Coasting In Retirement Ep 27: Is A Million Dollars Enough To Retire On?
Segment 1 (Show Open):
Good afternoon, everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Thanks for joining us today, we’re excited to have you! Josh Null here, joined by the one and only Michelle Lee Melton, the Bugs Bunny to my Daffy Duck, the Statler to my Waldorf…Michelle, how are you doing? We are back again in Coastal College’s recording studio, beautiful downtown Fairhope, ready to yet another great show!
Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement living your best life along our part of the gulf coast. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 20 minutes past the hour - fan favorite, “Michelle with the News of the Week”. 3rd segment, roughly 40 minutes past the hour,” Josh’s Crystal Ball and…(Michelle:) Big Mouth”. That’s right, big mouth. So buckle up, we’ve got a lot to get to!
Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, an independent investment management and financial planning firm with offices in Fairhope and Orange Beach, Alabama. You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com, or feel free to give us a call at 251-327-2124. If you missed that, don’t worry, we will repeat our contact info several times throughout the show!
On our last episode, we discussed a question that many folks in or near retirement have asked themselves: what should I do with my 401k when I leave or retire from my job? For those of you that would like to hear what we had to say about 401k rollovers, you can find this episode, and all of our previous episodes, on the podcast tab of my website gulfcoastfa.com.
Today we are going to ask and attempt another question that many of you in or near retirement may have, but before I ask and answer, a quick question to Michelle: Michelle, have you thought about having a million dollars in the bank? Is a million bucks enough to retire on? Tell us about it…
So that leads us to our topic of the day, a milestone that many strive for and more people reach than the news would have you to believe – accumulating a million dollars – but is that enough to retire on? We’re even going to discuss strategies for those of you fortunate enough to have a million dollars of investments and looking at potentially retiring early, which I can tell you from experience, is one of the most enjoyable and fun financial planning experiences we have with our clients at Gulf Coast Financial Advisors.
To help answer this question, we’re going to utilize the financial planning software we have at Gulf Coast Financial Advisors. Now, normally, I would give a talk like this with these numbers and projections visible on a flat screen TV, so for the sake of our radio audience, we’re going to focus on a just a few of the specific numbers and outcomes. As you will see, or hear rather, it’s not so much hitting a financial goal exactly to the penny, it’s more about what type of income, and for how long, can a bucket of assets, such as a million dollars, produce.
So, Michelle, you and I are going to be the avatars for the married couple example I am about to walk thru. In this example, we are both going to be 60 years old (don’t say yuck MLM, our listeners are old!) and interested in retiring early, which is kind of funny, because Michelle and I have different retirement goals. I don’t mean to speak for you Michelle but you would love to retire early, correct? Whereas as I don’t ever plan on retiring, I’m just not sure if I could handle the nonstop conversation in my head if I’m not little overworked or have more tasks in a day to do than is realistic. But for the sake of today’s episode, we’ll name our couple “Josh and Michelle”, we’ll make them both 60 years old, and we will say that husband and wife are both interested in retiring early. Got it?
Great, so let’s talk details. Now listeners, there are going to be some assumptions made in our example that are broad, that may or may not resemble your situation, and as you will see, will need to be stress tested in any financial comprehensive plan. The goal is to give you a retirement planning scenario of someone in their 60’s with a million dollars of investments, in broad strokes. Your specific situation will undoubtedly vary but that’s why we give out our contract info – to have an individual conversation with you.
So here’s what we know about Josh and Michelle: Both are 60 years old, and to make things even both have $450k each in their retirement plans, plus they have about $40k in a joint savings account and $120k in a joint after-tax investment account, which adds us to about a million dollars in available retirement funds.
Now because Josh works in the private sector and Michelle in the public sector, he makes just a little bit more in our scenario: $120k per year to Michelle’s $95k. Josh still contributes about 10% of his annual salary to his 401k, while Michelle spends her extra on…shoes…just teasing. Their total monthly expenses are $8000 per month, and they both contribute a total of $6000 per year to their joint accounts. Finally, we are going to base their retirement plan on Josh starting social security at age 70 for about $3000 per month while Michelle starts hers at age 67 for about $2000. Again, with no visual aids for our listeners, we are using round numbers for sake of clarity.
So, Michelle, what if Josh and Michelle want to retire right now, like, today? (Michelle – they would run out of money?). We’ll lets find out what our financial planning software tells us:
If Josh and Michelle retire right now, for this exercise we’re going to utilize their joint accounts first for income needs. As we discussed, Michelle and Josh spend $8000 per month, so their first year income needs are $96k. Remember, they have $160k in after tax joint accounts, so assuming no interest, simple math tells us that they will have about $64k in after tax accounts after their first year of retirement, which means that sometime in year 2, they will need to start taking withdrawals from their retirement accounts. Got it?
Again for sake of brevity, we’re going to assume that their retirement accounts are growing by 6% per year. We’ll discuss later how an investor’s rate of return is never exactly the same year to year, it goes up and down, so to accommodate this, we’ll designate this 6% as an average, and more importantly, we’re going to stress test our assumptions using a Monte Carlo (no, not the car) simulation. We’re also going to factor in 3% inflation; I know that inflation has been higher the past few years but we are banking on inflation to regress to its historical mean.
So Josh and Michelle could do basic back-of-the-napkin math, adding 6% interest to their retirement account values, then deducting their $8000 per month income needs factored with 3% inflation, and come relatively close to how long their money would last. But wait! Michell and Josh are forgetting one hugely important factor. Remember when I said that Josh and Michelle had a combined balance of $900k in their 401k plans? Michelle, remember from our last episode, are 401k contributions pre-tax or after-tax? That’s right, pre-tax. And what happens when you make withdrawals? That’s right, you pay income taxes. Yes, listeners, I know there are sometimes Roth options in a 401k, but again for sake of time we’re keeping our variables basic.
So for us to have an accurate amount of the withdrawals needed to fund Josh and Michelle’s $96k annual lifestyle, we need to factor in taxes and inflation, which means the total retirement plan withdrawal will need to be higher than $96k to produce the total withdrawal needed. When our financial planning software inputs all of this data – account balances, withdrawals, taxes, inflation – what we are working towards is an income solve, or more specifically, a withdrawal rate, so that we can see if Michelle and Josh’s dreams of retiring at age 60 with a million dollars is realistic, at least mathematically.
In our scenario, Josh and Michelle’s withdrawal rate is about 8.5% in the first year, which is already a red flag. Most financial planners shoot for a 4-5% withdrawal rate, but many would argue for even a 3% rate to be safe. The news doesn’t get better because as Josh and Michelle drain their joint accounts, then start tapping into their retirement accounts, this withdrawal rate continues to grow because they are taking out the same amount of money for income from an ever decreasing account balance. Why is this? Because a high withdrawal rate is almost always going to be higher than the rate of growth in a conservatively managed portfolio.
Now our listeners can’t see this, but if we project these numbers out, even factoring in social security at age 70 and 67, our financial planning software tells us that Michelle and Josh will run out of money in their late 70’s, early 80’s, at best. Josh and Michelle both have longevity in their family history, so this is not good.
So does this mean that Josh and Michelle have to work until they drop? Fortunately, no, in fact, we’re going to demonstrate how a few relatively small changes can have a huge impact on the longevity of your retirement plan.
Let’s say that Josh and Michelle like their jobs, or at least tolerate them, and the thought of working a couple more years isn’t the worst thing in the world. If you made one change of both of them working until 62, holding all assumptions stable, Josh and Michelle would now be projected to have $650k in their investment accounts when they reach age 90. Not bad, right?
Or, what if Josh and Michelle both not only decided to continue working to age 62, but also agreed to work part time from age 62 to 70? Josh could be a part time RV and boat salesman, and Michelle could….? Let’s say they produce $40k in income between the 2 of them, if you add that into the projections, again with all assumptions held steady, Michelle and Josh will now have $2.5M in investment accounts at age 90!
And I have an even more encouraging scenario. Studies show where retirees tend to spend the most money in the first part of their retirement, then eventually reduce spending thru things such as less travel or large purchases, then ramp up spending again towards the end of retirement, often due to health expenses. It’s called the “Retirement Spending Smile” and is shaped like a smile, or a flattened out “U”. Our financial planning software has the ability to run Retire Smile simulations, and if we add it Josh and Michelle’s projections, the result is $3.7M in investment accounts at age 90.
And finally, as many of you listening have probably shouted at me thru the radio, Josh and Michelle can simply choose to reduce their spending and live on less. This can obviously happen but in my experience, people tend to settle in at certain lifestyle and not vary from it much over the years, we’re happy to illustrate this, but remember – the goal is to help you achieve the retirement you dream of, not the one your settle for.
Michelle – thoughts? We’re going to need a bigger boat?
For those of you interested in seeing how YOUR financial situation projects in the future, we invite you to reach out to us. We approach our financial and retirement planning exercises with the goal of educating and enlightening our clients, and there’s never any pressure to make quick decisions or do business with us until you’re comfortable. You set up an appointment by calling 251-327-2124 or you can reach us through our website gulfcoastfa.com. One our site, you can choose to send us a direct message, or click on the blue button in the upper right-hand corner to set up a 15 minute introductory phone call. Or do all 3!
Alright folks, coming up next - There’s always a lot going on in the world! Particularly the world of finance, investments and money. Every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!
Segment 2 - Michelle with the News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Our job is to help you all understand how these headlines impact you, especially when it comes to your money! We also include the articles links on our show transcript, which you can find on our website gulfcoastfa.com under the podcast tab. So, without further adieu, here’s “Michelle with the news of the week!”:
1. Michelle: Alright Josh, in our opening segment we talked about how Josh and Michelle retired at age 60 then went flat broke by age 80, so I thought an article about how to NOT go bust in retirement would be a good place to start. The U.S. News and Report article I found seemed to have the broadest advice, with their article titled “12 Ways to Ensure You Don’t Run Out of Money in Retirement”. Now, I’m not going to list all 12, as you said listeners can find the link to this article on your website, but a couple pieces of advice jived with what we discussed, such as working part time in retirement, delaying your social security if you’re able, and the ever helpful “stop spending so much”. I did notice that this article recommended annuities for income production, plus also mentioned reverse mortgages and long-term care insurance. What did you agree or disagree with in this article?
Josh: This article starts out with something I think is super critical to the long term success of any financial plan, especially folks that leaving employment – have a budget. It is not uncommon for folks to underestimate what they actually spend every month, particularly on things such as eating out, and if you’re monthly income needs are off by even a few thousand dollars per month, it will have huge consequences on your quality of life in retirement and the longevity of your investments. This can be as simple as spreadsheet or as sophisticated as using software like Quickbooks, but however you do it, have an accurate portrayal of what you actually spend on average every month. I use an Excel based program called Tiller and I love it, and at only $79 per year, it’s much cheaper than Quickbooks. This article also recommends having a diversified portfolio, which will help spread out your risk and ensure that you don’t have all losers at the same time. Retiring into a down market with a heavy equities position can have a huge effect on the longevity of your assets, it’s called sequence of returns risk and is usually coupled with what’s called draw down risk.
The article does mention annuities, specifically income annuities, we’ve discussed annuities at length on previous episodes and I’m sure we’ll discuss again. We also had a previous episode dedicated to long term care insurance, so I’ll just briefly give an example. I recently had a client pass away that had bought an asset based long term care policy from me years ago. She got sick and passed before needing to claim any long term care benefits from her policy, but because she bought an asset based policy, she left behind a healthy death benefit to her heirs. Asset based policies can be purchased with a lump sum that purchases a certain amount of death benefit and well as being leveraged up to provide a monthly benefit that is typically 2 to 3x your initial premium. When you pass, if the death benefit is greater than the long term care claims that were made, the balance is paid out in a death benefit. (If time mention that you don’t generally recommend reverse mortgages, and why).
https://money.usnews.com/money/personal-finance/slideshows/12-ways-to-ensure-you-dont-run-out-of-money-in-retirement
2. Michelle: Next up, a word of wisdom from hair metal icon Kip Winger, er, just kidding, an actually useful article from Kiplinger. It’s titled “Which Accounts to Spend Down First in Retirement? 4 Tips” and is focused on the tax consequences of a retiree’s withdrawal plan. The author pushes back on conventional wisdom that retirees should spend down their taxable assets, such as bank and brokerage accounts, first, then move on to tax-deferred assets such as 401k’s and IRA’s second (401(k)s, saving their tax-free accounts, such as Roth IRAs, last. I think the main takeaway is that a financial plan can help retirees see the impact of their withdrawals on their taxes, and according to the author, help them make decisions that can add years to the life of their portfolio. What say you?
Josh: So this article talks about the practice of spending down all other assets completely before touching your Roth IRA, and makes the point that if your only income sources at that point are Social Security and Roth IRA withdrawals, there’s a chance that you will have negative taxable income, possibly missing out on personal exemptions and standard deductions. It also makes the case that people who exhaust their taxable assets completely often find themselves trapped in a high tax bracket after Social Security benefits and required minimum distributions (RMDs) commence, in fact, if the combined amount is high enough, it might also trigger higher taxes on items such as capital gains and dividends, Social Security benefits, and Medicare Part B and D premiums, which all makes sense. I also agree with this article that investors, particularly those in or near retirement, should look at their asset allocation, that is, what types of investments are they holding in their various retirement accounts, and that sometimes is makes the most sense to tap into your Roth IRA, if you have one. Does this sound a little complicated, Michelle? Well, thankfully for those of you looking for this type of help, these are the tasks we handle with our financial planning process at GCFA, 251-327-2124.
https://www.kiplinger.com/article/retirement/t037-c032-s014-which-accounts-to-spend-down-first-4-tips.html
3. Michelle: So Josh, you walked thru a basic financial planning exercise in our opening segment, and I now understand how financial planning software can project the longevity of an investment portfolio, but it got me curious as to what else a plan can do. I checked in on our good buddy, ol’ Chuck Schwab, and they happened to have an article titled “8 Keys to Good Financial Plans”. In addition to the retirement planning we’ve discussed, Schwab states that a financial plan should also help investors with budgeting, debt management, setting financial goals and preparing net worth statements, just to name a few. Does the financial plan you offer at Gulf Coast Financial Advisors check all the boxes of Chuck’s list?
Josh: Yes, and I would argue, then some. It’s pretty robust, and I think it makes a good companion to my real world experience of owning several businesses and being either self-employed or contract labor since my mid 20’s. A good plan should help not just with investment projections, but should also help you budget, manage debt, learn how important cash flow is in retirement, and make sure your risk management plan is in place. And just as important, your financial plan should be flexible and dynamic enough to deal with life changes, because as Michelle and I know, and anyone listening to this show knows, even the best laid plans can be knocked off course, sometimes in the blink of an eye. Our software allows our clients to create a client portal where they can, at their discretion, sync up their other accounts such as bank accounts, investment accounts, mortgages, loans, college savings plans, etc., so that all of these numbers stay up to date in real time, and give client’s the ability to see how their entire financial life stitches together. That way, let’s say you want to make a big financial decision, say buying a 2nd vacation home – you can see how that decision impacts your potential financial outcomes. It’s pretty cool, and I think a great value. Listeners, if you’re interested in discussing a comprehensive financial plan, give us a call at 251-327-2124 or reach out on our website gulfcoastfa.com.
https://www.schwab.com/financial-planning-collection/8-components-of-good-financial-plan
4. Michelle: In our opening segment, you had our avatars Josh and Michelle delaying social security until ages 70 and 67 respectively. I know we’ve discussed on this show the benefits of holding off on drawing social security as long as possible, but I can see how many people feel it’s a gamble to wait or are maybe concerned that they may pass before they start social security. Well hopefully Forbes can help answer these concerns with their article titled “Here’s More Evidence in Favor of Delaying Social Security Benefits”. This article references a study that claims delaying Social Security benefits to age 70 instead of 62 increases monthly benefits by 77% in inflation-adjusted terms, plus I found it interesting that the actuarial data used to determine Social Security benefits was designed way back in 1983, when we were just little elementary school age brats. Walk us thru a conversation you would have with a client around the timing of social security.
https://www.forbes.com/sites/bobcarlson/2023/02/24/heres-more-evidence-in-favor-of-delaying-social-security-benefits/?sh=6b5113996e96
Josh: So first, these conversations are always specific to the individual, there is no one shoe fits all approach when it comes to timing social security. That said, in certain situations, there can be a case made for delaying social security benefits. In addition to cost of living adjustments, your social security will automatically increase ever year you wait until age 70. And as this article states, people are living longer than ever, so if you project that increased benefit over the course of your expected life time, the difference between the total additional benefits you received vs what you left on the table by not claiming social security earlier can be substantial. Now of course not everyone is a position to delay social security, but for those of you that have other sources of income – say a pension, or retirement account, maybe rental property or even just cash, or heck, for those of you planning to work thru your 60’s and beyond – there may be a justification for it. The best advice I can give to those of you in or near retirement is to find a fee-based or fee-only financial planner, whether it’s me or someone else, and ask us to put together a comprehensive financial plan for you.
Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those in or near retirement! Listeners – if you have questions around the topics in our headlines of the week, or questions related to your investment strategy or financial plan, why don’t you give us a call at 251-327-2124 to have a conversation or set up an appointment, or you can reach out to use via our contact page on our website gulfcoastfa.com.
Alright folks, coming up next : Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned!
Segment 3 – Josh’s Crystal Ball and Big Mouth:
Welcome back! Your host Josh Null here, along side co-host Michelle. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Sometimes I feel so strongly about something that I talk about it publicly, on the various podcasts and radio shows I’ve had, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth. Alright Michelle, what’s first?
1. Michelle: So on a previous episode of our radio show, we discussed investments for those in or near retirement to ignore. One of those investments was something called “meme” stocks, that is, stocks that are artificially bumped up in value thru a concentrated effort of investors communicating thru places like social media, Reddit and YouTube. The communication around these stocks usually involves using memes, such as a rocket to the moon. To be honest I hadn’t thought about meme stocks much since then but we recently watched the movie “Dumb Money” which was story around one of the most well known meme stocks, GameStop. The movie does a good job showing both sides of the trading activity but definitely has a soft spot for the retail investors that participated in the frenzy, even ending on a positive note for the main character and other investors that got out before the stock collapsed. So did seeing how regular people were able to dramatically increase their wealth thru investing in a meme stock soften your stance on them?
Josh: No.
2. Michelle: Alright Josh, as many listeners know, you’ve been opening critical about cryptocurrencies, especially when it comes to retail investors in or near retirement. You’ve also been pretty open that you think that artificial intelligence, or AI, has both stolen crypto’s thunder and a more attractive bet for future growth and opportunities, at least from an investor’s perspective. With the recent positive news for crypto in the form of approved ETFs, and surprisingly, FTX announcing that they would pay back their customer’s in full, coupled with the somewhat bad news for AI in the form of AI generated phone scams, does this change what you’re big mouth has to say about these 2 technologies?
Josh: AI is being generated by the largest of the tech firms – think Microsoft, Google, Tesla if you want to call them a tech firm – and truly is the antithesis of crypto, which is primarly composed of smaller groups or companies trying to find a reason for a niche technology to be adopted by the masses. AI is by definition a centralized system – you go to Google to access Bard, etc – while crypto is supposed to be de-centralized, al though I would argue that people are learning this isn’t what it’s stacked up to be. And I believe AI cannot run on the blockchain, crypto bro correct me if I’m wrong.
So let me say this as it relates to crypto sometimes both arguments for and against can be true – crypto and the underlying technology could work it’s way into mass adoption AND it could be a gigantic waste of time for investors. Blockchain is basically a fancy database, so let me give this example Michelle - Did you know that in the 1980’s there was a technology developed that handled complex calculations, served as a sophisticated database, at least during it’s time, and revolutionized people’s ability to gather, track and conduct business? It was called Lotus, or more specifically, Lotus 1-2-3, and while I’m sure it made it’s parent company and it’s investors a good chunk of money in it’s early years, all it took was Microsoft to steal, er, develop, it’s own spreadsheet called Excel, eventually driving Lotus 1-2-3 to irrelevancy. If you had put all of your money into Lotus in 1980, how happy would you be in 1990? 2000? Now? Not happy at all, you’d be broke. So, yes, maybe blockchain is the next Lotus, and maybe it will change the world…and/or maybe it will fade out or be replaced by a better technology. Something like…AI.
https://www.sec.gov/investor/alerts/sdira
3. Michelle: Last one Josh. Anyone that knows you well knows that you have a…let’s call it an aversion…to flying. I’ve heard you state on more than one occasion that as someone that ran all types of equipment and machinery in your younger years, the one consistent thing is that machines tend to break, and that an airplane is no different than any other machine. So with all the bad news around Boeing’s Max 737 airplane, from the tragedy of 2 crashes that killed hundreds to actual pieces of the aircraft falling off, in flight, just a few weeks ago, are you just going to go all John Madden and take a bus when you travel long distances?
Josh: This one obviously has nothing to do with investments, we’ll make it silly in case Chas has to cut for time.
Well listeners, I hoped you enjoyed a peak behind the curtain on how I form my opinions and predictions, and more importantly, that I’m willing to admit when I am wrong. Which isn’t very often, but still. Now, to our listeners that have more questions the various investments and topics we discussed in this segment, we invite you to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com.
Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, a thank you to our awesome radio station 106.5, many thanks to the provider of our show music, local band Sloth Racer, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well. Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null!
Disclosure:
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management ("PCWM") and Qualified Plan Advisors (“QPA”). Certain services may be provided by PCIA affiliates. In this format, Josh Null provides general information, not individually targeted personalized advice, and is not liable for the usage of the information provided. Exposure to ideas and financial vehicles should not be considered investment advice or a recommendation to buy or sell any of these financial vehicles. This information should also not be considered tax or legal advice. Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.