I'm 60 with $1 Million: How to generate $50,000/year in retirement income?

If you're like most retirees and pre-retirees, you want a retirement income strategy that'll help you preserve your principle in retirement. Today, we're going to do just that as we explore a couple's retirement that are 60 years old, generating $50,000 a year in income from a $1 million portfolio. We're going to take a look at some traditional strategies, and then I'm going to throw you a curveball with an alternative strategy you may have not yet considered.

The traditional method that most people are using when it comes to managing the retirement income portfolio is picking a risk tolerance. Typically, they're doing that with a risk tolerance questionnaire, maybe some more sophisticated measurements that you've used to determine if you're going to be conservative, moderate, moderately aggressive, maybe aggressive. And then we have to see if that matches up with your retirement income plan.

Will that strategy of that degree of risk actually allow you to accomplish your end goal of preserving your principle and generating the amount of retirement income that you seek? Today, we're going to take a look at some indexes as benchmarks that Morningstar provides us. You can get a link to this in the show notes. Just check it right down there in the notes section.

And please, throughout this conversation, if there's anything that sparks your interest, you have more questions about, just drop it in the comments section, and I'll be sure to answer each and every one of those questions. When we look at Morningstar's benchmark indexes, we're looking at everywhere from aggressive to conservative and somewhere in between. A typical conservative allocation would be 20% equity and 80% fixed income, where the typical retiree is using a moderate allocation or a moderately conservative allocation.

And that's probably due to something called the rule of 100. You take your age, put a percentage behind it, and that's typically how much you're going to allocate to the more conservative portion of your portfolio, the fixed income or the bonds, where a moderately conservative allocation is going to have 60% fixed income or bonds, 40% allocated to equities. Moderate allocation is going to be allocated about 60% to equities and 40% to fixed income.

So a pretty typical allocation for a retiree landing somewhere between moderate, moderately conservative. Every once in a while, you may find someone that's very aggressive and they're getting out on the limb to moderate aggressive or all the way to an aggressive allocation that would be 95% equities. We're going to be using some of these returns that Morningstar gives us in these benchmarks as we look at various different scenarios for this couple that's 60 years old generating 50,000 a year in income.

Those returns can be found when you go through each one of these indexes. If you'd like to take a deeper dive yourself, you can look at what those returns have been. So for the conservative benchmark, their 15-year average is 3.86%. Over the last 10 years, closer to 3%.

Five years, about 2.5%. And those numbers are just going to keep going up. The moderately conservative jumps to 5.7%. 10-year average of 4.5. Jump over to the moderate allocation. That's 7.18% on a 15-year return.

Then we have moderate aggressive and all the way out to the aggressive that's going to put us out there at 9.66%. As a 15-year average, about 10% a year, pretty close to what you'd expect from the S&P 500. The last 10 years at 7.75. Five years at 9.02. Now let's do the fun part and start running the numbers. So just offer us a little bit of a review to make sure we understand what returns that we're using.

We're using the conservative return of 3.46%. Moderate conservative 5.7%. Moderate at 7.18%. One of the things that I often hear from families that come in to visit with us, and something that my dad actually said over and over about his own retirement, is make me 4-6% and don't blow me up. And that's exactly what we're seeing in this range. And for this couple that wants to generate $50,000 a year in income from their $1 million portfolio, they would need to make 5% per year to preserve that principle.

That's the really simple math. However, we want to look at some different strategies in order to stress test things a little bit so we have a better understanding of some of the pros and cons and risks that we might be taking. If we were to look, and what I have here is portfolios that are conservative all the way to moderately aggressive.

So we're going to look at returns in the conservative, moderate conservative, moderate aggressive. Then we have a new strategy that we're going to jump to in a minute. But first we want to look at those traditional strategies and what is happening to that principle over time.

So with that conservative allocation, drawing $50,000 out every year from that $1 million, we're not generating a 5% annualized return. So those numbers are going to go down over time. We're going to be eating into that principle.

And one of the things you might be saying to yourself is, well, Casey, we're in such a high interest rate environment, we could preserve our principle if we put these dollars in a money market paying 5% per year. This is true. You also have to ask yourself, how long are interest rates going to stay as high as they are today? If we allocate to a money market or a short-term bond fund that might be generating that 5% rate of return today, what's that going to look like in 3 months, 6 months, or 5, 10, 20 years into retirement? Because those are not secured or guaranteed for your lifetime.

We have to really pay close attention to that at a time like this when we can get a little over our skis thinking that we're going to be able to generate these types of fixed income returns with a short bond duration portfolio money market for a very long period of time. So we want to look at this from a long-term perspective. Long-term, we might expect something in that conservative allocation closer to 4% in all likelihood, something under the 5% that we need.

That means we would be out of money sometime between we were age 90 to 100. Then, more than likely, you're going to say, Casey, I want to be in that moderate conservative allocation. So now we're just generating rate of return that's just a little bit more than the income that we're taking.

And that means we're actually going to grow that account over time. 10 years into retirement, we have 1.1 million. 20 years into retirement, we are sitting at 1.25. And if we live all the way to age 100, we've actually doubled our money and spent $50,000 a year.

Now, I also want to emphasize here that we're not talking about throwing in any inflation adjustments for this couple. That's not what we're trying to illustrate. We're talking about a very high-level example so that we can understand what's actually happening and some alternative strategies that we can use.

We're not talking about a specific client that we're working with or projecting any specific returns that we would be providing for our clients. We just want to understand this from a high level. Then we can start running new iterations of throwing in inflation adjustments along the way and start stress testing that portfolio also against market downturns.

Let's go ahead and take a look at the moderate allocation. That moderate allocation is going to double our money by the time we're 80 instead of waiting all the way to age 100. If we look at that moderate aggressive allocation, we can see we're almost doubling our dollars almost 10, 15 years into retirement.

But if we live all the way to age 100, we've accumulated $12 million and we've spent $50,000 a year. We should have in that scenario most likely left a lot of room for inflation adjustments along the way. Now, what if we took a different approach? If we took a different approach that could offer us more certainty in that income? Why do I say that? Because all of these approaches, again, are highly determinate on market returns, whether that is fixed income returns, interest rates, what's happening in the economy, what's happening in Washington and abroad.

So this couple says we want more security. We want certainty that that income is going to come in every month. We don't want to have to worry as much about interest rate fluctuations and us not getting the type of fixed income returns today 20 or 30 years down the road.

So they say let's allocate around $700,000 to a guaranteed income product, a tool that's going to guarantee $50,000 a year for the rest of both of our lives. And we went out, we ran some numbers across the top insurance carriers today to see what those numbers would be. And it's actually just shy of $700,000 in order to accomplish a $50,000 annual guaranteed lifetime income.

And, of course, one of the things you have to do as you're evaluating these strategies is really understand the strength of the claims paying ability of those insurance carriers because that's ultimately what's securing that payment for the rest of your life. There are some very strong carriers out there. There's some very weak ones out there.

You want to work with an experienced advisor to walk you through all the different available options for you and walk you through different carriers as well. Maybe you want to decide to use multiple carriers. You want to understand the guarantees that are offering, the state guarantees that might be offered.

You want to understand the nuances. And those income guarantees can vary widely. So you want to make sure you're working with an independent advisor that has access to as many carriers as possible to provide you the very best guaranteed income at the end of the day.

Now, why do I have these percentages in here? Well, what we're evaluating here is something much like buying a business or investing in your pension when you have a lump sum option for that matter. What do I mean by that? Well, if I was going to go out and buy a business for $700,000, I want to know how quickly am I going to get my money back in my pocket because you don't make a return until you get your money back, which is why you see 10 years into retirement a negative 3.71% highlighted up here because in this example, they deposited $700,000, withdrew $50,000 a year for 10 years, so you now have back in your pocket half a million dollars, but you put in $700,000. Well, that would be a net loss, right? And so we want to fast forward when we start getting into the insurance company's pocket and ultimately generating a real rate of return for yourself.

20 years in, we're 80 years old, and now 20 years in, we've spent $1 million of our $700,000 deposit. In order to accomplish that, in order to generate $1 million of income, $50,000 a year over 20 years with a $700,000 deposit, we would have to return about 4.5% per year, and at the end of 20 years, we'd have nothing left, but we would have generated 4.5% a year for 20 years, spent $50,000 a year. That is equivalent, again, to that 4.71% rate of return that we're highlighting here, and that rate of return's going to keep going up the longer that we live.

So when we're 90 years old, we've now generated a 6% rate of return, 6.02% per year. Again, that means that we deposited $700,000 into a tool that generated a rate of return of 6.02% per year to create that $50,000 a year of income. But unlike a business or a traditional investment that maybe at that point in time, you have nothing left, you go out and you put that $700,000 in an investment portfolio that generates 6.02% a year, then you're out of money by the time you get to age 91.

In this circumstance, you always get that guaranteed income payment whether there's anything in the account or not. By the time we're 100, that number is almost reaching 7% on an annualized basis, 6.69%. Now, this is how we catch up to some of these more aggressive allocations because now we're able to be even more aggressive with the dollars that we have left. We've secured our $50,000 per year, so now we know we don't need to take any income from this portfolio that we're going to set aside and let grow over time.

Now we can be more aggressive. We're using that aggressive benchmark return to project what those values would be over time for this $300,000 that's remaining outside of the annuity. In 10 years, it's worth $754,000.

So after 10 years, we've almost been able to preserve our principal. There's probably a little money left in the annuity at that point that might even keep us even 10 years in. What's that similar to? That's similar to the conservative allocation that we started with.

Now, if we fast-forward 20 years, we have about $2 million, and there's probably nothing left for our heirs in that annuity, but we have $2 million set aside that we still don't need to touch. That is equivalent to our moderate allocation. So then we fast-forward, and we get all the way out here.

Let's say that we live to age 100. Now we are matching the value of these two combined accounts, the annuity and the aggressive dollars. We're matching the value and the projections we were able to accomplish with that moderately aggressive portfolio.

To sum things up for us here, if we look at all these different options that we have, with the conservative allocation, we have about 80% in fixed income. Moderately conservative, 60% in fixed income. Moderate, we have about 40% in fixed income.

Moderately aggressive, 20% in fixed income. The aggressive allocation, we're 95% invested in the stock market. How would you invest if you were 60 years old? Ask yourself that question, and most people say fairly conservatively because I just don't have that much time left.

Well, that's true, but you do have time on some of those dollars that you don't need, and what we want to do is buy you time to invest as if you were younger. With the allocation we finally talked about in that alternative option, we have 70%, not in fixed income either. We have 70% that is guaranteed and insured.

We don't have to worry about interest rate fluctuations because we locked in those interest rates for the rest of our life. We don't have to worry about bond default risk. We have eliminated a lot of the risk on 70% of our portfolio, and we're only 30% equities, but as we saw there, we're accomplishing, well, we're landing ourselves somewhere between this conservative and moderately conservative allocation that we projected returns forward on.

We're generating returns and principal preservation that's going to land us somewhere closer to this moderately aggressive allocation, and that's something that's important for you to consider as you're evaluating all of your retirement income strategies. Maybe you find a traditional strategy is the right thing for you, but you'll never know if you don't run the numbers. Today, I want to give you that opportunity.

All you have to do is call the number on your screen to schedule a free consultation and a free income analysis with one of our personal financial planners that'll visit with you anywhere you find yourself in the United States. We'll visit with you online and help you build your very own retirement income strategy.