I'm 55 with $1Million: How Much Can I Expect to Spend in My Retirement?

Casey Weade: You're 55 years old with about a million dollars saved for retirement and you want to retire at age 65. Can you do it? Today we're going to find out. Hey, I'm Casey Weed, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner.

What I'm going to be walking you through today is how to build a financial plan, how to build a financial plan and make sure you cover all of your bases. We're going to be taking a look at a couple today that are 55 years old, about a million dollars saved for retirement and they're targeting a retirement age of 65. Now, we're going to take a look at their overall plan, but we have to make sure we're looking at each and every piece to optimize this plan and I'm going to walk you through each step that continually optimizes this financial strategy. We're going to take a look at their current scenario, then we're going to optimize Social Security benefits. Then we're going to optimize their taxes. Then we're going to start to fill in some gaps in that planning when it comes to life insurance and long-term care.

Let's jump into the case. We're taking a look at a hypothetical example here of Dave and Donna Comprehensive because they want a comprehensive financial plan. Dave, he is currently an engineer. He's bringing in about $150,000 in annual income, and he's expecting that he'll get about a 3% continual raise from today until he gets to age 65, which again is that projected retirement date. Now, Donna, his wife, she's a nurse. She's making about $84,000 a year and she expects little to no raise over the next several years so we're using a 1% annualized projection to increase that income from now until retirement.

Then we have their Social Security benefits. This is a key decision for you. Most people, like Dave and Donna, will just say, "Hey, I'm retiring at 65. This is when I'm going to file," but you have to do more work than that. Let's first find out how did we come up with the numbers that we have here at $3,900 a month for Dave, about $2,900 a month for Donna.

This is something that you can do for yourself and that is going to the Social Security calculator at ssa.gov. The Social Security Administration gives us a calculator where we can jump in, throw in their current earnings, what they've been earning, their earnings history, and then projects for us what those future benefits are actually going to be.

We can do this on an inflated basis, a non-inflated basis, and because of their birth year, their full retirement age as the Social Security Administration defines it is 67. When we get that age 67 number, then we can start running our Social Security analysis. If you want us to run your Social Security analysis, all we need is that number. What is your full retirement age benefit? Then we can start to optimize it and run our Social Security analysis from there.

Now we're doing an estimate at ssa.gov. I would highly encourage you not to use the estimator. You can call the Social Security Administration and get your number. Alternatively, you can look at your benefit statement. You can log into your own account at ssa.gov and look at exactly what those projections are for yourself. Then we can use that to do the Social Security analysis.

For them, based on that earnings history, when they are 67, so Dave's full retirement age benefit is this $3,435 a month. Then if we look at Donna's, based on her earnings record, we're estimating about $2,500 a month. 25, 34 per month, those are our two base numbers. You'll also notice those don't really match up with the numbers that I just showed you because I had them run this estimate without inflating those benefits.

Every year that there's a cost of living adjustment for existing Social Security beneficiaries, all of those of you that have yet to file are also getting that cost of living adjustment. We want to estimate what that adjustment's going to be. We're going to be using 2.75% per year as our cost of living adjustment. Why is that? If we look at the history of cost of living adjustments, the 50-year average is about 3.7%. We had some good ones over the last few years. 2023 was 8.7%. The 10-year average is still under 3.

We're going to be conservative and take a look at that 10-year average, use 2.75% per year, and start to run our analysis using our Social Security optimization software. When we look at that, it is showing us that by the time, given that cost of living adjustment and continued earnings, we're going to expect that Dave's benefit is going to be about $3,900 a month, Donna's is going to be $2,800 a month. We're going to dive into this Social Security analysis here a little bit later and show you how we optimize it, how we get even more benefit out of Social Security, but let's do what Dave and Donna wanted us to do. They wanted to file at age 65.

If they file at age 65, these are their benefits. They have no pension benefits. Many and most retirees today are not going to have the pension that maybe your parents or grandparents did, and so we need to do even more diligent planning around retirement income strategy. Let's take a look at their assets. Their assets are all in tax-deferred retirement accounts. It's all in 401(k) for Dave. It's all in a 403(b) for Donna.

We have everything in these tax-deferred retirement accounts, about $700,000 in Dave's plan and about $300,000 in Donna's plan, and they're still saving. They've done a great job saving over the years and they continue to do so, adding about $1,500 a month to Dave's plan and about $1,000 a month to Donna's plan.

Now let's go to the expense portion. What we always talk about when it comes to expenses is we really can't build a financial plan, especially a retirement strategy, until we know exactly what your expenses are. I also see a lot of mistakes being made when it comes to the expense plan. I'm going to walk you through some of those expense mistakes that I actually see made by financial advisors, by those of you that are budgeting and creating your own financial plans.

It's very important that we look at the line items on that plan and not just say, hey, we're Dave and Donna, we're going to spend $10,570 a month and it's going to inflate at 3.5% a year for the rest of our lives or 2.5% a year for the rest of our lives. Why is that? You might also notice here, I use an average inflation rate of 2.34% and you go, "Well, that doesn't seem high enough." Here, let's take a look at the history of inflation.

The history of inflation, current 10-year average at 2.82%. 110-year average is 3.27%. Again, we want to be conservative. We're going to use that 3.27% average and say, well, Casey, you didn't use it. I did use it and this is one of those mistakes that I often see made. If we look at their household expenses, they have a mortgage that makes up a pretty good chunk of their monthly expenses at $2,500 a month. I'll often see an inflation rate tied to that number. This is a fixed-rate mortgage. It is set to be paid off in 2040. That number is not going to inflate over the years.

However, other items may inflate. Real estate taxes, homeowner's insurance, utilities, cable, maintenance and improvement, all of these we're applying an inflation rate of 3.27% on. We have food, dining out, clothing, personal care. We've walked them through each one of these line items and really helped them get into the details of what those costs are going to be.

We have Medicare Part B and Part D premiums. Your Part A is covered. Your Part B and D are going to come out of pocket. We're assuming they're going to be on traditional Medicare. However, maybe they do Medicare Advantage. Maybe they pick up a supplement. We have to do more of that planning and continue to iterate as we get closer to retirement.

We have about $2,500 a month in transportation expenses. I think this is important. You often say, well, what if I need to buy a new car in retirement? What if I have maintenance costs in retirement on my home or on my house or on my auto for that matter? We budget for those things. This couple, they are leasing cars. Because they're leasing cars, we're going to inflate those payments over time. However, even if you are not leasing a car and you're buying a car, you should be setting aside a chunk of your budget each and every month so that when you get to the point that you need to buy the car, that's where it is. That's what you did during your working life. It shouldn't be any different while you're in retirement. You still follow a budget.

They have no education costs, of course. They do have some entertainment costs. They love to vacation and travel. They're planning on doing a lot of that in the first 20 years of retirement. They feel that once they get in their mid-80s, they're going to reduce some of those vacation and travel expenses. We have that $1,000 a month from 24 all the way through 44.

They're also charitably minded and we're not going to inflate that number. They don't want to give more each year. They're just planning on giving $500 a month and their standard giving. Now, when they're giving gifts to their loved ones, they do expect that number will inflate and they want to continue to increase that budget. We're just getting into the nitty-gritty of those line items. You really want to do even deeper work than what I'm really illustrating here because you have to dial in those expenses. There may not be anything that's much more important than that.

Let's find out if they're going to be okay. When you look at their retirement, when they turn 65, they're going to have Social Security of about $7,000 a month. That gives them net monthly expenses of $30,000 and a gap of $7,000 a month. They need to come up with about $84,000 a year in order to fill that gap when they get to that year and step into retirement. They need about $84,000 a year. Their first full year of retirement, they need about $105,000.

Why is that? It's because it's all coming from this tax-deferred retirement account, this 401(k), so they have to pay taxes on those dollars. They need to pull out about $100,000 in order to net that $7,000 a month that they're going to need. They're still going to be in the millions of dollars when they get into their later life.

If we get down here to age 90, at age 90 we have them still spending about $20,000 a month at that point, and they still have about $3 million in these retirement accounts until they start going backwards due to inflation when they get into their upper 90s, and maybe into their 100s for that matter.

Our first step is to optimize those Social Security benefits. In order to optimize those Social Security benefits, we're going to use our Social Security software, and we find that it says, hey, these two, in order to maximize their benefits, because we are assuming that Dave's going to pass away at age 85, Donna's going to pass away at age 90, they would receive about a half a million dollars more in benefits by delaying until age 70 versus filing at age 65. The benefits are significantly higher. Instead of getting $3,300, $4,500 a month, now they're getting $4,700, $6,400 a month in benefits.

Let's just plug that in to our software and see what these adjustments will do to the overall plan. Let's go to that Market tab and see how far we moved that red line out. We moved that red line out to 97. It was previously at 91. We've extended, even in a worst-worst-case scenario, their funds in retirement, we extended that from 91 all the way out to 97, so a pretty good extension that we've seen by just tweaking one piece of the financial plan.

The next piece that we want to tweak is try to optimize these taxes, because we know everything is tied up in these 401(k)s, and they need to get those dollars out at some point in the future in the most tax-efficient manner possible. Taking a look at their current tax situation, looking at where they're going to be in the future, one thing I like to look at is this bracket tracker. We can see what bracket they find themselves in.

Today, they're finding themselves eking into that 22% bracket until they begin to fill up that 24% bracket from 2029 through 2033. In 2034, they're still finding themselves in that 22% bracket. Over time, they will find themselves, if they are lucky enough to live long enough, they're going to start filling up these upper brackets. They're going to start filling up that 24%, that 32% bracket, and so we want to optimize against that.

One of the things we can do here is we can also stress test it from a tax standpoint. We can say, well, what if taxes increase by 10%? What if taxes increase by 25%? We're not only stress testing the portfolio from a market risk basis, we're also going to stress test the portfolio from a tax increase basis as well. For just this analysis, let's take a look at how we can optimize those taxes.

Let's say that we want to do Roth conversions over five years. We want to put together a Roth conversion standard strategy for five years. The software is telling us we should convert $92,000 roughly per year from their 401(k) or traditional IRA over to the Roth. Inside of your 401(k), you should be able to do that internally, converting those dollars internally in that 401(k) from the traditional side to the Roth, depending on the provisions of your plan. A lot of plans are starting to adopt that today.

What we want to do is optimize this. We're going to take the $91,000, move it over to that Roth IRA. What happens? If they didn't do anything, if they just left things alone, their projected lifetime taxes are about $3.1 million. They will be leaving behind about $3.5 million by doing just $92,000 per year over five years.

Again, we're not saying that this is the perfect plan for you or the perfect plan for this couple. We want to continue to run iterations and look at different scenarios. We're just looking at that high level. When they pass away, they're leaving behind all of their dollars in tax-free money. It's all Roth IRA funds at about $4.7 million. They're paying projected lifetime taxes of $1.5 million-ish. It's saving them lifetime taxes of about $1.5 million. They're leaving all these dollars behind as a tax-free legacy.

Let's take a look at what the impact of that is. If we just go ahead, maximize that Social Security, and now we do Roth conversions at $92,000 a year, roughly, for five years, we're going to take a look at that market tab. Let's look at that worst-case scenario. Now we're never running out of money in retirement. We're all the way out to $100,000, even in a worst-worst-case scenario. Not only have we significantly increased the assets that they are going to have to leave behind in a good scenario or in an okay, even a conservative scenario, a worst-case scenario, they're still not running out of money in retirement. That's going to give them a heck of a lot more confidence.

We're not done there, because this is where we often stop. We go, "Okay, I'm great, I've optimized my Social Security, I've optimized my taxes," but we still have some gaps in that plan. We have to guard against the worst of worst-case scenarios. A lot of those can be insured against. That is death or long-term care. Let's take a look at those risks for them, again, using our software. Let's take a look at current life insurance. They have no current life insurance. They felt they didn't need it. The kids are out of the house. They no longer needed the life insurance, so they canceled it. However, there are still risks.

If they assumed that if Dave were to pass away, that Donna would still need 100% of those same expenses, then today they'd need to fill in a gap and pick up about a million dollars in life insurance, which wouldn't be necessarily cheap. They could do a million-dollar 10-year term policy, but the reality is they're planning on saying, hey, we're willing to reduce our expenses if one of the two of us passes away.

If they're willing to reduce their expenses to, say, 75% of their previous budget, then now they need about $300,000 in life insurance, but by the time they get 20 years down the road, there's no need for life insurance. Now we need Dave to pick up about $300,000 of life insurance today, whereas if we take a look at Donna, how much life insurance does Donna need? Now on Donna's life, if Dave is willing to reduce his expenses by 25% if she passes away, we actually don't need any life insurance on Donna. We need a little bit of life insurance on Dave, no life insurance on Donna.

Now let's take a look at long-term care risks, because we might be able to kill two birds with one stone here. Let's take a look first at Dave's analysis. Again, they are saying, hey, if one of us passes away, we're going to reduce our expenses by about 25%. How much is that long-term care coverage going to cost us?

Let's first look at what the risk is to us. If they need that long-term care at age 80, so Dave needs care at age 80, then the current monthly cost in the state of Indiana, and we can run these numbers for each state that we work with, $8,700 a month in long-term care costs, inflated at 3% per year. That means by the time that Dave gets to be 80, it's going to be almost $20,000 per month to cover those long-term care expenses down the road. That means over four years, if he needed care for four years, that'd be about a million dollars in need. Now does he need it for four years? Does he need it for three years? The average stay for a male is around two and a half years. The average stay for a female is closer to four years, and so it really depends on how much of this gap they really want to fill.

Now if this were to happen, and Dave needed that care, we can run that projection. At age 80, they're going to have to significantly increase their expenses. Their expenses at that point go from $15,000 a month to over $30,000 a month. Then he passes away, they go back to $13,000 a month because Donna is willing to reduce their expenses a little bit. Now are they going to be okay? Absolutely. They're still sitting on a couple million dollars down the road, and they're still going to be okay even if they incur some pretty significant expenses for long-term care. This is someone that you would say could self-insure. They could self-insure against those risks.

However, they could also fill in the gap because self-insuring really means this. You're willing to pay those dollars out of your pocket. Dave and Donna say, hey, we know we could pay it out of pocket, but we want a little extra insulation there so that we protect against those costs and can protect the legacy for our heirs. They don't want to go out and buy a traditional long-term care insurance policy that they're going to end up paying money into, and they may never use it. They wanted to go with a life insurance policy that had long-term care benefits attached to the death benefit, allowing them to accelerate the death benefit for uses of long-term care.

We ran ahead. We ran a couple of different quotes for a couple hundred thousand dollars in death benefit. We went ahead and ran them a few quotes through our quote engine to determine roughly what those costs might be. For a $200,000 death benefit policy on someone that was very healthy, so they're both age 55, they're in great health, they're going to go out, they're looking for just a simple policy that's going to be there to be accelerated death benefit. Some of these policies are going to have accelerated death benefit options that can allow you to use them for long-term care, some of them won't, but we can see roughly what those costs are going to be, $2,500 to $3,500 a year, $4,500 to $6,500 a year in Dave's case.

Let's assume that we're going to pick up a couple of those policies in order to just add a little additional legacy protection coverage for this couple and build those into our plan. When we build those into our plan, we're saying they're going to spend about $600 a month in life insurance costs, and again, those are not inflated. Are they going to be okay in that worst-case scenario? Now they're running the risk in a worst-worst-case scenario, that they run out of money when they're 97 years old. Is that a good idea for them or not? That's a decision that they're going to need to make.

Maybe they decide that they're never going to live that long or they recognize that one of the two of them are going to pass away prior to age 97 and they'll be able to use that death benefit if they need to in order to reinvest in their plan, or maybe they decide they don't want life insurance coverage at all. These are the kinds of iterations and conversations that you have to be having with your financial advisor in order to ultimately get the best solution for your own unique situation.

If you're ready to have one of those conversations with a financial planner, our team is standing by. As a fiduciary financial planner, you have the opportunity to sit down with us and get a better handle on your situation and potentially put you in an even better situation than you are today. We're offering a free consultation right now. All you have to do is call the number on your screen. That's 866-968-3658.