tothis.
Number one, that mortgagepayment that they had, the
$1,500 in change that they weregoing to have for the next
several years.
That goes away.
Number two, the property taxesthat they have, that tax bill
(17:18):
that they have starting todayfor the rest of their life.
That gets cut by a couple fewthousand dollars every single
year.
So it's lowering their lifetimeexpenses.
And then, finally, number three, there's a little bit of money.
There's a couple hundredthousand dollars of money, of
cash that they would then haveafter selling this property that
they could invest to createmore income for themselves.
So there's this triple benefitof lower short to medium-term
(17:41):
expenses in the form of gettingrid of the mortgage, lower
long-term expenses in terms oflowering the property taxes and
higher portfolio assets toactually create income for them
for the rest of their life.
So when we look at this righthere, if we were to illustrate
this, so keep in mind.
This is not working any longer.
This is not cutting savings orcutting spending in retirement.
They're still traveling.
They're still spending thatamount per month.
(18:03):
That move, as you can see,dramatically changes what their
potential outcome looks like.
It changes their probability ofsuccess from 13% to almost 80%
a pretty dramatic, a verydramatic increase.
So what this is showing thisisn't saying that your situation
is going to be exactly like Jimand Sally's.
(18:24):
What this is showing, though, isretirement is all about
trade-offs.
Some of those trade-offs arewhat are the things that we need
to do today to cut back, tosave more, to downsize, to be in
a position to retire?
Other times?
Those trade-offs are we havemore than enough to meet our
needs?
What do we do to spend more, togive more, to optimize more and
have more quality of life givenwhat we've done?
This is the importance ofplanning.
This is why you have a strategy.
(18:45):
This is why, even if you don'tknow exactly what retirement is
going to look like, get startedcreating a plan, see what the
initial projection looks like,because then that gives you some
real clarity on what are thethings you can do to optimize
this and make sure you'repreparing for the retirement you
dreamed of Once again.
(19:08):
I'm James Canole, founder ofRoot Financial, and if you're
interested in seeing how we helpour clients at Root Financial
get the most out of life withtheir money, be sure to visit us
at wwwrootfinancialpartnerscom.
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