Transcript
Mike:
I’m 61. I’m single. I’ve saved about $1.4 million. Can I retire?
Mike:
We have someone named Jane Doe. Now, as you can tell, I’m being very creative with my name. Obviously I’m not going to give real names here, right? This is a real person that came to us and her birthday, January 15th, 1960, as we’re recording this today, she’s 61 years and nine months. We’re recording this in October of 2021. She came to us. She said, I’d like to ideally retire at the end of the year, at the age of retiring right here at age 62. That’s the goal, January, 2022. And the question is, well, how much money after taxes? Okay. Not pre-tax but spendable, how much money do you feel that you need? And she says, well, I’m making about 10,000 now a month, or about 120, but she’s also maxing out her 401k. So like 26,000 of that is already going to the 401k. So now she’s like, okay, so already my net is down below a hundred thousand.
Mike:
And she said, I ran my bills that she had just paid off her house. So there’s now there’s no mortgage anymore. And she said, look, I can live on about $6,000 a month, right here, 6,000 a month. I can live on that, provided that that’s after taxes. Again. She lives by herself. The house is paid for, this is basically just all the fun stuff. Actually. Her comment to me was, you know, honestly like a thousand of it’s going to go to health insurance, right? Until Medicare. And then when Medicare kicks in, that number will go down as well. But still we have to include some inflation in here. Cause she’s only 62. How long might a single woman who is 62 years old? And she was in great health. How long might she live? Well, statistically, you gotta assume mid nineties, maybe longer. I mean, you have to assume that because women live longer anyway, she’s already really healthy, no health issues.
Mike:
She comes from a long lived family. And again, it might be different for you, but that was her situation. We have to assume at least 95 and with medical advances, maybe a hundred when it comes to her income, here’s what she had. She said, well, Mike, here’s what I’ve got. I’ve pretty much decided. She said that if I retire, I’m going to start my social security right away at age 62. And if she does, she’ll get a couple thousand a month, she’s actually a pretty high earner. So she’ll get a pretty good chunk. Now we can debate whether or not that’s a good idea. And we can play around with the numbers. I’m not going to do that today. That complicates things. Plus, you know, she really wanted to take it. So, you know, let’s find out if she could, plus she has a little pension.
Mike:
She said, Mike, the company I used to work for had a pension, but I didn’t work there very long. So it’s not huge. It’s roughly a thousand bucks. I think it was 9 86. Let’s just round it off called a thousand. But it doesn’t start until she’s 65. So she’s gonna have to wait a couple of years before she retires. Other than that, it’s her investments, right? That’s all that’s left. What do we have here? We’ve got a couple thousand right away, but she wants how much? 6,000 spendable. So she’s got to take 4,000 a month. Plus from her retirement accounts early on, once this guy kicks in or pension, now she’s got 3000 a month. So she’s going to take 3000 out of her portfolio plus taxes, plus don’t forget. Yeah. Inflation. Is this going to work? Well, let’s take a look at this on her assets.
Mike:
Here’s what she’s got. She’s got roughly a million that she saved over the years in her 401k. Good job, Jane Doe. Right? Good job. She did great. And what happened was now it was her house paid off. Her parents had recently passed away and they left her an inheritance. Now, after paying off her home, that’s how she ended up paying off the house. Right after paying off her home, she had 400,000 leftover from the inheritance. And as of you know, when she visited with us, it was basically still in the bank. Right. She hadn’t deployed that money at all. That’s it? Right. That’s it. And so what we do is we say, well, let’s imagine that your money is all invested. Let’s imagine you’re in 5% now might cheer. And more than that over time. Sure. But I don’t want to assume big numbers here.
Mike:
You know, whenever you’re talking about, if she retires, that’s kind of an irrevocable decision in her mind, we want to assume conservatively. We want to make sure that her money will last. So we’re only going to assume down here, you can see it 5% return, nothing crazy. Right? Let’s be conservative here. So once we do that, we just go up here to the top. We click this little tab that says, retirement will this work? This works until she is 96. If she lives to age 96, that’s when she runs out of money. That’s when she only has her pension and her social security. And that’s it. How do we feel about that? Are we good with that? And the answer is I don’t know, maybe, but here’s a more important question. We’re assuming a 5% rate of return, but we don’t know what kind of returns we’re going to get in the markets going forward.
Mike:
They might be good. They might be bad. Let me give you an example of what I’m talking about. I’m going to go over here and click this little market tab on the right hand side. And when I click it, let’s imagine for the sake of discussion that the it’s not 2021, or she’s not retiring in 2022. Instead she’s retiring in the year 2000. Let’s pretend that would be the case. And if we go down here because the markets didn’t do very well between 2000 and 2009, we go down and here we say, oh, look, if she would have retired in 2000, instead of running out of money at age 90, 96, whether this, she runs out of money at age 85, what does that mean? It means that she has some real market risk here. We’ve got problems here. What’s it. What if on the other hand though, she was lucky enough to retire in 1990, right?
Mike:
What about then? Well, now her money lasts forever and she leaves somebody. Maybe she has children, like at the age of 96, $10 million. In other words, what do we have here? We have a problem because here’s, what’s going on. If you, again, look at this retirement tab, she’s got roughly 1.4 million, but look, she’s got a cover, you know, roughly 4,000 a month or 50,000 a year, roughly she’s got to pull out of these accounts. And the question is, will that work? Well? It depends on how these accounts perform if they do well. Like the markets did in the 1990s, she’s on cloud nine. She’s the most brilliant person. She’s got plenty of money. Everything’s good. All but flip a coin. Oh, tales came up. She retires in a market like 2000 and she runs out of money at age 85 versus 95. That’s not good.
Mike:
So the problem we see here is that if she were to retire right now without planning, if she were to retire well, she’s basically hoping that the market cooperates, do you want to retire? And just hope that the market cooperates, Hey, 50% flip a coin heads, the market cooperated you’re in great shape. You’re going to win tales. The market didn’t cooperate. Oh, now we’re not happy. And by the way, right now, as we’re recording this, most people would say, in fact, every financial expert out there pretty much with a couple of exceptions all believe that the market’s wildly overvalued, including Mr. Buffet. So the odds that she would retire into a 2000 experience versus a 1990 are pretty high. We want Jane here to be able to retire and be comfortable no matter what the market does, right? It shouldn’t matter if the market’s good or bad.
Mike:
We want her to have success, no matter what. Well, if we take a look at her tax situation, this is by the way, this is using current tax code. And we look at her annual taxes in retirement. Notice what’s happening here. You know, this year it’s a little higher cause she’s working of course. But once you get into retirement, look at this $900 maybe next 1, 7 50, basically almost nothing. Taxes are nothing to her for the first several years. But then something happens in 2032. Her tax jumps from essentially zero to wow, $17,000, $17,000. What happened? Ah, what happened in 2032? Well, what happened was she turned 72 years of age and suddenly she’s got required minimum distributions. In fact, she has them every year for the rest of her life. By the time she’s 95 years old Looker tax bills up to 66,000.
Mike:
Not because she wants to spend a bunch of money it’s because required minimum distributions, she lives to 95. She’s going to spend, I don’t know if you can see this number here, I’m sure. Local zoom in for us call it $945,000 that she gives to the IRS over her lifetime, $945,000, almost a million dollars. She gets to the IRS over her lifetime. Most of it because of required distributions. Now, if we could reduce that number a little bit, do you think that would help improve her financial security? Yeah, I think it would. And this is where Roth conversions might make some sense. One more thing. What if she needs long-term care down the road? Well, let’s click on this button here right now, right? She’s 62. She’s pretty healthy. And today long-term care. At least in our area is about 7,000 a month. And it’s growing.
Mike:
I call it 4%, 20 years from now when she’s 60 or when she’s 83, it’s like, oh, something happens. She gets all timers. She has a stroke, something, and she needs care for four years and she dies. You know what? Let’s increase this. Let’s say it’s 85. She’s healthy. Remember let’s make it 85. So she needs him for four years. Well, at the time, what is today? 7,000 month is going to be 18,000 a month. Let’s kind of go scroll down here and see what happens. Right? We scroll down here. We’re like, oh, see this red line, that red lion’s problem line. It says, oh, you don’t have enough money to pay for care. You’re going to run out of money while you’re in either a nursing home or assisted living or something. You are going to end up on welfare. And when you’re on welfare, you’re kind of subject to whatever the state decides.
Mike:
You know, you need for care. She’s like, I don’t like that. I want to maintain my independence. Like in this case, what if she was paying someone to come in the house to take care of her? Right? Well, you ran out of money. Nope, can’t do that anymore. Often the nursing home, you go, whether you want to or not. So we have all these issues. We have a problem with the ma- you know, not having an income plan. If the market does, while she wins, the market does poorly. She loses, we’ve got tax problems here. She’s about to get the IRS on the road. She’s on nothing at first, but over time, about a million dollars. And if she needs care, she’s in trouble. But the good news is we have planning opportunities. So I’m just going to kind of go in here. I’m going to hit scenarios.
Mike:
I put in here. Some post-planning. What I did is I said, let’s play with this a little bit. Let’s just change a couple little things. Can we help her out? She’s got a million dollars in her IRA or 401k. What if we carve out half of it, 500,000 and let’s put it into some kind of an annuity, maybe some kind of guaranteed annuity that would give her 4,000 a month for the next 14, 15 years. The other thing I did is I said, what if we started doing some Roth conversions, we’re not going to do it in a big way. Small amounts, 50,000 a year. That’s it, 50,000 a year. And we’re going to do it for the next seven years. We go to our retirement tab. First question. So we just changed two little things. How long will the money lasts now? And oh, by the way, I don’t want to miss this.
Mike:
We still have the same. What? Sit down here. Same 5% return. We haven’t changed returns at all. So let’s see if this works well. We clicked the retirement tab. Remember before, how long did the money last age? 96. Now we’ll look at this. The money never runs out. Now. Even when she’s a hundred, she still has $1.3 million. Hey, that’s pretty good. Right? Money lasts a lot longer. That’s good news. Hey, how about this? We go to our tax tab. Yes. We pay annual tax a little bit more money early on, but we added all up in how much tax are we paying now? Not a million. It was 9 45. Now the number 21, we say 20, 55, about six 40. We shave $300,000 in tax over her lifetime. Instead of giving you the IRS, almost a million dollars, 945,000, we give them 300,000 less. If we’re not giving that 300,000, the IRS, where’s it go.
Mike:
It goes in her pocket to increase her financial security, which makes her money last. Yeah, you got it longer. How’s it? How are we doing in the long-term care side? Right? Is that going to work? Well, I don’t know. Let’s find out and we go down here. Guess what? You’re in the home for years. You still have money. You can still, what if it, you know, Alzheimer’s you might be been there seven, eight years. At least you still got money. Is it more likely now that she can retire? Heck yes, it is. The money now lasts. There’s a lot less tax, a lot more money for long-term care. If she wants, maybe we should be looking at buying some long-term care insurance to solve that problem. I don’t know something to look at. Here’s my point. Jane Doe 61 years old, save 1.4 million actually saved a million inherited 400,000.
Mike:
Can she retire? Well at first, when we looked at where she was at, the answer was, nah, I don’t know. Now I’m giving her the green light. I’m saying, Jane, you got this. As long as you set this up the right way, you can retire. Now the question is, of course, this is just a simple scenario. Some are more complex, some are easier. Your situation. What does your situation look like? How are you doing on your income planning on your tax planning and on your long-term care planning. If you’re married, don’t forget about life insurance, right? How are you doing? This is a kind of planning that you need to go through before you make a go or no go decision when it comes to your retirement. Here’s the cool part about all this, by the way, if you haven’t had this done, you want it done. Guess what? Our firm, we do that for free for people. Why do we do that? Because it helps us figure out whether or not we can help you. And if we can help you, it helps you figure out whether or not you want our help. All right, that’s this week’s episode a little longer, but I think it was worthwhile. Enjoy the rest of your day. We’ll see you next time.
