Is $1.5 Million Enough to Retire? We Ran the Numbers.

My clients Ben and Sarah came into the office recently. At 60 years old, they’ve worked hard their whole lives to save up $1.5 million, and they’re seriously starting to think about retirement. But, will that $1.5 million really be enough for them to meet their lifestyle goals and enjoy retirement on their terms? Let’s find out.

But first: Before diving straight into Ben and Sarah’s plan, I want to emphasize that you don’t have to be in the exact same situation as Ben and Sarah. The process I walk through with them is the exact same process we’d walk through with any client, regardless of age or portfolio value. But in my 24 years of working in the financial industry, I’ve found that by looking at a specific plan, it can often be much easier for people to visualize the process and understand what that same process might look like for themselves.

Starting the Planning Process

So to start, let’s look at what we’re working with in terms of assets. Ben is making about $140,000 a year and has $700,000 in his 401(k), of which he’s contributing 10% of his income. He also has $60,000 in a Roth IRA. Sarah is making about $95,000 per year and has a 401(k) of $400,000, of which she’s contributing 5% of her income. She also has $30,000 in a Roth IRA. They have $60,000 in savings and a joint investment account of about $250,000. In terms of spending, they currently budget about $10,000 per month.

In every situation like this, the first thing that I want to do is sit with the clients and really understand what they want retirement to look like. Think of it this way: The first day you're retired, what are you doing? Are you getting on a plane and traveling? Are you sitting on the front porch drinking coffee and reading the paper? Are you going to a part-time job at the golf course? What does that first day look like to you? I also like to think of retirement as “work optional,” a goal of getting you to a place where you go to work because you want to, not because you have to.

The answers to these questions will determine how we build the most efficient investment portfolio, and how we analyze taxes, insurance, and the estate plan. It all starts with a goal.

So, I started this exercise with asking Ben and Sarah when they wanted to retire. They both enjoy their jobs and thought maybe they could make it to 65. They arrived at age 65 because that's when they could start Medicare, and they hadn't really thought about what it would look like if they retired before Medicare. One thing to remember is that if you retire before 65, which is when Medicare eligibility begins for most people, your health insurance has to come from somewhere else. And that could be a substantial planning cost. So, in this case, for Ben and Sarah, we set age 65 as their retirement date.

Once we determine the start date, we then look at how much we're going to spend. Ben and Sarah actually helped me understand this quite well. They’d kept a pretty detailed spreadsheet showing that they needed about $6,000 per month for a comfortable retirement. They also wanted to look at getting a new car every five to seven years. They figured they could trade in their cars for about $10,000 in value, and they'd like another $25,000 on top of that. They also talked about how they enjoyed traveling. So, we decided to build in a $10,000 per year travel budget for their first 20 years of retirement.

Then, we looked at their retirement income, which for them will just be Social Security. Based on their current combined income of $235,000, we estimate their total benefit to be approximately $78,000 per year in 2025 dollars.

Once we know all this information - their goals, their assets, their savings, and their retirement income - we want to put this all together and see if they can retire at 65 and spend what they need to spend to have an enjoyable retirement.

First Trial Run

With our first run through the program, where we simulate 1,000 trials of varying market returns, we see that Ben and Sarah are in a good spot to retire at 65. We have a median ending asset value of $2.1 million.

What I like to focus on in this chart, though, are the ranges of outcomes.

You can see that with a high degree of certainty, Ben and Sarah could retire at 65, spend $6,000 per month, buy a new car every five years, have a travel budget for the first 20 years of retirement, and at age 90, they’ll still have between $1.3 million and $3.2 million. This is all assuming their current asset allocation mix of 65% equites and 35% fixed income.

Now, the program assumes that this portfolio mix could net an annual return of 6.2%, and it’s highly unlikely they’ll achieve this exact return every year. Some years they could net a higher return, and some years net a lower return. Because we use varying risk and return numbers, and because the market doesn’t achieve straight-line growth, the probability of success and confidence scores are very important here.

But just as important is the fact that we evaluate this plan at least annually. We want to make sure that we are accountable to the plan and not the investments. We want to make sure Ben and Sarah have the information to make decisions based on the plan and not the portfolio. I’ve seen too many times when people let emotions run the way they invest. In a down month or quarter, it’s easy to bail on the asset plan and sell out to “stop the bleeding.” When a plan is in place, we’ve already planned for downturns in the market. It’s very possible that the market downturn is one of the 1,000 trials we’ve already run. So, as we do with all planning clients, we meet on a regular basis to make sure that no matter what the portfolio is doing, the plan is on pace. If there’s a bad month and the plan still shows a high level of confidence, it’s easier to stay on target.

Taking a Closer Look

Back to Ben and Sarah. Here’s a closer look at that plan:

Using the median trial of returns, you can see the growth of the portfolio until retirement, as Ben and Sarah continue to grow their portfolio with planned savings and their asset allocation until 2029. When they retire that year, the withdrawals from the portfolio are greater as their entire income is supported by investments until they turn 67. At that point, Social Security comes into play, and they can reduce the pull from the investments and allow them to grow until age 73. At that point, the IRS will make them start to take required minimum distributions (RMDs). Using our simulated average returns, this should leave them with just over $2.15 million.

From here, I look at the cash flow for the next 10 years and their projected withdrawal rate.

What’s interesting here is the positive cash flow pre-retirement. You can see that there is approximately $35,000 to $40,000 per year of unsaved cash flows. This tells me that they either have a substantial amount of excess they could be saving for their retirement or even some planning for their grandkids’ educations; or, their spending budget is missing a few things. This might mean that they could need more than the $6,000 they told me they needed during retirement. For now, we are going to assume those dollars are spent.

The cash flow echoes the investment portfolio. The first 2 years, Ben and Sarah’s retirement is fully funded by investments. At age 67, most of their retirement income needs are funded by Social Security, and the pull from their portfolio drops substantially.

This is shown in the withdrawal rate page. For a retirement to be successful by asset definition, withdrawal rates typically need to be between 3.5% and 4.5%. When Ben and Sarah retire at 65, we pull from the portfolio at about 4.5% to 5%. That may seem a little high, but look at the next 8 years. Withdrawals from the portfolio range between 0.5% and 1.5%. In 2040, the IRS starts requiring RMDs, but the pull from the portfolio is still below 4%.

These are good looking charts overall, which means we can get into some of the fun parts of planning.

Changing it Up: What Else Can We Do?

When I see a high level of confidence, there are really two things we can explore. First, do you want to retire earlier? And second, do you want to spend more?

In this case, I asked Ben and Sarah those questions, and they said, “Let’s run the numbers.” So, let’s see what it would look like at 65 if they wanted to spend $8,000 per month instead.

That increase in spending would cost them (on average) less than $400,000 over the course of their lives.

Then they told me they were curious what an earlier retirement age would look like for them; and, if it was possible, they would actually prefer this over increased spending. So, I showed them what would happen if they retired at 60. Since this is the more desired variable, let’s spend some more time here.

Using the same analysis, we have a high degree of confidence that retiring at 60 on $6,000 per month would result in between $700,000 and $1.9 million in end-of-life assets. The median ending balance is about $1.2 million.

So, what do all these numbers mean?  It means that while it could cost them about $915,000 over their lifetimes, they could, with still a very high level of confidence, retire today.

Digging Deeper

Let’s continue to dig further into this plan. As before, the success of this plan is dependent on the rate of withdrawal from the portfolio.

The withdrawal rate of retiring early looks a little different.

In this proposed scenario, Ben and Sarah must pull a larger portion of the portfolio to fund both earlier retirement expenses and added healthcare costs pre-Medicare. The withdrawal rate is high early on, and if we continued at that rate for longer than the seven years shown, it could have an impact on their long-range outcomes. However, we follow those years up with eight years of very low portfolio withdrawals. Many of those years, except the year Ben and Sarah buy a car, we see that pull rate at less than 1%. Even with the onset of RMDs at 73, the rate of withdrawal is still below 4%.

This is why planning is so important. Ben and Sarah would’ve never thought retiring at 60 would be possible because they’d have to pull so much so early. They didn’t see the longer-term forecast showing that they could make that higher rate up by talking less when Social Security begins.

Our Results

So, we covered a ton of information about Ben and Sarah. We showed them they could retire at 65 on $6,000 per month with their current assets. But, we also showed them that they could walk away today if they wanted. What a good day for Ben and Sarah. They now know that they may not be retired per definition, but that they are officially “work optional.”

Besides being work optional, the planning playbook is open wide now. If they wanted to continue to work, we could possibly de-risk their portfolio. We could move them to a lower risk profile. For example, we could add more fixed income to their mix and therefore reduce volatility.

In this example, we could give up just an estimated 0.4% of return to reduce the volatility by over 18%.

We could look at some tax planning, too.

With low effective tax rates, we could take advantage of strategies like Roth conversions or RMD planning that could save some of the taxable assets for later while drawing down some of the assets that they’ll be required to pull and pay taxes on at age 73 when RMDs begin.

What’s Next?

So, what does this mean for Ben and Sarah, and what does this mean for you? No matter how much you have in your nest egg, no matter how much you need in retirement and no matter when you want to retire, you need a plan. Ben and Sarah walked away with huge smiles on their faces, knowing they were now work optional; something they never would’ve thought when they initially came in. They were just hoping they could make it to 65 and have enough to live on, afford some new cars every once in a while, and travel some. They left with a renewed confidence. And that’s what planning does. You may not be in the same situation as Ben and Sarah, but you can walk away from the exercise having a confidence that somehow, some way, it can work.

We want you to have the same confidence in your retirement picture, and we’d be happy to meet with you to help you live the retirement you deserve. Email us at education@thenoblegroup.com to schedule a complimentary review, or you can click here to reach out to us via phone or contact form.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Investing involves risk including loss of principal.  No strategy assures success or protects against loss.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Standard deviation is a historical measure of the variability of returns relative to the average annual return. If a portfolio has a high standard deviation, its returns have been volatile. A low standard deviation indicates returns have been less volatile.

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