353. Is $2 Million Enough to Retire? What about $3 Million?

Reaching a retirement portfolio of $2 million or $3 million may feel like crossing a definitive finish line. However, an account balance alone does not determine whether someone is financially prepared to retire.

In this episode of A Wiser Retirement® Podcast, we discuss how two households can enter retirement with the same amount of savings and experience very different outcomes. Retirement age, annual spending, taxes, healthcare costs, debt, income sources, and account types all influence how long a portfolio may last.

The more useful question is not simply, “How much have I saved?” It is, “How much does my retirement plan require from my portfolio each year?”

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Transcript

Two Million Might Be Enough

SPEAKER_04 0:00

You saved $2 million, maybe even $3 million. So you should be able to retire, right? Well, not necessarily. Today we're looking at why a $2 million retirement plan can sometimes be stronger than a $3 million one, and the one number that matters more than your account balance. Stay tuned.

SPEAKER_01 0:18

Welcome to a Wiser Retirement Podcast, where we cut through the noise and bring you real, honest conversations about investing, retirement, and building lasting wealth. No sales pitches, no gimmicks. Just insights to help you stop guessing and start planning your financial future.

SPEAKER_04 0:37

Welcome to a wiser retirement podcast. I'm Casey Smith, and today I'm joined with financial advisor Michaela Doughty. We will be discussing: is 2 million enough to retire? What about 3 million? Hello, Michaela.

SPEAKER_02 0:48

Hey Casey.

SPEAKER_04 0:49

So let's hop right into this. When someone comes in to the world-renowned Michaela Doughty and says, um, I have two million dollars. I want to retire. Can I retire? Where do you begin?

SPEAKER_02 1:09

Yes. And I feel like this is such a common question.

SPEAKER_04 1:11

It is.

SPEAKER_02 1:12

Especially here lately.

SPEAKER_04 1:15

Yes. About this.

SPEAKER_02 1:16

It is what number do I need to have to retire? What is that end number that I need to be saving towards? And then also, okay, I already have this amount saved. Can I go ahead and retire? Um, and it's something that we really do have to discuss. Of course, different people have different expectations for retirement. So it's really understanding, okay, what are your expectations? What are those goals that you have that you really want your retirement to look like? For some people, they want to travel the world, they want to do international travel. Other people are like, I've been traveling my entire career, like our pilots. And they're like, I want to sit at home for a few weeks, you know, and not have to few years. Yeah. So it's definitely something that everyone has a different expectation for retirement, as well as just understanding, you know, okay, what other income streams do they even have coming in to the plan? You know, um, there are still people out there that have pensions. I know we don't hear about them as much anymore, um, but there definitely are still pension plans out there that are great benefits for clients that we have that come in, uh, that that is a really big benefit to their plan when looking at, you know, you don't need as much in your portfolio if you have a pension. And then also seeing any other sort of income, you know, a lot of rental properties nowadays. So we see a lot of people that have built up a great real estate portfolio. And so with that, they have a lot of great income, um, which then becomes a lot of conversation of when to sell and all of those. Um, but definitely something that that also, you know, carries into this conversation of how much do you really need from the portfolio? So if you have those outside sources coming in that are really supplementing your retirement and those goals, then you don't need as large of a portfolio. So it does become a question of, well, how much are you actually going to need to be pulling from the account year over a year? And then that really gives us our answer on okay, well, based on these expectations that you have, based on these goals, then this is really where we can then decide, okay, this is how much you truly need in retirement.

SPEAKER_04 3:12

So what you're saying is uh a family with two million dollars, if we had four families with two million dollars, their lifestyles could be totally different based on other factors.

SPEAKER_02 3:21

Absolutely. So for some people, two million is going to be plenty for a family. And others, it's going to say, uh, you know, actually it's a little tight for us. You know, we we have other expectations and other goals that we want to balance. And so, of course, your balance does matter in your account. You want to have retirement savings. But at the end of the day, it's really the spending of your family that matters the most.

Spending And The 4% Rule

SPEAKER_04 3:41

Okay. So let's start with, I think, the one thing that everyone wants to calculate how much how much does $2 million generate me in income?

SPEAKER_02 3:50

Yeah, absolutely. And I think the top number that you hear and the rule of thumb that, you know, we even kind of allude to even in our planning at different points is, you know, the additional or initial 4% draw, withdrawal each year. And so, of course, if you do have that 2 million, then you're gonna see that about 80,000 you could take out of your portfolio each year, year over year, because that's about your 4% level. And we're assuming the portfolio is growing typically more than 4%. Um, so typically you're still growing your portfolio at that rate, but you're able to, of course, withdraw from the portfolio as well. And of course, you know, that 80,000 is, you know, before taxes and anything like that that might be associated. But typically that 4% is what's referenced a lot of times because it does have that great amount as far as how much your portfolio should be growing year over year versus how much you can be pulling out. So as long as we're not too far exceeding that 4%, um, then typically you're in a pretty good estate at that time.

SPEAKER_04 4:49

So if you're getting, let's say, $60,000 that's total for um husband and wife or uh yeah, um from Social Security and they need $120,000 to maintain their lifestyle a year. So the portfolio would only need to cover that remaining $60,000. And then if you had pensions or if you had real estate like you're talking about earlier, then that that makes it even um even easier because you have other other income sources.

SPEAKER_02 5:17

Exactly. And so that's where when you start factoring in all of those different levels of things that are, you know, truly going into that goal amount. So say like you're wanting to spend $10,000 a year or not a year, a month in retirement. And so then with that, if you're wanting to maintain that lifestyle, then yeah, if you already have social security of $60,000, then you only need that $60,000 coming from the portfolio. That's about 3% of a withdrawal. So at that on a $2 million portfolio. So at that point, you are looking at a very reasonable, you know, lifestyle at that time.

SPEAKER_04 5:47

So I think this is a hard conversation to have in a podcast because every family is so unique. So let's kind of draw out a couple of scenarios.

Scenario One Retiring At 65

SPEAKER_04 5:55

Uh, we'll call it scenario one. Um, so let's kind of lay down the the the uh assumptions. Yep. Uh both spouses are age 65. Their home is paid off, they have no significant consumer debt. Uh, they expect to spend $110,000 a year before taxes, and we'll stick with that $60,000 in Social Security income between the two of them. Uh their portfolio uh must provide approximately $50,000 per year. So their uh initial withdrawal rate would be approximately 2.5% off of the um off the portfolio.

SPEAKER_02 6:34

Exactly. You know, with that, that's just like how we were talking about the 4%. That's below that 4% threshold that we were just referencing, which is a very rough threshold to be referencing. Um, that does change, of course, per client scenario. Um but that being said, you know, that 2.5% a year is really putting them at a great spot. And because Social Security covers such a meaningful portion of their retirement plan, then that's not something that, you know, they're going to have to worry too much of how much they're pulling from the portfolio because Social Security is compensating for so much of that so that they can really manage that ongoing life's lifestyle. And because they're retiring at 65, this is a huge difference in our clients. So clients that are retiring at 65, they're not having to pay additional costs for healthcare. They're already on Medicare. So they're already eligible at that point. And healthcare costs are one of the most expensive things to be associated with your plan, you know, before, you know, 65. So if you're retiring 58, say, and I think we actually have that in here later, is that it's a much more and much larger line item in your expenses. And so you have to really consider that. So considering that they're already on Medicare, that's really great. They're not having to pull out as much on the front end from their portfolio. And it also makes it really help that they have a lower withdrawal rate. So when we do go to, you know, look at stress testing their plan, they have a lot more flexibility typically within their plan at this level, because it is something that if there is a market downturn, they have a lot more typically as a buffer, or if they need to, you know, purchase a car one year that they hadn't factored in, or if they, you know, want to start gifting to, you know, their children in the future, those sorts of things, they have more room for that at this point. And so there's definitely, you know, more flexibility within the plan, which gives a lot more peace of mind to clients as well.

SPEAKER_04 8:19

Okay, so let's change the scenario only slightly. And let's say that they have $3 million instead of $2 million. How does that really change their retirement picture?

SPEAKER_02 8:28

Yeah, of course. And so with that, you know, again, talking through the 4% role, it's just an easy number to look at here uh to do the comparison. So $2 million, we were looking at $80,000. At 3 million, you're looking at more so like $120,000 that you could initially be taking from the plan. Um, so you know, that additional million dollars is essentially giving you $40,000 each year in additional retirement spending.

SPEAKER_04 8:51

So an extra million dollars sounds like a lot.

SPEAKER_02 8:54

It does, yep.

SPEAKER_04 8:55

But but the net isn't isn't that great.

SPEAKER_02 8:59

No, it's not as large of a difference as a lot of clients would assume. Um, and a lot of people would assume, quite frankly. But the thing is that we are doing a lot of stress testing on these plans. So with that, you have to you have to, of course, assume that even in bad timing, which are, you know, really the worst time period to go through a credit crisis, you know, 08-09, right at retirement, um, that we're still wanting to make sure there's a value left in your plant at the end of that time, even if that were to occur, you know, at age 95. Um, and so that's where we want to make sure that that's, you know, still being protected there. Of course, also the taxability of the accounts that you have it in. Sometimes, you know, we need to take that into account. If it's, you know, in not a Roth IRA, it's in a traditional, well, it's going to be taxed ordinary income. You know, if it's in a brokerage account, you're gonna have capital gains to be associated potentially. So we have to be mindful of those tax changes as well. And then typically when you have more income or not income, but more savings, once you're crossing over that threshold from 2 million to 3 million, typically there is a change in lifestyle just naturally. Um, because if you're having more ability to save, then typically you're a higher earning individual. And so with that, um, that's, you know, something that your lifestyle might have shifted over these years of what you've come to expect. You might expect a $25,000 trip every year. And so that's a non-negotiable, or you're, you know, you might have a larger home that's gonna have more property taxes and more bills to pay on it. Um, and just naturally your life is more expensive, or your cars are more expensive because they're more luxury. And so that being said, you know, typically as the portfolio grows, the lifestyle also grows with it. And um, not all the time, but sometimes. And that's a typical thing that we see. So that's also why that 40,000 sometimes isn't as much as people would assume. Um, but there's just a lot going into it and a lot of variables that are changing that.

SPEAKER_04 10:48

So that extra million sounds like it it really creates more flexibility, which is which is good, but does it doesn't put you into a whole other retirement retirement realm necessarily?

SPEAKER_02 10:56

No, not necessarily.

Scenario Two Retiring At 58

SPEAKER_04 10:58

All right, so let's introduce another scenario, call it scenario two. Um this household uh will have more money, but also a more demanding retirement plan. And this is probably getting into a lot of what we do.

SPEAKER_02 11:13

Absolutely.

SPEAKER_04 11:14

Um so we'll we'll call it uh again, scenario two. Uh so the second couple, both spouses are now age 58. They want to retire now. Uh the plan is to spend $190,000 per year. They still have a mortgage, social security will not begin for several several years. Uh they must purchase health insurance until Medicare eligibility. So $58 to $65, they'd be on private health care. Um, they plan extensive travel because they're younger, right? Yes. The legs still work. Uh they provide regular financial assistance to adult children. Uh, and most assets are held in pre-tax retirement accounts, as it'd be 401ks and IRAs. So let's let's kind of walk through how does this family look so different?

SPEAKER_02 12:00

Yes. So the main first thing to point out here, because we kind of already alluded to it earlier, is that they're retiring much earlier. So they're retiring at 58 instead of 65. So you have seven more years now that you're having to fund from the portfolio. And the difference being is that now your healthcare costs are probably triple what you would be paying on Medicare for seven years, you know, at this time. So from 58 to 65, like you were saying, you're gonna have to be on Medicare, or not Medicare, but you're gonna have to go to the marketplace. Of course, depending on where you keep your income, can adjust what you're actually paying in premiums, also your health level, what doctors you need, all of that can adjust your healthcare cost. But that is a big change in your plan typically, because it is so much more expensive to be on the marketplace than on Medicare. So that's a huge change, as well as, you know, looking at really just their goals for retirement. So you have that massive travel budget that they're going to want to have each year. They have already just a naturally more expensive lifestyle because they need to spend more, because they also still have a mortgage. They still have debt to pay off. Um, and so that does make it to where they need more of a safety margin there as well, um, that because they have a debt that is requiring them to pay that off. And with that, though, they don't have any income coming in anymore. So there's no social security, and there's also a longer on-ramp to social security, because really, I mean, we're looking at if you're waiting to full retirement age, then I mean, that's nine years that they're going to go without having any income brought into the portfolio. And so that's where you're not having any sort of supplement there. But then you're also, because of the way the assets are held in pre-tax holdings, um, you know, it's going to be taxed at their ordinary income tax rate. So they're not in a favorable, you know, spot there either with the way their accounts are structured. So going back to healthcare, they're going to have to pull out of those accounts that have ordinary income. Well, then that's going to raise their income. So they're probably not going to qualify for as many subsidies for healthcare costs. So then at the end of the day, they're going to be spending more on both ends because you're going to have to take more out of the account to even pay your tax bill, potentially, if they don't have enough in savings. So there's a lot that's happening in this plan. Um, but with it, it is there's just a lot more, a lot more that's going to have to come out during those first pivotal years of retirement. And so you're not going to have as much growth on your portfolio in those early years that then provides for later down the line. So definitely something that there's a significant adjustment in these plans just because of the fact of retiring later and then just the overall costs.

SPEAKER_04 14:32

So despite having a million dollars more, their plan has a lot of different ways that it could potentially fail or fall short of their of their retirement goals.

SPEAKER_02 14:41

Definitely. And, you know, there is, you know, potential that they could make some adjustments to make that happen. But of course, just given their age and potential taxes on their accounts, as well as just, you know, there not being any other income that's really helping them supplement, then that's where we're really seeing there's a heavier burden on that portfolio to make it happen.

SPEAKER_04 14:59

So when people are doing uh financial planning, what are some of the what are the some of the expenses that people are missing?

SPEAKER_02 15:07

Yes. So I would say honestly, just to start from the beginning is a lot of people that come in for planning have no idea what they spend today. And so that is just the start of it, is just saying, well, how much are you spending on just your regular day-to-day today? And it's a great spot to be in that you're not having to worry about your bills. That's huge. Um, and that is a blessing in and of itself, um, that you don't have to crunch the numbers every month. But that being said, it is something though, on the next end when you're looking at retirement, well, now you need to know how much you do spend because you need to make sure you can keep your lifestyle where you want it to be. So I think it's a lot of times understanding that. Um, but another thing is really people, again, and I don't want to harp on health too much, but healthcare costs are very expensive. And so people don't understand that sometimes and understand that, you know, the marketplace is so much more expensive than a Medicare cost. Um, and so really understanding that even with dental envision, those are going to be, you know, separate policies that you have to receive, as well as just out-of-pocket costs as well. And so we'll assume all of that in planning, but I think that's something a lot of time that isn't as considered, or even just general, you know, home maintenance, vehicle replacements. And I will say with our planning, most of the time, how we're planning for those is just we do have more conservative, you know, assumptions built into the plan. Now, if we do have clients that are like, hey, you know, I want to buy a new car every other year, well, okay, we're gonna build that into the plan because that's just a part of their, you know, regular recurring expenses. But if it's something that, oh, I'll buy a car once mine really just runs out, then absolutely that's just, you know, your portfolio is going to a lot for that typically over time.

unknown 16:41

Yeah.

SPEAKER_02 16:42

Um, you know, travel, I will say this is not something that typically actually a lot of our clients are including this because it is becoming such a more normal thing, I think, for people to really be considering in retirement. And this is why a lot of people are trying to retire even earlier. It's just so they can go see the world and travel. And so this is a very common thing that clients do know how much they want to spend on travel a lot, uh, but it is something that, you know, sometimes maybe not exactly how much they want to spend if it's not already a part of their regular, you know, amount that they're spending. Now, I will say one thing that we do miss quite a bit is the, you know, giving to children, adult children, or even to grandchildren. I think that that's something that, you know, is a lot still a large portion of what a lot of people choose to do and a lot of parents still choose to do, just as times come up, they want to support their children and make sure that they're providing for, you know, not only their own children, but also their grandchildren. And so making sure that if it is something that there's substantial giving each year to those, um, that we're making sure that that's noted. And we're also trying to do that in the most efficient way as well. So really, you know, locking in those as well as even charitable giving, I would say. And this is one that's difficult for a lot of clients too to decipher in retirement because you are transitioning from having income. And for a lot of our clients that are charitably inclined to give to a church or something like that, well, now they're trying to rewire, okay, well, I was used to doing this 10% automatically. Well, now I don't really have an income per se. So how do I choose to save? And that's a very personal decision at that point. But it's something that gets a little bit more difficult for them to, you know, understand how much they truly want to be giving at that much at that point and how much they realistically can be gifting at that point as well. So really figuring out all of those. And then as younger clients, I would say long-term care is something that's overlooked currently. But that's of course, it's just not something on the forefront for a lot of our clients. Um, but it's something that we, of course, want to make sure that we're talking through and covering, even if they're still too young to really be considering any sort of insurance.

SPEAKER_04 18:44

So the age in which you retire uh really has a big effect on things. And and if you think about it, for um those last few years, that's usually when your retirement accounts are the largest. So they're getting the most compounding through rates of return those last few years.

SPEAKER_02 19:00

Yep. And so you're getting more years on those portfolio or able to get those portfolio growth, whereas if you're having to take those withdrawals, then of course you're losing that growth on those on that value essentially. So absolutely, as you're having to take those withdrawals, and typically if you retire earlier, like we were just saying, your withdrawals are going to have to be larger just because of your natural expenses are going to have to be larger at that time.

Taxes Income And Investment Risk

SPEAKER_04 19:23

So, how much a uh difference is guaranteed or predictable income make? Because I feel like this is um this is in our planning software, it really likes Social Security and pensions because it sees it as guaranteed.

SPEAKER_02 19:38

Absolutely.

SPEAKER_04 19:38

You'd be careful going down this road because this is how annuity fixed annuities get sold as well. Yeah, right? Absolutely. It's a guarantee.

SPEAKER_02 19:46

Yes, we love the guarantee word, right? Exactly.

SPEAKER_04 19:50

So so there's plus and minuses, obviously, to to having annuities in a portfolio. I think probably in my personal opinion, mostly minuses, but what um uh you know, how how much how much does this play into planning?

SPEAKER_02 20:04

Yes. So I will say social security and pensions are always going to be such a great benefit to your plan, of course, because it is something, of course, your plan is viewing that as guaranteed income, and it is something that it doesn't see changing other than through inflation um or a cost of living adjustment if you have a pension with that. Um, of course, your social security is going to have that each year, but you know, pensions don't always. And so that's always going to be such a great, you know, benefit to your plan because it's making it to where you're not having to take as much out of the portfolio, like we were saying earlier. And so it's making it to where there's less stress on your portfolio because you have this supplemental income that's coming in for you. Now, of course, if you're, you know, not if you don't have as much or if you have your discretionary income and that sort of thing that's coming in from these predictable sources like social security and pensions or even rental income. Now, rental income can vary quite a bit. So it's not as much of a guarantee, I would say, as, you know, say like a pension or social security, but it is something we still factor in. Or if you're gonna even work part-time in retirement, then those always offer a really great buffer to your plan. So you're not having to take out those withdrawals. Um, but definitely something that really helps with the cost of inflation, even as well on your plan, um, as it eats away, you know, too, that that social security keeping up with inflation really does help as well. So absolutely, overall, having that guaranteed and predictable income is always gonna look better on your plan. But we do know pensions are not as, you know, as large as they used to be, um, or as common as they used to be. But social security is still there and we still anticipate it to be there. But of course, we are, you know, looking at if there are going to be any changes to that as well.

SPEAKER_03 21:47

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SPEAKER_04 22:06

So another thing that affects retirement are what types of accounts you're pulling from. So direct relation is to taxes. Absolutely. So all right, so two people may have uh two million dollars each, but that doesn't mean they have the same amount uh to spend. And this has a lot to do with the type of uh where the money is, what what what's the account type that the money is in? Can you explain how that works?

SPEAKER_02 22:31

Absolutely. So with it, it does depend on that tax structure. So this is very similar to what we were just talking about in the age 58 scenario, where we were talking through, okay, well, at age 58, in that scenario, they only had, you know, pre-tax accounts. They had contributed pre-tax during retirement or not during retirement, for retirement, for retirement. And so with that, it made it to where now every time that they go to have a distribution during retirement to pay for their living expenses, that's going to be taxed at ordinary income tax rates. And so that's not as favorable in retirement like you would like it to be. So it just increases that tax bill that you're going to owe because of the fact that it was contributed to a traditional IRA or traditional 401k, 403B plan, those sorts of things. Um, now, of course, the flip side of this is a Roth account. So this is where you can contribute, you know, to your Roth 401k or a Roth IRA directly, um, or even doing a backdoor Roth contribution is how people accumulate this balance. And that's where you pay, of course, tax on the front end. And so then when you actually go to retirement, if you've had the account for longer than five years, then you actually get to pull it out tax-free. And so that is a great benefit to this account, is that you're getting to participate in the growth of the market. And as long as those dollars are in there for longer than five years, then you're not even having to pay tax on those dollars, which is huge. And so it's a really great benefit to have this account. And that's why we really encourage young people to be contributing to this because their income tax is low. So when they do go to have to pay taxes during that year to contribute, they're paying lower taxes than likely what they'd even pay in retirement. And but they're also getting to participate in full market growth in this account. And then as long as they keep the account, then you know, they're going to have a great benefit for themselves there. It's also a great account to inherit too. So that being said, though, there's also taxable brokerage accounts. And that's where, of course, if you opened up an individual or joint brokerage with your spouse or whomever, then that's where you can contribute. And of course, very similar to like an IRA or Roth, even, but the difference, of course, being that instead of paying ordinary income taxes and any um capability there, you would actually be paying, you know, capital gains tax and capital gains rates, which are actually more favorable typically than ordinary income tax rates, because the top tier of taxable and or taxable accounts for brokerages is 20% for those capital gains. Most people are going to fall within that 15% range, though, which is typically much lower than, you know, ordinary income tax rates that can go up to 37%. So definitely something that we want to review there. And then health savings accounts too are huge. And so those HSA plans are massive if you have a high deductible health care plan, which of course does depend on your family situation if you have access to that and if you choose to utilize that. But it is a triple tax advantaged account so that uh funds that go in don't get taxed when they go in. It grows tax-free and you get to take it out tax-free as long as you're spending on healthcare costs. So it is a great, great account to have, whether it's today or in retirement. It's a great account to be contributing to and taking advantage of that triple tax savings.

SPEAKER_04 25:42

As we get, you know, we're we're saying we're at retirement, we have two or three million dollars that has been um conserved in one of those accounts. Uh, do we need to get really conservative with our money at that point? Do we get conservative in retirement? I feel like a lot of people think that they should. So I'm retiring now. I have to be conservative.

SPEAKER_02 26:02

Yes. And I think it's something that you get more conservative than maybe when you were working in retirement. You do typically adjust your allocation to be more, you know, in line with what your risk tolerance is. So you would be a bit more conservative just because you're now taking distributions from the plan. So we want to make sure that you're going to have access to, you know, the funds you need to live your life. Um, but at the same time, you're still going to need growth because if you're retiring, say 65, well, we're not planning for you to, you know, potentially end the plan is what we like to call it, or, you know, pass away until you're 95. And so that being said, you have 30 years that you're really having to provide for retirement. And so with that, you know, you need to make sure there's still growth in the portfolio because that's still a time horizon of 30 years that these funds need to be here. And if you're not having them invested, then they're not growing and you're losing purchasing power. And so if you're losing that purchasing power, then you're not going to be able to afford as much in groceries or go on those trips or, you know, keep up with the cost of living. And so you need to make sure you're still invested in the market to participate in that growth. But then thereafter, you do want to make sure that there is a good, healthy amount uh, you know, in a cash bucket or cash reserve for you that would be providing for, you know, two years of cash flow. So we want to make sure that there is a nice balance, and that is going to be dependent on everyone's situation, on how much you need to pull from the portfolio is going to adjust, you know, what your overall allocation needs to be.

SPEAKER_04 27:31

Yeah, one of the things people fear is losing a bunch of money in the initial year of retirement. And sequence of return is a real risk. But what you just said solves that problem where if you have two years worth of reserve and cash uh inside the portfolio plus your emergency reserve cash outside the portfolio, and then you have uh bonds, and then you have your stock, you can reduce the effect of a bad sequence of returns, like retiring into a financial crisis, because you kind of let that the stocks kind of sit there and let it grow, right?

SPEAKER_02 28:02

Absolutely.

SPEAKER_04 28:02

So so that that's a good um that's a good reason why you you you you want to be more conservative from a cash flow perspective, but overall in the portfolio, that's why that 6040 portfolio works so well. 60% stock, 40% bonds. People make fun of that portfolio, but it's funny is in in in weird times people write articles, you know, 6040 is dead, and then a year later, 6040 is back, and then next year 6040 is dead. Usually the 60-40 dead people are usually trying to sell you an alternative product. Yeah. Um like that's 6040 is dead. Um, that was kind of the Bitcoin anthem for a while. It's like, oh, you have to invest this money in Bitcoin. And then there's the annuity people who try to say 6040 is dead, buy the annuity. Yeah. And the reality is um it's not dead, it works, it works fine. And um uh it's just you can build it really cheaply.

unknown 28:50

Yeah.

SPEAKER_04 28:51

And there's other people who want to sell you things. So you have to be careful about who what with what's the agenda of the person that's educating you um about their their topic. Um, so let's talk about healthcare. Uh this you alluded to it earlier that it can be expensive. Why, why is it so expensive prior to age 65?

SPEAKER_02 29:09

Yes. So you're having to go to the marketplace, and that's where you're going to healthcare.gov typically to go and find a policy for you that is through the marketplace. And this is where even if you have friends that are self-employed, you know, and they're having to go out to the marketplace and get their own policy for themselves, you know, um, this is where they might even talk about how expensive healthcare costs are. And that's because it is that you're not doing it under the umbrella of an employer or going through the government in the sense of Medicare and that sort of thing. And so it's a lot larger of a cost typically up front to pay for those premiums. Those premiums are typically, you know, three times the cost of Medicare. And so it just gets very expensive very quickly. And of course, there are income limitations. So depending on where you live, exactly where you're at, um, even your zip code truly does determine how much you're going to pay in in health insurance. And so, you know, it does depend. I know Georgia is very much zip code specific. Not every state is zip code specific. Um, so it does depend on how they have decided to run their health care program in the state. Um, but in this instance for Georgia, it is specifically, you know, even where you live in your zip code truly does affect how much you're paying in premiums. Um, how many people you have as dependents in your household will largely affect it. And now, of course, as we've seen subsidies actually get backed off of a lot this past year, um, we're starting to see that those costs are even more expensive than they were previously. So, you know, we had a lot of clients that come, you know, really February, March timeframe that their, you know, cost of healthcare went from, you know, being $500 a month uh pre-retirement or pre-Medicare to now $1,500 a month pre-Medicare. And so it's a very large change for them. And that's a single individual. And so it's just something that it is very large. And then with that too, if you're already someone who has, you know, you're retiring early and you have this larger amount that you want to be spending in retirement. Well, if you exceed $218,000, or even if you were earning $218,000 two years prior to your retirement, because there's a two-year look back to determine your premiums, then you might be subject to Irma. And so that's where you're getting charged an additional, you know, coverage amount. And that, of course, is for Medicare. Um, but you know, you do want to make sure that, you know, you're trying to also keep your cost for healthcare lower in that instance as well, of how much that you're truly spending each year in retirement. And so, you know, for some people, that's not going to be a large effect as far as Irma is concerned. Um, but, you know, also Medicare doesn't cover every cost once you get to that point. And so it's something that too, you're going to have out-of-pocket costs. And depending on your health level is going to depend how much those out of pocket costs are. So definitely something that you have to really consider and, you know, see that out-of-pocket costs are going to be expensive. And even if you're definitely retiring before age 65 and you're not eligible for Medicare, then you're really going to have likely a larger line item going towards healthcare costs because it is growing right now at about five and a half percent each year, which is massive in comparison to a two and a half percent inflation that we typically see, you know, during um the standard

Inflation Stress Tests And Next Steps

SPEAKER_02 32:17

year.

SPEAKER_04 32:17

Inflation is a good segue. Um, I think this is the number one thing that I see wrong with plans that people put together by themselves. So someone walks in and says, Hey, I've done the math, I think I'm retired. I just want you to, you know, double check me.

SPEAKER_02 32:32

Yeah.

SPEAKER_04 32:32

The problem is that they're they can be retired for like five years, and then after five years, inflation starts creeping in. And then by 10 years, I think that they'd be really struggling if they didn't take into account inflation. I mean, you look at our cash flow sheet that goes all the way out to age ninety-five, every year your income increases by two and a half percent, healthcare by five point three percent.

SPEAKER_05 32:53

Yeah.

SPEAKER_04 32:54

Uh, and then we will increase travel budgets and things like that by two and a half percent typically as well. Uh, but this is this is the biggest thing that gets missed. Um, if you think about an average inflation rate, uh, if we used uh 3% as a number, uh, I think you actually use the two and a half in your I did use the two and a half. You give me the two and a half.

SPEAKER_02 33:13

Yeah. So if you do two and a half percent on say a hundred thousand dollars, um, just to keep it whole numbers here, then really after 10 years, that 100,000 has turned into 125,000. And so we really want to, you know, make sure that you're having to grow that value. Cause especially if you're even looking at, I would say, uh, we see this a lot with our younger clients who are coming in, say in their 30s, and they're like, I put it into AI, you know, and it's great. And don't get me wrong, you know, great to try and put it together. And I, you know, really I love that they're trying to get their finances in order and AI is a great tool to try and, you know, start that conversation. Um, now, that being said though, if you're not accommodating for inflation correctly in those calculations or even just in your spreadsheet, then this can very quickly your purchasing power just goes away completely. Um, and I think even just something to add on to this too, if you're if you are trying to run the numbers yourself, even in addition to inflation, I think beyond that, you also see unxpected, you know, average returns. And, you know, I think a lot of times we have clients come in and they're like, well, I want an 8% return, you know, on average is what I want us to plan for. Okay, well, sure, you can plan for an 8% return, but on average, we don't actually see that, you know? And so you want to be conservative in your assumptions, especially when you're doing future casting. And so you never know, you know, what the market's actually gonna look like. And you have to accommodate for those down years where it's 22% down, 24% down, you know, and alongside those years where it's up 20%. And so you have to find that happy medium, but you don't want to, you know, err to the side of let's always plan for 8% of a return, because that's just not necessarily correct either. Um, so you want to be more conservative with that. And depending on your allocation, depends on exactly what is realistic for you. But I think that's another thing that we typically see, and that's not even included here, but another thing that we typically see for clients, um, just doing the calculations on their own.

SPEAKER_04 35:07

Questions we should be asking uh before retiring with two or three million dollars. Let's kind of work their way through these. Um, one is what do we realistically expect to spend each year? So you have to go to retirement with a spending budget. You probably should divide it in two. Um it could be three, really. Well, typically for we take care of the healthcare. Most people don't understand healthcare costs, but but really the the the two that the client should come to the table with is one is what's your basic spending? What does it take just to run the household?

SPEAKER_05 35:36

Yep.

SPEAKER_04 35:37

And then the second part should be your discretionary, all the fun stuff you want to do in a retirement. Uh and sometimes discretionary, we can tear that down as you age, which helps you live on more today. It's not it's not a linear thing. You probably don't need a travel budget for when you're 95 years old, right?

unknown 35:53

Yeah.

SPEAKER_02 35:54

Absolutely.

SPEAKER_04 35:54

So it it's it's um uh that that's one question uh that I would um that would start with. Um what yeah, it kind of goes along with it all as well as which expenses are essential and which are flexible. So that kind of breaking those those uh things into into two. You still got to pay your light bill.

SPEAKER_02 36:14

Yep. And I think doing even just a I know not to harp on spreadsheets here, but doing a true cash flow analysis of what you're doing day in and day out, because it is something that one month, you know, a lot of people pay their insurance, you know, every six months. And so it's something that, you know, you might not even be factoring that in. That's something that gets missed because you only pay it every, you know, six months. And so, but at the end of the day, when it comes to retirement, well, you don't want to have a shock of a bill, you know, at you know, that sixth month where, okay, well, here's your thousand dollars that you have to pay an insurance for your car or more, you know. And so that being said, you do want to make sure that you're taking that into account. So a lot of our clients we even have coming in, you know, it's a kind of a challenge to them right before retirement to say, okay, this next year, really look at your cash flow, really analyze it. Pretend you're almost in retirement, you know, a little bit, just to kind of get that a little bit of, I hate to call it role play, but a little bit because it's something that it also helps with the stress when you go to retirement and you're no longer having that paycheck coming in. It just alleviates a lot of that stress.

SPEAKER_04 37:16

How much income will come from Social Security and pensions? This is the part that people will try to take Social Security at 62 if they're trying to retire early. And really you should look at it as how many income sources do you have? So if you have a portfolio, if you have pension, if you have social security, if you have rental income, um, all these things should be optimized. So you might be pulling more from one for a little while before you take social security. So you might decide to uh even delay a pension to get a higher benefit in some cases, uh, or there's no benefit to delaying a pension, so you take all of it at 65, uh, but then you delay your social security until 70 because that's the highest payout. And then in the meantime, your portfolio is supplementing the difference. So you're getting you're getting the more now, but you're just paying for it out of your own bucket until you can get to other people's bucket that are more efficient, that's more efficient. And exactly that that's thinking that that's one of the biggest surprises or hardest parts of planning is getting people to understand it's okay to spend down for a little bit if you know in the long term uh you benefit of it uh for it. And absolutely delaying social security is kind of a no-brainer. Unfortunately, a lot of other advisors don't always recommend that. I think it's for selfish reasons. They want to they don't want you pulling out of their portfolios, right? Because if you have thousands of advisors and they all say don't pull, take social security as soon as possible, then that's millions of dollars. It stays into the company that gets built. So you have to be careful again where where the advice is coming from and and and do they have your best interest um are they legally uh justified your best interest.

SPEAKER_02 38:53

Because it's something too, I think with that is just for social security, you are getting essentially that cost of living adjustment each year. And then, you know, even that additional, you know, bump up between 67 and 70 as well. And so it's just something that it is a pretty much guaranteed, you know, cost of living adjustment and everything for you. Whereas in a portfolio, you can't guarantee any sort of return like that. And so uh, especially when it's going to be, you know, substantial year in and year out moving forward. So definitely something you do want to try and maximize that as much as possible.

SPEAKER_04 39:25

Um, how much of the portfolio is taxable? That's that's a big deal. We always calculate things net of tax. But um, if you're not doing that at home, then you're gonna have to pay income tax on on like IRA distributions. Uh what happens the market declines the first five years? We we call it bad timing. You basically retire into a financial crisis. If that were to happen, can can you be okay?

SPEAKER_05 39:47

Yep.

SPEAKER_04 39:47

Um, will we need to pay for healthcare, product Medicare? We we kind of talked about that uh extensively at this point. Uh are we planning to support children or grandchildren or parents?

SPEAKER_02 39:58

Yeah, that's a big question.

SPEAKER_04 39:59

That's a huge thing. Carrying your entire family is very expensive. And you may not be realizing how much you're doing.

SPEAKER_02 40:07

We have a lot of clients that are, you know, managing that right now.

SPEAKER_04 40:10

Do we expect to move or buy another property? Okay, downsizing, at least in a metro Atlanta area where a lot of our clients are, does not mean it's cheaper. A lot of times you're paying 20, 30, 40 percent more for the home. It's smaller, there's less square square footage to maintain, but it is costing you more. So you have to work that into your into your plan. And where where is the excess coming from? Should be cash because you don't want to be carrying mortgage into retirement. I do.

SPEAKER_05 40:37

Definitely, definitely.

SPEAKER_04 40:38

Uh, what adjustments are we willing to make if the plan falls behind? So what what's the give and take? Where where's the excess in the plan that you could switch if things aren't going well? Yep. Um, I'm thankful that we have really conservative financial planning software and we don't have really have to have those conversations unless the client has spending problems.

SPEAKER_02 40:58

Correct. Absolutely. And then at that point, it's just a whole different conversation. But uh definitely something understanding kind of what your non-negotiables are. I think it's almost kind of like alluding to a house, kind of like you you're just saying. You know, you have your non-negotiables when buying a house, and then you have your wants.

SPEAKER_05 41:13

Right.

SPEAKER_02 41:14

And you got to figure out what those are. And then from there you can really, you know, determine what might need to be adjusted if it were to come to that point.

SPEAKER_04 41:20

So I think we've established that either two or three million dollars can mean very different things. Um, adding a million dollars sometimes doesn't really change quality of life that much.

SPEAKER_05 41:30

Yeah.

SPEAKER_04 41:30

Uh and sometimes it's necessary that you have to have that extra million dollars. Uh, so really every family is so um so different and unique. Yeah, there's not as I was telling someone recently when we do our tax planning here for clients, it's never the same. Uh it's like a thumbprint. Every family is slightly different. So when you're talking to your friends and you're talking to your buddies about their financial plan or their rate of return, absolutely, their retirement plan or what their retirement, what their advisor said, it's all very, very different. I cannot sit here and tell uh we we get about 9,000 downloads on a podcast. So we're talking to 9,000 people right now. Yep. And 9,000 people, every one of you are gonna have a totally different plan from one person to another. But these are all very general guidelines and how you how you get through the the planning process. And I hope we this is really only talking about one segment of planning, which is retirement. That's only about 30 minutes of our three meetings, which are an hour and a half each. It's this is only like a 30-minute conversation compared to all so many other things that that are important uh for retirement planning or financial planning.

SPEAKER_02 42:35

Absolutely. And I hope we didn't focus too much on, and I think we tried not to say that it depends, like the dreaded it depends. It depends. It just depends.

SPEAKER_04 42:43

It's like talking to an attorney. It depends.

SPEAKER_02 42:46

Exactly, exactly. There are a lot of moving parts, and everyone is unique. Um, and yes, it does depend to a degree, but there are also some other things that are pretty, you know, understanding just the numbers in and of itself. Um, but I think really kind of what we've outlined here, even is just, you know, the closer you retire to 65, the better you're gonna be as far as the plan, just success.

SPEAKER_04 43:05

Because of Medicare.

SPEAKER_02 43:06

Because of Medicare, and because of, you know, you're not having to pull out of your portfolio as long. And depending on your income, depending on, you know, what you have available for healthcare, especially too, if you're a tri-care, you know, anything like that, then that's gonna largely affect kind of what you're seeing as well. And then just making sure that you're spending within a reasonable range. Um, and that's something that you would, you know, determine what that number is for you. Of course, we talked about the 4% rule today, uh, but you know, that can also be determined in other ways. I know, especially for our earlier retirees, you know, they might be taking out six percent from the portfolio in the first five or so years. And then, you know, once Social Security starts, they're taking out less than 2%. And so it really is, you know, it does vary um, you know, over time. So it's not going to be a stagnant stay below four for most clients. And especially once you get to even age, you know, 85 plus, typically we do start to see that clients do start to go above that 4% threshold just because the cost of living has gone up so much. Um, but definitely something to consider there. And then of course, wanting to limit your debts as much as possible, like we saw in that scenario. When you have locked in, you know, debts where you're having to pay off a mortgage or a car loan, anything like that, it just adds pressure to the plan that you don't want to see. And I think we talk about that extensively on the podcast of like please get debt free before retirement, um, because it just makes it so much more enjoyable. Um, and then with that, too, of course, income is huge to have in retirement. Social security is amazing to have in retirement, but so are pensions. And also if you do, if you've gone into real estate, rental properties, those sorts of things, that's a good income source. Or if you're just trying to stay busy and want a part-time job, um, a lot of clients just like to have it for feeling like they have a purpose that goes beyond themselves and having still something small to do. Um, and you know, just making sure you understand what your spending is, how you want your portfolio taken care of. And then of course, not forgetting that taxes and healthcare costs also need to be considered and that those do vary largely. Um so really at the end of the day, it's just making sure that, you know, your two million, whether it's enough, is very different uh from client to client. Um, but it, you know, if you follow kind of looking at what is reasonable for you and your family and your spending, then it can definitely be, it definitely can be enough.

SPEAKER_04 45:18

Um, I would say don't choose your retirement date because your account reached a certain number. So you need to build a plan first because that number could be very different than what you think for on the good side or the bad side. Yep. Um, estimate your spending, identify your income sources, evaluate your taxes, stress the portfolio against market declines, inflation, healthcare costs, and focus on a long retirement, not just retiring for the next couple of years. Yeah. That's definitely that's a big thing. Um, thanks for listening to today's episode. If you're interested in learning more about wiser wealth management or want to schedule a consultation to meet with one of our fiduciary financial advisors, you can do so by going to wiserinvestor.com or you can click on the link in the episode notes. We'll see you guys again next week.

SPEAKER_00 45:59

Thanks for listening to a Wiser Retirement Podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestor.com in the chat. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets, or any other investment vehicle or a basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest for clients, listeners, or similar interests. Investments involve risk, and unless otherwise stated are not guaranteed, be sure to first consult with a qualified financial advisor, tax professional, insurance professional, andor legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.