I'm 60 with $1 Million: Can I Retire at 65 and Spend Up to $13K/Month?

Navigating IRAs and RMDs: A Strategic Approach

Casey Weade: You're 60 years old and you'd love to retire at the age of 65. You have about $1 million saved for retirement and you want to know what's the best retirement income strategy for you. Today we're going to take a look at a couple of different scenarios and the pros and cons of each. Hey there, I'm Casey Weade, CEO and Founder here at Howard Bailey Financial, also a Certified Financial Planner practitioner, and I'm here today to walk you through some retirement income scenarios. I'm going to be walking you through a couple of scenarios that want to retire at the age of 65, they're 60 years old today. We're going to take a look at a current scenario that would be at a higher level of risk.

We're also going to be taking a look at incorporating some guaranteed income strategies and the pros and cons between these two different strategies for them, and you may see how this might show up for you and what kind of strategies may be best to implement in your own financial life. Let's jump into the scenario. Today we're going to be taking a look at Joe and Sally Guaranty. Joe is 59 years old and 10 months. Sally is 60 and one month year old. Joe is planning on retiring at the age of 65. Now Sally, she's already stepped into retirement and they are depending on their social security for a large portion of that retirement income that they plan to start upon Joe's retirement at the age of 65.

We can see Joe's social security is about $2,200 a month. Sally's social security is just shy of $2,000 a month, and then they plan on spending about $6,000 per month in retirement. Currently, they have around $1 million saved. They have about $850,000 in an IRA. That may be your 401(k). Maybe it's a 403(b) or a 457 plan, some type of tax-deferred retirement account that you've been saving in for years just like Joe here, and then they have some non-qualified funds. What do we mean by non-qualified? They are not in a qualified account. They are after-tax dollars.

There's about $225,000 that they've already paid taxes on and these are continuing to grow and this is also a valuable retirement asset for them to use alongside of that IRA. Now what I want to do is jump into a scenario. Joe's a contractor. He's bringing in around $115,000 a year and he's expecting to see some increases in his salary over the next few years. He's currently, as we said, 59 and 10 months. He plans to retire on April of 2029, which would be a great birthday present for him on his 65th birthday. As we stated, Sally is already retired. Now, Social Security is also plugged in here.

We have them starting those Social Security benefits at age 65 with those numbers we talked about a moment ago. I want to say that just because we're plugging in age 65 as them taking Social Security at that point in time, this may not be the best strategy for you. It may not even be the best strategy for them. What we would do if you're working with our team, we would take this whole analysis several steps further. One of those steps would be to run some Social Security analysis and really maximize those benefits. What we're trying to illustrate here are some concepts around different income strategies in retirement as it pertains to the assets that they actually have saved.

You'll also note that we put in some cost-of-living adjustments for those Social Security benefits. The reason we use 2.75% is that the 10-year average of cost-of-living adjustments for your Social Security has been about 2.75%. The long-term average is higher than that. Any time that we want to run any scenarios, we want to be a little bit more conservative when that opportunity presents itself to ensure that you can retire as planned and the scenario actually plays out the way you would like it to play out. They also don't have a pension. I also want to point that out, because most of the people that we're visiting with today, they're not retiring with pensions.

Pensions are becoming a thing of the past. This is why guaranteed income solutions have become so popular over the last several years is because people still want that certainty around the retirement income like their parents, or your grandparents had for that matter. We're going to look at creating their very own pension-type guaranteed income here in just a moment. First, we're going to take a look at a more standardized scenario. We have Joe here with IRA funds, about $850,000. They have after-tax dollars of about $225,000. It's important we discuss rate of return. We're using a 9.9% rate of return for them, both pre-retirement and post-retirement.

We're assuming they're going to make 9.9% a year. I didn't pull that number out of thin air. That 9.9% number is what the S&P 500 returned from 1928 through the end of 2023. If you'd like to better dive into the source that we used for that return, check out the link in the description. You can also play with those numbers for yourself. We're not saying that this is the strategy that you should be using. We're not saying that this is a strategy that they should be using. Again, we're trying to illustrate a concept here. Your actual portfolio when you're working with our team may look dramatically different than just using some basic indice returns here.

We have a 9.9% return, and they have some expenses. Their expenses are about $6,000 a month after tax. We know they're going to need more pre-tax income in order to net $6,000 a month after tax. They have a 3% inflation rate that we've also incorporated in here. Why did we use 3%? The 10-year average is about 2.82%. The 110-year average, as you can see, is about 3.27%. We're using a flat number that's somewhere in between these two different areas at 3% per year.

Let's take a look at retirement. We know they're not going to retire for five years. They have five years to let these assets continue to grow. That million at 9.9% a year, that $1,075,000 will turn into about $1.8 million just over five years, growing at 9.9%, which creates a lot more stability for them in retirement. We're going to take a look at a scenario that would also say, well, what if they don't make 9.9% over the next five years? What's the risk of that? How do we hedge against that risk? In this scenario, they have $1.8 million and they have Social Security income of about $4,200 a month between the two of them, they have net monthly income of $4,100, they have net expenses of $7,000 a month.

We said those expenses were $6,000 a month. We're inflating those expenses again. After five years, from five years, just a five-year period of a 3% inflation rate, that monthly expense number goes from $6,000 a month all the way to $7,000 a month. That'll continue to increase over their lifetime. By the time they get to be 85 years old, we're having them spend about $13,000 a month. Is that realistic or not? That'll depend on how they're spending those dollars. If all of those dollars, that $6,000 a month, is on non-discretionary expenses, in all likelihood, they really will experience those increases over their lifetime.

If half of those dollars were on discretionary expenses, maybe they spend a little bit less over time and inflation has less of an impact on them and these are the things we want to evaluate with you when you're visiting with our team, are each one of those line items inside of your budget and applying specific inflation rates to each one of those to really hone this in and customize it for your own unique situation. What we can see here is that those assets that they have, $1.8 million grows to $3 million, $4 million, $5 million. By the time they're out here and they're 90 years old, there's $11 million that they still have in these accounts.

This is where you might want to have a discussion with your advisor to say, "Well, what if we spend a little bit more?" Well, these are all things that need to come up in your conversation with your financial planner. A lot of times, this is where I will see people stop. They'll say, "Ookay, I'm good. I used a rate of return, expenses, inflation, all those things are plugged in. I'm going to be okay." They're okay as long as we don't have a worst-case scenario. Again, we have this couple allocated 100% equities in this particular scenario. We know we could have some really bad years in there.

What if those really bad years happened on the front end of retirement? Those are the years that we have to safeguard. We call this retirement red zone. Maybe you've heard that before. It's the first few years before retirement, the first several years after retirement that you want to be very cautious with how you're allocating your assets. Because if you get that worst-case scenario, you can end up starting to violate the number one rule of investments. You start to sell when the market's down in order to generate that income.

This is why we always encourage individuals to start creating some type of safety blanket as they're approaching retirement in order to ensure that they don't commit what's called reverse dollar-cost averaging. On your way to retirement, you're allocating dollars to your 401(k) systematically, and you're dollar-cost averaging. When the market's down, you're buying more of the market. When it's up, you're buying less of the market, effectively timing the market without having to know anything about it. Now, once you get to retirement, now you're reverse dollar-cost averaging, the opposite's happening. Now when the market's down, you're violating that rule of investments.

This is, without a doubt, the number one risk to a retirement income strategy. Let's see just how big of a risk that really is. In this scenario, we're saying, well, what if we go through a lost decade? 2000 to 2009, some of the worst returns we've ever seen throughout the history of the market. We always want to stress test against that worst-case scenario. In that scenario, instead of having, after the first 10 years of retirement, about $3.6 million in these accounts, they only have $1 million in these accounts. Their net worth has been cut in half over the first 10 years of retirement. That's something that this couple said, "I'm not sure I'm really comfortable with with that much risk.

As we continue down the line, we can see now they're running the risk of actually running out of money in retirement and only relying on Social Security at some point in the future. Even if they don't live all the way out here to age 92, maybe they pass away when they're 85 years old, roughly their life expectancy, individually speaking. I would venture to guess, even though they didn't run out of money, they had some anxiety about that life savings because of all the volatility that they experienced in the market. What can we do about that? Let's take a look at a different scenario here where we start to incorporate some guaranteed income.

Okay. We have the same scenario here with Joe. He's a contractor. Social Security numbers are all the same. No pension here. We have assets. This is the biggest difference. We've split out the assets a little bit. We can see we now have about $525,000 up here in this at-risk bucket, and we're using that same rate of return on these assets of 9.9% a year based on equity returns, historical equity returns. What did we do? We split out about $550,000 to purchase some guaranteed income. We set this aside in a product that's going to guarantee them by the time they retire. Now, they're actually making this investment today.

They're making this purchase today here at the age of 60. They're not planning on turning it on until the age of 65. About five years, they're going to defer this, and this is going to kick out about $4,600 a month when they actually step into retirement. We just ran some numbers and wanted to figure out what roughly today, given our current interest rate environment, they could get in the way of monthly guaranteed income for both of their lives in, again, this current interest rate environment, which is a pretty darn good interest rate environment. This allows them to lock in that income for the rest of their lives.

What I want to talk a little bit about here is the difference in the different products that are out there that can create a guaranteed income for you. This is what I call the spectrum of guaranteed income. These are the four different tools that you can leverage today in order to create a guaranteed income for yourself. These are the acronyms that you're going to hear, and you've probably heard of some of these different acronyms as you've been doing some of your research. This SPIA, this DIA, this FIA, this VA, these are these four different tools that insurance companies provide us with in order to create a guaranteed retirement income, but there's dramatic differences between each one of these tools.

Oftentimes, when people think about guaranteed income, and most often, they're thinking about SPIAs or maybe DIAs even. SPIAs were the first type of annuity that was created to create a guaranteed income for the rest of your life. That is a single premium immediate annuity, often referred to as an immediate annuity. You make a deposit into that account, and it's going to guarantee you income for the rest of your life, but you've lost control of the money. We often refer to this here, lovingly, as a new aside because you've annuitized those assets, and you've lost control.

If something happens a year, two, three, four years from now to both Joe and Sally here, there wouldn't be anything left to their heirs, but it would guarantee income for both of their lives. Then we have DIAs. DIAs or DIAs are deferred income annuities. It operates the same way as a SPIA or an immediate annuity. It just isn't something that we make that deposit today and it starts kicking out the income immediately. It's going to defer that income in the future, and you're going to have a start date that's somewhere down the line. Then we have fixed index annuities and variable annuities.

Now, both of these tools, you have the opportunity to add an income right or two, known as a guaranteed lifetime withdrawal benefit or a GLWB. That is, you have a fixed index annuity, which is going to protect your principal, give you some upside potential, and you're still going to have this account that can continue to grow over time. At some point, after the surrender charges are gone, you could walk away with it. If you pass away, whatever's left in that account, gains minus withdrawals will pass on to your heirs. Both of these tools have those benefits of having an account value that can pass on to your heirs, both variable annuities and fixed index annuities.

The difference being, the variable annuity, your assets are actually going to be allocated into the market, the dollars that could be left to your heirs or you could walk away with someday. That guaranteed lifetime withdrawal benefit means just that. It's guaranteeing that at some point in the future, you can have a guaranteed income at a set level for the rest of your life. This is the tool that we're using here, this fixed index annuity with a guaranteed lifetime withdrawal benefit, because this particular client doesn't want to take any risk with those dollars that they allocate to this particular solution.

In another video, I'm going to be walking you through really the details between the differences of the SPIA, the DIA, the FIA. What I will tell you is that more often than not, we're going to get more guaranteed income with a fixed index annuity with a guaranteed lifetime withdrawal benefit than a SPIA or a DIA. That seems counterintuitive because you say, "Well, if I just gave up total control over the money, wouldn't that be something that would produce more income? I have less control, I have more income." What that does for the insurance company is a little different.

They know that people that allocate funds to these fixed index annuities with guaranteed withdrawal benefits, or the variable annuities, for that matter, well, they're not all going to activate the guaranteed income. Some of those people are going to have these riders on these policies and they'll never use the income. For those people that are actually activating that income, they're getting subsidized by all the people that aren't. More often than not, you'll find more income in these types of tools. Now that we understand the different types of guaranteed income products and tools that are out there for you to use, let's see about how that shows up and what the impact of this is on a financial plan.

Jumping back into it here, I want to point out a couple of different things. One is that rate of return. We've lowered the rate of return quite significantly from 9.9% to 5.86%. That's because we are contending to assume the same rate of return on the at-risk assets at 9.9%. The guaranteed income account that we have here, we're illustrating a 2% rate of return on the cash value that's still in that account, dragging down the overall return. What we're doing here is essentially using this guaranteed income tool as their bond holdings in retirement or their fixed income allocation.

If we looked at the rule of 100, it would say that they should have about 60% in safe assets or fixed income and about 40% at risk. In incorporating the annuity at the level that we did here, it's about a 50-50 blend of 50% of assets low risk and about 50% that are still at risk here. We have the same expenses, $6,000 a month. In retirement, one of the things that's nice here for this couple is that now they have Social Security and they have this guaranteed monthly cash flow that's coming through. Between their Social Security and that monthly cash flow, they actually have a little bit of surplus in that monthly cash flow.

Now that's going to change a bit over time as inflation is going to impact their spending power and they're going to need to start drawing some additional income potentially if inflation has this impact on them from those at-risk assets. This is the way that I like to safeguard against inflation. Rather than adding an inflation rider to the guaranteed income product, I would rather allocate the assets we may need for future inflation into tools or investments that can best keep up with inflation over time. Then should that happen at some point in the future, we can restructure and reallocate that income plan at some point down the line.

The market tab is what we were trying to safeguard ourselves against, that worst-case scenario. After 10 years into retirement, now they still have about $800,000 in that worst-case scenario. Their upside potential has went down quite a bit. If we go down to the very bottom, we can see that no matter what, even in that worst-case scenario, they're never going to run out of income in retirement. They have about $100,000 left in these accounts in that worst-case scenario at the age of 100. Even if they get to 105, 110, they're still going to have that guaranteed income from, not just their Social Security, but also the income from that annuity that's been incorporated into the plan.

This gives them the confidence that every single month they can spend at that rate without worry of running out of money. That's one of the things that I know my father really enjoys with his retirement income strategy. He always says, "Well, every month I know what I have coming in. My goal is to spend every dime of it. Then when we get to the next month, I'm going to spend every dime of it again because I have these paychecks to continue to hit my mailbox for the rest of my life." He likes to refer to that as his mailbox money.

One of the risks that we haven't addressed yet is, well, what happens over the next five years? This, many times I hear, "Well, I'm still got five years until I retire, I can still continue to take the risks that I'm taking. I don't need to reallocate or get more conservative until I actually get a little bit closer to retirement." Over a five-year window, the market can get pretty bad. We've seen this happen through the tech bubble burst, and we've seen this through the financial crisis. We want to also stress test that first five years before they get to retirement and not just the 10 years after they get into retirement.

In this scenario, what have we done? We've assumed that before retirement, they don't make anything for those first five years, and then they get back to averaging 9.9% a year. Why did we use that? If we look at the years 2000, 2005, the S&P 500 had a negative annualized rate of return over that period of time. We're just saying, well, let's say that it's 0%. We know this is a scenario that can play out and has played out in the past.

Again, check out a link in the description if you want to look at those actual historical returns of the S&P 500. For this particular scenario, with no returns prior to retirement, then getting back to making 9.9% per year, they're pretty set. That upside potential long-term has really nosedived. Missing out on those five years of growth over the first five years before they retire has dramatically changed the long-term accumulation potential of that portfolio. Of course, if they have 5 bad years followed by 10 bad years, well, they're going to run the rest of running out of money a whole lot sooner than they had actually planned.

Now, what if we incorporate the annuity into that strategy? We can see here that they have substantially less dollars, of course, when they step into retirement. Now, when we look over the long term, though, now they are still, even that worst, worst-case scenario, they're never going to run out of income and that date of which they run out of actual retirement assets is pushed out quite a bit. I think also what's interesting is they're not really far off from the upside potential they had from the risk assets in this scenario. All that we really changed was the first five years of not getting any return on those at-risk assets.

It really gave us and equalized some of the return potential or accumulation potential between these two different strategies. What I want to do now is just give you a little summary so you can see the big picture. Let's summarize things here. Our best-case scenario without an annuity gives us a ton of upside potential, almost $4 million at the age of 75. The worst-case scenario gives us about $1.1 million. When we incorporate that annuity, we can see that our upside potential gets almost cut in half, about $2.3 million by the time we get to age 75, instead of about $4 million.

The worst-case scenario, not that far off, about $1.1 million versus $800,000. Now, the long term is really where we see the bigger impact, both to the upside and to the downside. Without the annuity, by the time they get to 95, they could have around $15 million in those retirement accounts. With the annuity, they'd have about $9.4 million in those retirement accounts. In the worst-case scenario, and this is what they're trying to safeguard against, without the annuity, they're out of money at age 95, versus having about $545,000 by the time they get to age 95.

We also talked about the 0% pre-retirement return scenario. 0% pre-retirement scenario, we're not even looking at the worst-case scenario, being that the first 10 years of retirement, we experience a lost decade, we're just talking about having no returns prior to retirement, the first five years, and then back to normalized long-term returns. No returns pre-retirement. Without the annuity, we have about $2.1 million at 75 versus $1.5 million. Again, bringing these two numbers much closer together. We see the same thing down here, bringing these two numbers much closer together. No annuity at $7 million at age 95. With the annuity, we have about $6 million at the age of 95.

Now, I hope that what we've done here is just provide you a little clarity around the pros and cons of these different strategies. Of course, you're giving up significant upside when you take any risk off the table. If you're going to incorporate any type of guaranteed income, there's going to be pros and cons, just like there's pros and cons in the market. What we want to do for you is not just take a look at a generalized scenario here, but really take a deep dive into your unique situation and put together an income strategy that works best for you and customize it for you.

We want to offer you today a free retirement income analysis so you can see what guaranteed income might look like for you, so you can see what all these different scenarios look like, and then take an even deeper dive into Social Security strategies and tax strategies with a personal financial review. If you'd like to take advantage of visiting with one of our fiduciary financial planners and running a free retirement income analysis and a personal financial review for yourself and your family, just call the number on your screen right now at 866-968-3658.