I'm 55 with $1.2 Million: How To Retire at 62 with $6,000/Month

Casey Weade:

How do you know if you have enough money to retire? Today we're going to answer that question. It may seem like a complex question, but I'm going to show you a very simple way for you to determine at home if you have a well-funded retirement and can make the leap. Hey, I'm Casey Weade, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner.

Today I'm going to give you some tools so that you can answer that question, can I retire? We're going to look at it from a high level, giving you some financial calculators you can use online, giving you some tools to understand how that those calculators are actually functioning, and then we're going to take it to the next level. We're going to be looking at a case study today of a couple that are age 55, they want to retire at age 62, about $1.2 million saved in tax-deferred retirement accounts, and they want to spend $6,000 a month. I'm going to walk you through that case study.

We're going to look at it very simply from a high level, something you can do at home, and then I'm going to show you some more advanced planning techniques that could be used that could put six figures back in your pocket, maybe even more as you step into retirement. Now we're going to be talking about a specific situation and scenario here of a couple that are 55, retiring at 62, $1.2 million, $6,000, but your numbers may be a little bit different, and that's okay. All of the concepts we're going to talk about today in general terms are going to be very applicable for you to go and use in your scenario or take to your financial advisor for that matter.

First, I want to set up a scenario for you, and then we're going to look at some general calculators online. So taking a look at this scenario, we have a couple that are 55. So they're 55, they want to retire at the age of 62, they have $1.2 million in their IRA, and now we're starting to look at income.

You know, income, obviously the most important part of retirement, but something most people haven't really focused on until they take that leap into retirement. It's all a bit about growth and accumulation. Now it's income planning.

That's where it can feel a little bit more complex. Before we get into our calculators, I'm going to show you how some of those calculators can give you very skewed numbers if you don't go through this process first. So we start with Social Security.

Social Security income for this couple is projected to be $2,500 a month. Well, if you have Social Security of $2,500 a month, guess what? Probably not going to keep it all. There's going to be some taxes involved.

Taxes are determined on your Social Security. We're assuming in this case that 85% of that benefit is going to be taxable. It could be nothing, could be 50%, between 50 and 85 or 85 and above, and that's all determined by combined income or what the IRS calls provisional income.

That provisional income is made up of half of your Social Security, your ordinary income, earned income, and any tax-free income sources such as municipal bonds. There are some tax-free income sources that don't count. So if you have life insurance income, that's not going to count, for instance, but that tax-free income from municipal bonds, that'll count.

And if you are a single filer, those different thresholds will be different than if you're a joint filer. And these thresholds were never indexed for inflation from inception, and so more and more individuals are paying more and more taxes on their Social Security benefits. Those thresholds for an individual are going to be $25,000 and $34,000.

So if your combined income is under $25,000, no tax on that Social Security between $25,000 and $34,000, you're going to have up to 50% of your benefit become taxable, above $34,000, up to 85% of the benefit. And those thresholds for a joint filer, that's a married couple, those now are going to go to $32,000 and $44,000. So we have a married couple here, and what is their provisional income? You can see some of this math on your screen, and if you have any questions about this, Social Security, or anything we talk about today, drop them in the comments section.

I'll be sure to answer each and every one of those questions that comes in. As we calculate it here, we know their Social Security benefit's $2,500 a month. Well, half of that counts towards that combined income, so $1,250.

Then they have pension income. All of that counts towards that provisional income number. And so we have $1,250 plus our $1,500, we have $2,750.

So we have $2,750 that's now counting, but they're going to have an income gap, and that income gap is going to need to be solved with about $40,000 a year from their IRA. All of that $40,000 is going to get stacked on top of there to calculate that provisional income. This is going to put them well over that second threshold.

So we're going to say, without just doing anything but some rough math here, and this is what you should do at home, some rough math to get an idea where you stand at first, that results in 85% of that benefit becoming taxable. So $2,500 a month, 85% of that's taxable. That's $2,125.

Now we have $2,125, the taxable amount. And for this couple, we're going to assume a higher tax rate than they currently have. We're using an effective tax rate of 20% included in federal, state, and local.

Their effective tax rate today, probably quite a bit lower than that. But one of the things we want to guard against here, our tax is going up in the future. Everything that we do when it comes to planning, it should be done on a conservative basis.

Let's look at a worst case scenario to give us more certainty that we're going to be okay. We're talking about retiring for 20, 30 years or more. If you're going to be unemployed for that long, we want to make sure we get it right.

So let's take a conservative approach. We have $2,125, 20% of that is going to be our tax, which is $425. So now we know on that social security benefit of $2,500, $425 is going to Uncle Sam.

$2,500 minus $425, we net $2,075 in our social security. $2,075 in social security, now we have taxes to pay on our pension. We're going to take 20% of that off the top.

Now we net $1,200 in that pension income, bringing us to a total of $3,275, which is our actual spendable income roughly. Now we're going to get more precise here in a little bit. If we just looked at these numbers in a vacuum, we'd go, oh, we have $4,000.

We want to spend $6,000 a month. Our gap's two grand a month, but we didn't take taxes into consideration. Now we know that it's not $4,000 a month that we have in social security and pension, it's $3,275.

Gap is still $6,000 a month because that's what this couple wants to spend after tax, $72,000 a year. That gives them a gap of not $2,000, but $2,725. These are some of the things and details that we can get wrong if we don't do a really diligent job with some of these online calculators.

That's $2,725 that they need from that $1.2 million IRA. But we know when we pull money out of the IRA, it's going to be taxable. So we actually need to divide this number by 80% to get our true gap.

That true income gap is $3,400. That is significantly more than our $2,000 a month gap when we didn't take taxes into consideration. So we need $3,406.

That's going to be the number that we're going to be working off of as we go through some of these different scenarios. Now, as you're doing this for yourself, take a moment, write down all these different numbers for yourself, come up with your own gap, and then you're going to be able to use these calculators alongside of me in this video to run some of these different scenarios for yourself. And hopefully you find out that you have an overfunded retirement and it's time to give us a call and get you into that glory land called retirement.

Let's jump into the calculators. So one of the things that I like to do when individuals and families come in to visit with us is, of course, we want to get to know you on a personal level and start to understand where you stand and what your concerns are. Quite often, those concerns are taxes or healthcare or investment planning, estate planning, a lot of different aspects of retirement.

But at the end of the day, almost every visit ends the same way because you want to know, do I have enough to retire? And quite often, what we find is you're taking a lot more risk than you really need to and probably should. If you're within five years of that retirement date, it's time to start dialing down that risk. But you can't dial down the risk comfortably if you don't know if you have enough.

And there's a really simple way of doing it. I see most financial planners jumping right into this really complex financial planning software that isn't the best starting place. Typically, I think the best starting place is to just grab yourself a simple financial calculator.

I like to use a 10B2, HP 10B2 calculator. But if you don't know how to use one of these, there's plenty of different calculators online. And one of those calculators that I think is great to use is over here on the calculator site.

How long will my money last? You don't have to know anything about future value or interest rates or any present values, payments, all these different things that are acronyms on this calculator. Really, they're spelled out for you quite clearly here on the calculator site. And what we're going to look at first, I want to look at it as if, hey, we have $1.2 million.

And I want to know how much, how long is that money going to last if we never make any interest? Let's just say we take that $1.2 million. We don't even put it in a money market. We know they're going to pay us decent interest rates in a money market today, but we're just going to put it under the mattress.

So we're going to put it under the mattress. We're not making any interest on it. And if we don't make any interest on it and we need to withdraw 3,460 every single month, that is that gross withdrawal in order to get to our net income goal.

This couple said they were going to live till their late 80s, 87 was the timeframe. So we plugged in 25 years. So over 25 years, we're not increasing those withdrawals every month.

We're just looking at 3,460 coming out every month over 25 years. Then over time, they're going to withdraw a million dollars out of that portfolio. They're going to be left with $162,000.

So barring any inflation, they have more than enough to last over the timeframe that they're looking at. However, it is going to go to zero over time. So I think that is an important insight though.

If you have $1.2 million, hey, if I never want to increase this for inflation, which a lot of the families that we work with, they don't really have a need to increase with inflation. At the $4,000 to $6,000 level, you're probably going to see some impact of inflation over time. But if you're spending $10,000, $20,000 a month, like a lot of the families we're working with, well, you may not experience inflation the same way.

Your expenses may actually go down over time. So a simple calculation like this might make you come to the realization that, well, I'm taking entirely too much risk. Why don't I dial it back and I never have to worry about that $1.2 going to $600,000 or $700,000.

I could really secure my retirement and never have to worry about this stuff again because you've been taking risk your whole life. However, maybe that's not the way it goes. So let's start factoring in some other things.

So in this scenario, we looked at no interest being earned and no inflation rate attached to that. This next scenario, we say, let's attach an inflation rate. Let's say this couple says, yeah, we are going to increase our expenses over time.

That $6,000 a month, it's largely non-discretionary expenses. So a lot of these things aren't going to drop off. So if we increase it at 3% per year, how long are those things going to last? They're still going to last about 25 years.

Now we're spending $1.5 million instead of spending a million dollars over their lifetime. So we're spending a half a million dollars more and we're ending up running out of money, not just running out of money, but we're negative $300,000 at the end of this period of time. They're running out of money in 21 years and two months.

We need to generate a rate of return. So we're going to use a risk-free rate of return. I think that's always a great place to start.

A rate of return you know that you could achieve. The rate of return we're going to use today is the 10-year treasury rate. So the current 10-year treasury rate, 4.23%. That is our risk-free rate.

So we know we could set our funds aside or $1.2 million and secure ourselves at least 4% in the interest rate environment that we find ourselves in today. Maybe a little bit more than that. Depends on the tools we use.

And I'm not suggesting that we should put all of our dollars into treasuries or maybe any for that matter. There's a lot of different tools that we can use. Again, we want to look at this from a high level and give you some confidence.

If we took that whole $1.2 million and set it aside and insured it at 4.23% per year, spent $3460 a month over 25 years with a 3% inflation rate, then our future balance is about what we started with in 25 years. We have $933,000 at the end of 25 years, spent our $1.5 million. We are in interest of $1.2 million.

That is the compound interest. We took $1.2 million, made about $4.25 on it, and we generated about $1.25 in interest over the life of that investment. So this should go to tell us right here, I think we ask ourselves, how would it feel for you to take your nest egg today, whatever that is, set it aside in this calculator, apply the interest rate, apply the inflation rate, and now you recognize through this, I'm never going to run out of money and I never have to worry about the stock market again.

How would it feel to know you're always going to be able to spend those dollars and you're going to be leaving behind a pretty good chunk about what you started with in the future? And if the answer is, that feels pretty good, then that probably means you want to consider dialing down your risk if you're allocated differently. Those specific investments we're not getting into so much today, but this should tell you I have enough and I need to start doing some planning because boy, I'm ready to retire and it would feel really good to not have to worry about these things anymore. What I want to do now is move this over to some more advanced financial planning software that we use here at our firm, Howard Bailey Financial.

And in our planning software, again, we're taking a look at the same scenario. A couple are 55, they're retiring at the age of 62. One of the things that this is going to help us with is we're going to be plugging in their social security benefits starting at age 62, but it's going to be factoring in inflation adjustments on those social security benefits as well.

So we're going to be using that cost of living adjustment of 2.75%. And the reason we're using that number is that is the 10-year average of cost of living adjustments for social security. In 2024, it was 3.2. 2023 was 8.7. 2022 is 5.9. The long-term average, though, is 3.7%. 10 years at 2.75. So again, we're using that 2.75 because we want to give some conservative estimates. Next, we have our pension.

And even if we go back and look at that social security, should they be taking it at age 62? Maybe not. There's some planning that we can do as we get into these advanced planning pieces where we want to use our social security software to find the best filing strategy for them. This might not be it.

But again, we're looking at it from a high level. Are we okay? The most conservative thing, let's just take it first. And we can look at the different scenarios as we go through our iterations of these plans.

Taking a look at the pension benefit, we have $1,500 a month, and 100% of that is going to continue on to TAMI in our example. Then we have our assets. We have $1.2 million in this 401k, and the rate of return we've used is 0%.

So we're generating no return on that $1.2 million. We're spending $6,000 a month after tax, $72,000 a year. We're not even assuming that this 55-year-old couple over the next seven years, between 55 and 62, are adding anything to this 401k, which we know they would.

So we're almost trying to get the folks that we're working with to say, hey, maybe I'll hang it up early. How do we start to bring that number back that maybe you had in your head? I also want to build any plan, even if you want to continue working in retirement, in such a way that if you got to a worst case scenario and had to quit tomorrow or decided that you no longer wanted to work tomorrow, that you're job optional, that you could step into retirement immediately. That's why I titled my book, Job Optional, because I want you to create a job optional lifestyle.

And maybe that means you continue to work. Maybe it means you retire. But I want to set it up in such a way that you have the confidence to know when that day comes, you're going to be ready.

So now that we've walked through the basics, we've teed all of that up, let's look at what happens over time. So we have basically the same scenario. If we were to go out 25 years, then that's going to take us to about 56, right in here.

So age 87, we have $800,000 left in this IRA. Now, if we go back to our financial calculator, it showed us that we would only have in 25 years, but $162,000. How did we end up preserving our principle in this alternative scenario here as we brought it into some true financial planning software? That's almost entirely due to those inflation adjustments on social security, as we started this period with $2,500 a month in social security.

But by the time we get out here to age 87, now that social security payment is $4,900 a month, almost $5,000 a month. And we didn't inflate our monthly expenses. So now in our late eighties, we're actually starting to save some of those dollars.

And that's why that number is so much higher. But what did we forget about? Of course, we forgot about inflation. So now let's add inflation into this mix.

So now the only thing that we've changed is we added a 3% inflation rate to our expenses. Now adding that 3% inflation rate to our expenses, what's that going to mean? Now we're actually running out of money. We're running out of money at age 79.

And let's go back to our calculator. What did it show that we would have at that point? So in 15 years, it showed we'd have $427,000. And in 15 years in this example, which would take us out to 2046, we would end up with $180,000.

So $180,000, $425,000 in each one of those different scenarios. So now what's going on? What's going on is we have inflation that's been applied to our more advanced scenario here. And if we go out to that period of time, we get out here to 77, now our expenses are going to be $11,000 a month.

Those expenses aren't any different in this scenario than in the other scenario, other than we have more to withdraw here. We actually are withdrawing more in this scenario versus the financial calculator because the financial calculator doesn't notice that as we continue to increase those withdrawals for inflation, we actually need to balance out taxes at the same time. And so we are running out of money sooner because we're actually taking larger withdrawals than just that 3% inflation adjustment each and every year.

So how are we going to fix this? Well, one of the things I want to point out from this chart is what I think is the most important number that our planning software provides us with. And that is this right here, your required rate of return, the rate of return needed to avoid a shortfall. That's where we should start.

We need to achieve a 4.64% rate of return. Just 4.64% per year is going to ensure that we don't run out of money the rest of our perceived lives. That is till age 100, as the software is currently set up to do.

So 4.64% or we need to add $2.6 million. Much easier for us to achieve a rate of return because again, we're still projecting this at 0%. So let's go ahead and start adding a rate of return.

The first thing that I want to do is add that 4.23% rate of return. So now on that 401k, instead of 0%, we're going to add in 4.23%. So we're going to use 4.23% and let's roll that on out to age 87. So at age 87, 4.23%, we are looking at $1.2 million.

Started with 1.2, ended with 1.2, that's going to be at 4.23%. If we go to our financial calculator, it is showing us that in year 25, we have about $1.2 million in interest earned. We have $933,000 as a future savings balance. So we've done a little bit better.

And I think that should show just the nuances between the financial calculators and real financial planning software. We have to exercise some caution when we're using these calculators or even building spreadsheets on our own because there's all these little factors that can really compound over time and make a big impact. So now that we've gotten this scenario to a place where you say, I feel good, I get four and a quarter, I'll never run out of money.

We need to take it to the next level because I think we can get John and Tammy to spend even more in retirement or retire earlier. So now we're going to do a little bit of investment planning. And what we're going to do is we're going to not allocate everything to that risk-free rate.

Now we're going to allocate a half a million dollars out of that $1.2 million 401k over to the risk-free rate, the treasury rate we talked about a moment ago at 4.23%. The other $700,000, we're going to allocate to U.S. equities. Allocating those dollars over to U.S. equities, if we're looking at historical numbers, dividends being reinvested on the S&P 500, those long-term returns, depending on the timeframe that we're looking at, could have averaged out to 14.6%, 9.3%. We're going to use the lower of all of these numbers. We're going to use that 9.3% rate of return for equity returns.

Again, 4.23% on the treasury returns. These aren't numbers that we are promising we're going to achieve, nor these tools that we would actually be leveraging as we build a plan. But again, we're understanding the concept.

And the main concept that we want to understand here is why we want some safe money. We want some of those dollars to be safe. In this instance, we're going to be pulling about a half a million dollars out of these accounts in the first 10 years of retirement.

So we want to avoid any downside market risk in those first 10 years, in case we go through another lost decade, like 2000 to 2010. So we can now stress test this. So stress testing this scenario, well, let's say that they didn't go through that worst case scenario.

They didn't go through 2000 and 2010, like we see over here in this right column. Well, at the end of their lives, by just allocating a portion of the dollars to be safe money, and that is half a million dollars to be safe money, that is a pretty significant chunk of this account to say the least, and $700,000 to be at risk. Now they're looking at over $10 million.

Should they live well into those 90s, even at age 87, which they projected, they're just now hitting $10 million. Alternatively, if we go through a lost decade and they have three years where the market's down 40%, they have another year, the market's down 40%, well, they're still not going to be running out of money. And not only are they not going to be running out of money, they're going to continue to grow their nest egg over time.

But we're not done yet. Next step is we want to do a little bit of tax planning. So as we take a look at our bracket tracker, they're making a pretty good income right now.

But I think one of the things that's interesting, that's often overlooked, they find themselves in the 22% tax bracket. They are in the 22% tax bracket, but their effective tax rate is only 12.62% right now, even with a taxable income of $150,000, because they're still working. Now when they step into retirement, that taxable income is going to go down, their effective tax rate is going to be cut about in half to about 8%.

And now they're in the 10 and 12% brackets. Fast forward, not too many years into retirement, about 10 years into retirement, they're creeping back into that 22% bracket. Within 15 years of getting into retirement, now they're in the 24% federal bracket, and their effective tax rate continues to rise.

It's doubled at this point. Eventually, they fill up that 24% bracket. Now they enter the 32% bracket.

Why is all of that happening? Well, that's largely happening because they have required minimum distributions that are coming out of these accounts over time. This is their provisional income. We talked about 85% of their Social Security being taxable.

This means that they're hitting the top of that number, and it's always going to be 85% of it being taxable. We have the rates and their brackets over time. We can see that their federal tax rates continue to rise over time.

We can see that their annual taxes begin to skyrocket over time, and their cumulative taxes begin to skyrocket over time. The reason that is, again, is largely due to those required minimum distributions. This couple will have to start taking more than they actually need from those 401k dollars in retirement because Uncle Sam is going to make them start taking those dollars out.

Let's take a look at their RMDs over time. Their RMDs over time, before we implement any kind of tax strategy, kick in at 2044 at $180,000. They don't need, again, $180,000.

Then it goes to a million dollars. Then when they get about 10 years into their RMD stage, it's going to make them ... They're not even 85 years old yet. Now they're going to be hitting almost a half a million dollars in required minimum distributions.

We're implementing a strategy here to get those RMDs down underneath their standard deduction. That's going to be our goal. How do we get them under the standard deduction and get it down to $30,000 and completely eliminate them at some point in the future? That is also going to save them a lot of dollars when it comes to their social security taxes over the course of their lifetime.

We're going to look at doing a five-year period of Roth conversions. If we don't do that, then they are going to end up seeing required minimum distributions of $15 million, a high RMD of over a million dollars, projected lifetime taxes of $5.9 million, and even a legacy of still $17 million. Those may seem like ridiculous numbers, but think about the inputs that we used.

They're not so ridiculous. We used a 3% inflation rate. We ended up using a 4.25% roughly risk-free rate on the treasuries and about a 9%, 9.5% return on the equity side, blended rate of return about 7% per year.

We didn't really paint a real picture. These are very realistic and achievable numbers over a lifetime. These are looking at this couple as if they live to 100, which is still very likely that one of the two of them are here by age 100.

One of the things that's important to point out is they probably won't be here, both of them, at 95 or 90 or even 100. One of the two of them will probably pass away, leaving one of the two of them as a single filer. That's just going to exacerbate these numbers and make those taxes even bigger.

Let's see what kind of impact we can make by doing five years of Roth conversions at $125,000 a year. Remember, we have a $17 million projected legacy, but we also have to keep in mind that that $17 million legacy is still going to involve a lot of tax-deferred dollars. We want to get this to as much tax-free dollars passing on to the heirs as possible.

Now, instead of $17 million at the end of our lives, we're hitting that $17 million here about 10 years prior. Potentially, if they lived age 100, we doubled that legacy. We're even doubling that legacy roughly if they are passing away about 10 years prior, so at about age 90.

All in all, what did we learn here one hopefully learn some simple ways that you can go back and run some calculations on your own in order to determine if you have enough to retire hopefully that gives you some confidence to start making some tweaks and then doing some Advanced planning to allow you to spend even more in retirement we can probably take this couple and now show them how to spend not 6,000 a month maybe $7,000 month or more in this next phase of your life if you're ready to get a free income analysis and visit with a personal financial adviser to get yourself that financial review then all you have to do to visit with one of our advisers virtually from anywhere in the country is call the number on your screen right now