The below is a real case study with some adjusted information. This is a more detailed and longer post around retirement. If you have no interest in retiring soon, or in the next few years then this post isn’t for you. But if you are considering retiring shortly, or are retired, and want to know what questions to ask and factors to consider before you retire and want an objective review from a financial advisor, then keep on reading!
Although, we all have different expectations for our lifestyle, the principles for evaluating whether or not you can retire should be the same.
As I work with more and more individuals looking to retire I often get this question. In fact this is the number one question every worker inevitably seems to have, so when can I retire?
What are the factors we need to consider for retirement? Well, there are quite a few:
Lifestyle – arguably the biggest
Life stage – early or late retirement, meaning around age 55 or around age 70 respectively.
Everything flows together. Income and expenses will dictate your lifestyle but lifestyle can also dictate your spending. First I start by analyzing your income sources:
For this particular client she had:
Company Pension – $2,000/mo (very nice)
Social Security $2,200/mo (if taken at Full retirement age for her it is 66)
401k, and IRA accounts – Total balance of $500,000
A property worth $300k that is not completely paid off
First year retirement income is $24,000 in pension and whatever she takes from retirement accounts.
This is what she is working with. If she wants to retire she won’t have any other income streams besides those listed above, because she would no longer be earning or saving…
The next thing we need to consider is what are her expenses? What kind of lifestyle is she currently living? The first couple years of retirement will look mostly like the last of the pre-retirement ones.
Retirement Discretionary/Fun spending
All of her first year expenses are a combined: $61,200/year.
If she is 64 when can she retire?
Without diving deeper in the analysis, it appears she would most likely be able to retire now.
If you add in her guaranteed income streams they add up to $50,400. This includes the pension and social security. How does she make up the remainder? That will be coming out of retirement accounts. The general rule of a safe withdrawal rate from retirement accounts is 4% of your account value can be withdrawn each year. This would mean she could take out $20,000. However she is not taking social security the first year in retirement so she will need to take more out initially.
Assumptions I am making.
Her fun spending increases with inflation initially then will be less as she ages. This is because who wants to have a ton of money when they are 85? Wouldn’t you rather have more money when you are young and you can enjoy it? I usually assume fun spending increases each year with typical inflation while around age 80 it begins to deflate (decline). This allows for the spending difference in the years you feel are more beneficial rather than end your life with the most money possible for fun spending.
Healthcare expenses are the greatest later on in life. I am assuming around 5-6% inflation cost every year. Not a fun way to think about it, but your fun spending will be spent on healthcare instead, in your later stage of life.
A quick note, that we cannot be ignorant on how much inflation factors into the separated out expenses above. Each category will rise at a different rate, so we must have a separate inflation factor to have our assumptions as accurate as possible.
Even though expenses are increasing, I do assume that the investment return is greater than inflation and we have to consider taking on a moderately aggressive risk to achieve retirement goals in this case.
We don’t want to be shy about holding growth assets in the portfolio, this is especially true if the client has longevity in their family. She could live for 30 more years, and would then still need a return that allows her to continue with her retirement spending rate. Thus, a higher allocation to equities, perhaps 60-70% is needed.
With the guaranteed streams of income and the assumed investment rate of return we can come to a conclusion about the amount she can comfortably withdraw to meet her lifestyle goals.
As it turns out she has even more flexibility than originally thought. Her current fund spending was going to be ~$19,000/yr. She actually could safely withdraw another $10,000/yr to possibly spend more in retirement!
If we do a deep dive into the actual financial plan, the Monte Carlo situations, she appears to be able to take out more than 4% from her portfolio. Keep in mind her mortgage will be paid off in 5 years so that expense is gone. A big contributor to her success is the guaranteed income sources. This allows her the flexibility to spend more knowing she can take on more growth assets to provide income later in life.
The answer to the question of when can she retire, is now! Is there potential for her to do more than she thought she could spend? Absolutely! If I help to manage which accounts to withdraw from we might be able to help minimize taxes, which would again provide more spending flexibility. The next question I would ask is, what would you do with additional income to spend? Now the fun begins…
There may be other unknowns worth exploring, such as long term care insurance, and the tax strategy behind which accounts to withdraw from in retirement. These are very specific to the client and would require a deeper dive into resources and client wishes.
Have Questions about when you can retire?
If you have questions about when you can retire please let me know. You can reach me via firstname.lastname@example.org or by phone at 949.333.6394.
I know retirement can be a stressful time if you are not confident you will be able to do the things you want and make your money last. But you need to know specifics on when you can retire. After all, retirement is a one-time event you can’t change.
Actual results will vary. This case study does not constitute a recommendation of any objective for any plan having circumstances similar to those portrayed, and a financial advisor should be consulted.