As you approach retirement with a comfortable portfolio, you may begin to ask yourself some critical questions: “When can I retire?” and “How much can I comfortably spend during retirement?” For many, the process of accumulating wealth has been a primary focus for years. But as retirement looms closer, it becomes essential to shift that focus toward understanding how to turn your hard-earned savings into a comfortable and fulfilling retirement. This is the situation Tommy and Monica, a couple in their early 60s with a $2.2 million portfolio, found themselves in.
Both Tommy, a high school English teacher, and Monica, an attorney, had spent years diligently building their nest egg. Yet, like many, they had not taken the time to plan out the specifics of their retirement. This blog will walk you through the process of how they transitioned from a vague notion of retiring at 70 to developing a clear, actionable plan that aligned with their desires and financial realities.
Assessing the Starting Point: Income and Assets
Tommy and Monica have been saving through various means. Tommy has a 403(b) plan through his private school employer, while Monica has an IRA and Roth IRA, having recently rolled over her previous 401(k) when she changed jobs. Additionally, they have a joint investment account, own their primary residence, and are currently paying down a mortgage.
Their incomes are solid—Tommy earns $82,000 annually, and Monica brings in $215,000. Despite not having a pension, Tommy contributes significantly to his 403(b), and Monica is maximizing her contributions to her 401(k). Their projected Social Security benefits, starting at age 70, will be substantial, with Tommy expected to receive $2,400 per month and Monica $3,600 per month.
Identifying Goals and Priorities
Initially, Tommy and Monica assumed they would retire at 70, largely because they wanted to maximize their Social Security benefits. However, in discussing their goals and lifestyle aspirations, it became clear that their true desire was to retire earlier, if financially feasible, to enjoy activities like travel while they were still in good health.
Their current monthly expenses were approximately $6,500, which allowed them to live comfortably. In addition, they wanted to allocate $20,000 per year for travel—an amount they felt would let them take the types of trips they had always dreamed of. After discussing their travel goals, it became evident that waiting until 70 to retire might not be ideal, as their energy levels and health might not support such active travel in their mid-70s.
Planning for Healthcare and Housing
Healthcare costs were a significant consideration. Retiring before 65 would mean paying for private health insurance at an estimated $800 per month per person. Once they reach 65, Medicare would cover a portion of their expenses, but additional costs such as Medicare Part B and Part D premiums, along with out-of-pocket expenses, needed to be factored in, amounting to an additional $4,000 per year.
Tommy and Monica also live in an older home that they love and plan to stay in throughout retirement. However, maintaining an older home can be costly. Instead of itemizing every potential repair, they decided to budget an extra $15,000 per year for home maintenance. Additionally, they planned to replace their vehicles every five years, budgeting $30,000 per vehicle purchase, supplemented by the sale of their current cars.
Evaluating Retirement Income and Expenses
Tommy and Monica’s projected retirement income primarily consisted of their Social Security benefits and withdrawals from their investment portfolio. The couple’s initial goal was to determine how much income they would need from their portfolio starting at age 70, comparing this against their projected expenses, which included housing, healthcare, living expenses, and travel.
With their current assets and assuming a moderate growth rate of 6.5%, they were on track to have a portfolio value of approximately $5 million by age 70. Using this projection, their withdrawal rate in the first few years of retirement was estimated to be between 2.5% and 3%—a sustainable rate that would allow their portfolio to continue growing, even in retirement.
Exploring Retirement Timing: Age 65 vs. Age 70
Given their solid financial foundation, it became clear that Tommy and Monica had the flexibility to retire earlier than 70 without jeopardizing their financial security. By considering a retirement age of 65 instead, they could still maintain a comfortable lifestyle, with a high probability of financial success throughout their retirement years. While this would slightly reduce the projected value of their portfolio by age 95, it would still be sufficient to cover all their anticipated expenses.
Adjusting Lifestyle and Spending
If Tommy and Monica preferred to continue working until 70, they could enhance their lifestyle significantly. Increasing their monthly spending from $6,500 to $9,500, for instance, would allow them to enjoy more during their working years and throughout retirement. This adjustment would slightly reduce the amount left in their portfolio at the end of their lives but would still leave them in a strong financial position.
Another option was to continue working until 70 but stop contributing to their retirement accounts. By redirecting the $12,000 per year that Tommy saves into his 403(b) and the $30,000 that Monica saves into her 401(k), they could increase their current spending without compromising their future financial security.
The Power of Planning
For the first time, Tommy and Monica began to realize that retirement planning wasn’t just about maximizing savings for a distant future. It was about aligning their finances with their current and future lifestyle goals. By taking the time to explore different scenarios, they could see that they had the financial flexibility to retire earlier, increase their spending, or even continue working while enjoying a higher quality of life today.
This planning process was just the beginning. With a solid understanding of their options, Tommy and Monica could now focus on optimizing their investment strategy, tax planning, insurance needs, and estate planning. This comprehensive approach ensured that their financial plan would support a meaningful, productive life both today and in the years to come.
For those nearing retirement with a substantial portfolio, like Tommy and Monica, the key takeaway is to move beyond the accumulation phase and start planning for how you want to live during retirement. Whether your goal is to retire early, enhance your lifestyle, or strike a balance between work and leisure, a well-thought-out plan will help you make informed decisions that align with your goals and financial realities.
