Today we have an example from prospective client Stu. Stu says, I have $800,000 days up. Can I afford to retire? I could easily answer this with one or two sentences and say, Stu, the average flatline withdrawal rule of thumb says 4% of your portfolio. Or if you’re willing to follow the guidance and strategies we implement, you could withdraw more around 5% per year. So about $44,000 gross per year from your portfolio. Or we can dig in a little deeper to align both what Stu wants to do today and plan for the future, thus creating a retirement income strategy. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to guide you to a successful stress-free retirement while spending more and avoiding being killed in taxes. Let’s take a deeper look at Stu’s scenario. Firstly, congratulations to Stu for saving the sum of money. Of course, Stu is not her real name. Every client I talk about is Bob and Stu. So Stu is 65 years old. She knows she’d like to retire, but doesn’t know what the right age to retire is. That’s my first queue to stop. I asked Sue to tell me a little bit more about that. Sue believes retirement should either be at 65 because that’s when Medicare starts or at 70 because that’s when Social Security is maximized.
Now Sue is right but those factors don’t mean they drive the bust of your retirement. Sure they are past mirrors and included in the plan but we want to empower Sue to retire when she is ready and able and as it aligns with her goals, not a specific standard because there is no specific standard. Sure it might involve some more elbow grease in the planning but that’s what we’re here for. So my first question for Sue. Sue, what are your goals? How do you envision retirement and why does that matter to you? By the end of the goals discussion I can tell Sue would like to retire as soon as possible to enjoy her time with family but is nervous. She unfortunately lost her husband at a young age and is afraid of how much time she has to enjoy what she’s worked for and earned. But I can also tell she’s afraid to flip the mental switch from working and saving to spending down her retirement portfolio. I’m going to show Sue what her retirement income would look like if she retired right away but also what it would look like if she waited a few years. Sue explains her minimum dignity floor is $3,500 per month, but that includes a mortgage of $2,500 that will be paid off at age 68. Our minimum dignity floor is what it costs to stay in the house that we have, buy our groceries, pay our bills, pay for medical insurance, and remain independent.
Remember, Sue is already 65, so she is eligible for Medicare and has her premium already calculated into this. Sue likes to take girls trips the year off a couple of times per year. In her words, she says they are relatively simple and she enjoys walking around the different villages and staying in middle-of-the-road hotels. But her day-to-day enjoyment is picking up her grandchildren from school and having the freedom and flexibility to travel and attend their travel sports events. I would also ask about any other wants or wishes like buying an RV or leaving the legacy, but that doesn’t apply to Sue. The first expense we need to cover is Sue’s minimum dignity floor, and the first source of money we want to use is fixed income from Social Security, pensions, or part-time work. In Sue’s case, she will have Social Security, but no other sources. If Sue retires today at 65, her social security benefit will be $3,426. Great news is that just about covers her minimum dignity for claiming at 65 does incur a lifetime penalty though. So what if we wait till 70? Sue’s benefit grows to $4,873 and that’s before future COLA increases.
Social security claiming strategies have a few different factors to play in such as do you need the money? How long do you expect to live? And in Sue’s case, spousal benefits. Sue being a widow was eligible to claim her survivorship benefits at age 60. So what we can look at with Sue is claiming that survivor benefit today, whether she retires or not, and let her benefit grow until it maxes at age 70. The amount that Sue begins receiving for the next five years plus her max benefit is greater than her max spousal benefit. This strategy maximizes Sue’s social security benefit. So a midpoint recap, we’re still working and saving. We have $800,000 saved up and we are going to claim our social security survivor benefit at $2,130 per month. And we’re going to let our own social security benefit grow to an estimated $4,000. Remember, Social Security benefits before full retirement age can be penalized if you earn too much and benefits are always taxable.
In Sue’s first two years of retirement, if she were to retire immediately, her living expenses would be $3,500. Her fixed income from Social Security survivor benefits is $2,130 per month, creating a shortfall of $1,370 per month. Sue’s portfolio of $800,000 can sustain a monthly income of $3,226 gross. Including Sue in the 12% tax bracket, soon to be 15% tax bracket due to tax increases. So without using any additional strategies to create a retirement income bridge between retiring and Sue’s max Social Security benefit, we have Sue’s dignity floor covered with an excess of $1,856 per month. Now that we are pulling out this delta from our portfolio, it creates an income level over the IRS threshold of $25,000, making part of Sue’s Social Security benefits taxable. This means we have to withdraw more from our portfolio to cover the tax bill or more to cover our living expenses if we withhold. Taxes on our social security benefit, which is the more intelligent move, unfortunately creating even more tax liability.
That still leaves Sue with money left over which can be spent traveling. She mentioned she spends about $5,000 per year traveling, which still leaves her with an excess of roughly $17,000 for the year. She can spend this or save it however she wishes. This can create larger buffers in our income guardrails for large purchases or emergencies. Sue also is concerned about aging and paying for long-term care. She can either use her own equity as a long-term care plan, or let this excess grow in her portfolio to fund long-term care. Now keep in mind that two years into retirement, Sue will drop the mortgage and free up an additional $2,500 in monthly retirement income. And three years after that, Sue’s social security benefit will grow about $2,743 per month, now giving Sue a total of $7,049 in available income above and beyond what she needs. What else does this mean? Sue’s taxes are likely to go up in retirement, and given the sun setting TCJA projections, she could jump from the 12% bracket to the 25% bracket which means we may want to pay more taxes while taking the lower Social Security benefit via Roth conversions. I know one of Sue’s concerns was passing young but the worst case you could have is outliving your money. It is binary.
Either you outlive your money or your money outlives you. If you run out of money at 90 you’re not going to get a job somewhere else. So I’m planning on Sue needing retirement income until age 94. So immediately, yes, Sue can afford to retire and can afford to do even more retirement than she planned. If you notice Sue’s income has a couple of jumps during retirement. If Sue decides she wants to incorporate additional goals early on, we can factor that into her spending in a couple of ways. Even if her spending is above portfolio withdrawal recommendations, we can withdraw a higher amount in the beginning knowing we will supplement the rest with Social Security later. We get this flexibility using the guardrails approach through portfolio income. Alternatively, we could purchase a SPIA insurance product to bridge the gap and fund a set number of years. So I am hoping to convince Sue if she wants to retire, she can and should. If she loved work and it gave her a sense of purpose, that’s fine too, but her goal is to retire. She mentioned her Europe trips are simple, but the key aspect of them involves a lot of walking. That’s going to be less fun in your 80s than in your 60s. But I did tell her we can do some projections if she waits until 70 to retire.
She’s currently putting away $15,000 per year with her employer contributions included. Let’s add in her social security survivor’s benefit and say she’s going to invest that. That puts Sue retiring at 70 with about $1.4 million saved up, which is fantastic. So Sue would have roughly $9,600 in gross income monthly. So the question to Sue is, what goals will be funded by your massive excess? Again, if you love working and it gives you a sense of purpose, then you don’t have to retire. Your goals are yours alone. There is no standard. But if you want time with family and to travel and want to retire, what will those extra dollars do for you? Don’t believe there is a standard retirement. Put a plan in place earlier. You can, in fact you will, continue to adjust your plan. The second I hand someone a plan, it’s outdated. Therefore, it is never too early to begin a plan because it is always evolving. I would appreciate it if you subscribed to our YouTube channel. If you have any financial questions, you can email them, contact at BocaRetirement.com. I’m Hunter Brockway, founder of Boca Retirement Strategies. Enjoy your successful retirement and thank you for watching. Bye.