I'm 62 with $800K in IRA: Do I Have Enough to Retire and Spend $6,000/Month?

Casey Weade: So you want to answer that question, can you step into retirement? Well, today we answer that question. Talk about how well-funded your retirement is. We're going to offer you a simple calculation, so that you can determine just how prepared you are. Hey, I'm Casey Weade, CEO and Founder here at Howard Bailey Financial, also a certified financial planner practitioner. I'm here to answer that big old question, do you have enough money to retire?

I'm going to do it, giving you a simple calculation, something that we like to call the Retirement Funded Ratio. Answering that question, how well-funded is your retirement? Let's get into it by talking first about the equation. It's a very simple equation. We're going to complicate it a little bit along the way. Hopefully, by the end of this, you'll be able to run your own calculation to determine just how well-funded your retirement is.

This is that simple calculation. The funded ratio is just really taking your assets and dividing them by your liabilities. Now, there's some nuances that we're going to get into in this next slide that I'm going to share with you. However, we got assets divided by liabilities. Let's start there. Very basic. What's this mean? If it's over 1, we have some decisions to make. If it's under 1, we have some decisions to make.

If that funded ratio is equal to, or over 1, then you have some options. You might be considering increasing your spending. Maybe you're going to consider actually decreasing some risk. You say, "Hey, I have enough money," like so many people we've worked with over the years. You say, "I really don't need to take the risk." If you know that you're super well-funded.

Maybe that number is a 1.5, it's a 2. Then, you might say to yourself, "Well, I'm going to go ahead and take some chips off the table." Maybe you're going to create some guaranteed income. Maybe you're going to put some more dollars in cash just to give you the ability to sleep a little bit better at night, or maybe you're also looking at it going, "Well, if I'm that well-funded, and I'm not going to change my expenses, then I'm going to end up leaving a lot of money behind."

Maybe it's time to start thinking about what you want that legacy to look like, and maybe even setting some assets aside, specifically, for that purpose to take care of the next generation, or to leave those assets to charity, for that matter. Now, if it's under 1, it's a different scenario. If it's under 1, we probably need to consider reducing our expenses, reducing our spending in retirement, increasing the level of risk that we might want to take.

This goes back to some other videos I've talked about before. If you've been watching for a while, I talk about, can I take the risk? That is an acronym. Do you have the capacity, the attitude, the need? If you're underfunded, then you don't have the capacity, but you definitely have the need to take more risk, unless you're going to adjust your spending, or work longer and increase your savings, maybe even, in some circumstances, starting to incorporate inheritance in the road, or down the road, or even reverse mortgage.

A lot of things to consider there. Those are really important things for you to think about when you're thinking about that funded ratio. Now, I want to talk about how we make this number really as accurate as possible. In order to do so, we have to calculate something known as the present value. We need to know the present value of those assets, the present value of those liabilities that you have.

Here are some factors when you're considering that, because, I mean, think about this, what's the present value of your Social Security that you're getting at $2,000, $3,000 a month? What's the present value of an inheritance that you're not going to receive for 10 or 20 years? We have to factor in inflation, we have to come up with a lump sum, we have to take those expenses that you have, and apply an inflation number, bring it back to the net present value liability. That's what we're going to do.

I'm going to show you how to do it. We usually use a financial calculator. You can get yourself something called a 10BII calculator, a financial calculator, or there's plenty of calculators online that will help you calculate your present value. These are the numbers that you need to know. Those present value factors are one, time. How long is it going to be before you receive that inheritance?

How long are you going to need those expenses to last? Your interest rate. That is also known as a discount rate. We have to apply an interest rate, a Social Security cost of living adjustment, or an inflation adjustment to your expenses. Then, the payment. Maybe you're receiving a payment. You're calculating the present value of a payment that you're going to get over time, an annuity.

Maybe it's your Social Security payment, a pension payment. That's how we calculate the value of a pension as well. Then, we have a future value. You might be receiving an inheritance down the road that you want to calculate the present value of. Obviously, if you're receiving a stream of payments such as Social Security, there wouldn't be a future value. Just be focusing on that payment. You'd be entering a zero for future value.

Let's take a look at a simple example. Let's say that you're going to get $1,000 in two years. If you're going to receive $1,000 in two years, what's it worth today? You might say, "If I had $1,000 today, I'd invest it at 5%." You might want to use a discount rate of 5% in that example to bring it back to a present value. In simple calculations, if you just wanted to use a formula, you would take your $1,000 you're getting in two years, and then you divide it by 1 +.05. Divide $1,000 by 1.05, you get $950.

Then, you need to bring it back one more year, so $950, divide that by 1.05, now you're at $907. That is the present value of that $1,000 that you're going to receive in two years based on that 5% discount rate that you applied. Now that we understand that, that funded ratio, how it's calculated, and how we need to determine that present value, let's take a look at a specific example.

We're taking a look at a specific example of someone that's retiring when they're 62-years-old. This person's retiring when they're 62. Maybe you find yourself in that range, and they need $6,000 a month. That's what they need to meet in expenses every single month after taxes. Then, they have $3,000 a month in Social Security benefits, $800,000 they have in an IRA, half a million dollars in non-qualified funds.

That just means it's not in a qualified account. It's in an after-tax account, say a brokerage. Then, we have $500,000 as an inheritance that they expect to receive at age 80. They need to make a car purchase, about $50,000 down the road at age 70. Now, I'm giving you a very simple example for you to start running these numbers for yourself. You obviously probably have a more complex financial life, and you're going to have to factor more things in here.

We just want to keep it as simple as possible, so that we can understand the gist of things. Let's take a look at one at a time. $6,000 a month in expenses, this person says, "Hey, I want to factor in a 3% inflation adjustment. I want those expenses to go up at 3% a year, and I'm expecting a 30-year retirement." N is 30, I is 3. That means the present value of their $6,000 a month that they need is $1.4 million.

Now, let's go on to some assets. $3,000 a month in Social Security. They're assuming a cost-of-living adjustment of 2% per year. That's the interest rate, or the discount rate. They're going to live for 30 years. That's how long they're planning on receiving at $3,000 a month. The present value of that Social Security is $800,000. Think about that for a minute. Too many folks overlook the value of that Social Security decision.

It could easily be a million-dollar decision. Don't take it lightly. Make sure you do your research. Check out some of my other videos on Social Security, so you can make the best decision for yourself. or just give us a call for a Social Security analysis, and we can help you make a better decision there. Another thing you also may want to consider when you're thinking about your Social Security, and calculating that present value is taxes.

Up to 85% of your Social Security benefits could be taxed. You want to do an analysis to determine just how much might be taxed. That's something we didn't factor into this. Just keep things simple. We would want to do that as you're working with our team. Then, we have our IRA. We got $800,000 in an IRA. Obviously, that's never been taxed. We need to apply a tax rate to that to bring it down to a present value.

We're using a 20% number here. That $800,000 IRA is actually worth $640,000 in today's money. This is something that I often see people overlook as well. You might think you're a millionaire, because you have a million dollars in your IRA, but you still owe Uncle Sam, because you've never paid taxes on those dollars. Then, we have a half a million dollars in our nonqualified funds.

Nonqualified funds really just means it's after tax. It's not in a qualified account like a 401(k) or a 403(b). This $500,000 is after tax. Hey, you also want to look, do you have a low-cost basis? We're not really factoring in long-term capital gains taxes, or short-term capital gains taxes that might be incurred on those dollars, as you liquidate them. It's something else, so you'd want to factor into that equation.

We have a half a million dollar inheritance that this person wants to count on at age 80. At age 80, we need to apply a discount rate of 3%. That's 18 years into the future. That inheritance of the half a million dollars down the road, is really worth $300,000 today. Then, we have one more liability. That one more liability is factoring in a car purchase of $50,000.

Some people want to factor in a new roof. You might want to factor in new washers and dryers. It just depends on how detailed you want to get in this analysis that you're doing for yourself. They want to do that at age 70. In eight years, we need to apply a discount rate of 3%. They have a $40,000 present value liability. What does all of that add up to? All of that adds up to present value of assets, $800,000 Social Security, $640,000 IRA, $500,000 non-qualified funds, $300,000 inheritance, $2.24 million in their present value assets. Then, their present value liabilities, $1.4 million in expenses, $40,000 in a car purchase. That's $1.44 million.

What's their funded ratio? That funded ratio is 1.56. 1.56 is a darn good funded ratio. As you run this for yourself, you want to make sure you start building a plan around it. If you'd like us to run your funded ratio, and put together a financial analysis, give us a call right now for a personal financial review. We meet with people all over the country day in and day out here at Howard Bailey Financial. Schedule your visit with a fiduciary financial planner today.