The #1 Question: Can I Actually Retire?

“Can I retire?”

Here’s why we can’t answer that by just looking at your account balance.

Your retirement is personal. What you want to do, where you want to live, who you want to help—all that matters just as much as how much you’ve saved.

We build plans around your life, not around some generic retirement calculator.

Transcript 

You’ve been saving for retirement for decades. You’ve got a number in your head. Maybe it’s a million dollars. Maybe it’s more, but you still don’t know if you can actually retire. I get it and I hear that uncertainty from people all the time. I’m Alec Sunners with Financial Consulate and today I’m gonna walk you through exactly how we figure out if and when you can retire.

The Uncertainty of Retirement: What’s Your Retirement Picture?

As a financial advisor, this is what I hear all the time: “Alec, I have a million and a half saved. Is that enough for me to retire?” And honestly, I have no idea. Not because I’m not good at my job, but because I don’t know what your retirement looks like yet.

Are you the person who wants to travel six months a year? Or are you perfectly happy staying close to home playing golf twice a week and spending time with your grandkids? Are you planning to downsize your house or stay in it? Will you help your daughter with a down payment on her first home? Do you want to leave money to your kids or are you spending your last dollar on your last day?

These aren’t just conversation starters. Your answers to these questions completely change whether a million and a half is plenty or not nearly enough. That’s why we don’t start with numbers. We start with you.

Understanding Your Retirement Goals: What Does Your Day Look Like?

So when someone sits down with any of our financial advisors and asks, “Can I retire?” here is what we need to know first. What does a Tuesday look like in your retirement? Not the highlight reel Tuesday, the regular Tuesday. Are you working part-time because you want to? Are you volunteering? Are you taking a class?

Where are you living? Are you in the same house or a smaller place? Will you be moving to be near your family or are you planning to head south each winter? Let’s also talk about money. How much do you actually need each month? Not what you think you should need, but what do you need to live the life that you want? And here’s the one that people don’t always think about: What happens if you do live to age 95? Because that’s no longer the worst case scenario. It’s becoming more and more common.

Building Your Retirement Plan: The John and Jane Example

Once we understand your answers, then and only then can we build a plan that actually works for you. So let me show you what this looks like. This is a made-up scenario, but it’s based on real conversations that we’ve had.

Let’s meet John and Jane. John and Jane are both 62 and they want to try and retire next year. So let’s see exactly how that plan can get put into action.

Retirement Spending Goals: Addressing Needs and Wants

The first step that we have to take a look at is their spending goals. So we’ve got retirement there. Let’s look at how much they’re wanting to spend in retirement. So we have a couple different goals that John and Jane express to us that they want to make sure they accomplish.

The first thing they want to accomplish is they want to make sure that their basic needs are met. So these are things like your utility bill, your gas bill for your car, any car payments, groceries, entertainment, everything that is essential to live your normal day-to-day life and for them that’s about $90,000 per year.

With John and Jane their mortgage is going to be up in 2029 and they’re not planning on moving. So they’re gonna have a mortgage reduction of about $20,000 in 2029. In addition to this basic living goal, they also want to make sure their health care needs are met because they’re retiring before age 65. We need to make sure that we have planned out health care costs for private insurance before Medicare. So we’ve got that in here as well.

Now in addition to their needs, we also want to make sure that we are covering any wants that they want to accomplish in retirement. So for them, that’s $20,000 per year in travel. And they also express that they want to give a gift to their daughter of $50,000 so she can put a down payment on her first home.

Income and Assets in Retirement: How to Plan for Financial Security

After we input all of their spending goals, the next thing that we need to take a look at is the income and assets that they’re going to have in retirement. So let’s take a look at their Social Security here. There’s a bunch of different scenarios that we can model out for the best time to take Social Security. But both John and Jane expressed that they have parents that lived into their 90s, grandparents that lived into their 90s. So they want to make sure that they’re planning to live into their 90s as well.

So for them, what we’re going to plan on doing is have John, the higher earner of the two, wait until age 70 to start collecting and Jane, the lower earner, to start collecting at her full retirement age of 67. 

In addition to Social Security, Jane also has a pension. So we put that in here as pension income of $20,000 per year. Jane didn’t just take her pension of $20,000. She also is taking a survivor benefit. So if Jane passes away before John, he’s going to get $10,000 per year. That’s important so that we can model that out in their plan in addition to the income that they’re going to have in retirement.

They also have assets that are going to produce investment returns for them in retirement. So John’s got a 401(k) of a little bit under a million dollars. Jane’s got a 403(b). They each have a Roth IRA and they have some money squirreled away in some savings accounts, totaling up to about $1.4 million dollars.

They’re 62 now and they want to retire at 63. So they’re going to be able to put a little bit more into their retirement plans before retiring. So that’s another addition of about $25,000.

Assessing Retirement Success: Using Monte Carlo Simulations

Next we’re going to look at exactly how this program is going to analyze whether we can fund all of their goals in retirement based on their income and assets.

Now, this is where it gets interesting. We’re going to run a Monte Carlo simulation in a thousand different markets. So we’re going to have really good markets followed by even better markets, as well as bad markets followed by even worse markets and everything in between so that we can get a good idea about how their plan is going to hold up under a bunch of different market scenarios.

So when I run these thousand trials, we look like we’re about at a 92% probability of success and what I like to tell people is when you see these dials online that say, “Oh you’ve got a 50% or a 90%,” whatever that number is, don’t look at it always as a probability of success but a probability that you don’t have to make any changes to your plan. So for them there is an 8% chance that they’ll have to make any changes.

So if they’re spending more than we model out or if there are other costs that they’re not expecting that pop up in retirement, or if we have higher inflation or if we have worse markets than we expect, these are all things that people worry about and these are all things that we can model out.

Planning for Inflation and Market Changes: The Impact of Changing Conditions

So let me show you. Here is where we can take a look at different things that we want to make sure that we think about when talking about retirement and can someone retire. A lot of people think about these differently. A big one that’s come up recently are the effects of inflation.

All of our models are inputting a 2.5% rate of inflation in perpetuity. What happens if it’s three? What happens if it’s three and a half? We want to make sure we model this out in case that does happen. So I can take this slider and say, “What happens if inflation every year is actually three percent?” When we take a look here, we actually now split our needs. So that’s just our health care and that basic living expense.

And then our needs and wants, so the down payment for the daughter’s house as well as the additional travel each year. With inflation going up to three percent, we can fund John and Jane’s needs. But when we look at our needs and wants now, we’re getting close to dropping out of what we call our confidence zone. Anything below 75 there’s a good chance that some changes will need to be made to the plan. Maybe it’s not spending as much on travel. Maybe it’s retiring later.

Adjusting for Low Returns: What Happens When Markets Underperform?

The answer is really dependent on what in this scenario John and Jane want. I don’t want to ever tell someone this is what you need to do. I want to listen and explain that hey if you are gung-ho about retiring at age 63, then maybe some spending has to be cut back or if you’re saying hey I’m flexible with my spending, then we can adjust the spending without having to adjust that retirement date.

So it all depends on whether you value spending more money or retiring earlier. Let’s take a look at some of these other scenarios that people run into in their retirement. And again, a big one is going to be low returns. We like to be conservative with returns as is. But what happens if the market for the next 40 years doesn’t do as well as the last 40 years?

An element of that is we want to make sure we’re more conservative than what historical returns have been. But what happens if we weren’t conservative enough? We want to make sure that we model out what low returns look like so I can again take this slider, drag this across and say what happens when returns we’re expecting are actually a point and a half off and our returns are even lower than we thought.

And again for John and Jane their needs are completely met. Their needs and wants however, the travel and the down payment for their daughter, aren’t quite met. These are things to consider when thinking about retirement and again, maybe they say well we’re spending $90,000 per year no matter what and we’re retiring at 63 no matter what and I’ll say to them, “Yeah, you can do that. We’ve got no problem with that. But if in the event that we see lower returns, maybe you can’t travel as much, maybe you can’t give that gift to your daughter unless you are willing to work a little bit longer or you’re willing to pick up a part-time job in retirement.”

Tax and Healthcare Considerations: How to Maximize Retirement Longevity

There are a bunch of different answers to these questions. There’s no one-size-fits-all. If I say, “Oh, look if low returns happen, your plan doesn’t work. We’re out of luck.” It doesn’t work like that. There are a bunch of different dials that we can use to make someone’s retirement work and it really just depends on what the client says is important to them.

So what if the market tanks the year after they retire? What if healthcare costs spike? What if one of them needs long-term care? We also have to think about taxes. This is where this matters as well. Should they do Roth conversions while they’re in a lower tax bracket? When should they take Social Security? Which accounts do they pull from first? These decisions aren’t minor; they can add 5, 10, even 15 years to how long your money lasts. 

Conclusion: Creating a Retirement Plan Based on Your Life

So in our scenario, can John and Jane retire? Yes, they can but not because they had a magic number in their 401(k). They can retire because we built a plan around their actual life. We showed them exactly what they need to do between now and retirement, how to structure withdrawals, how to manage taxes, and what warning signs to look for like higher inflation or lower returns.

But here’s what matters for you. You don’t have to guess. You shouldn’t be lying awake at night doing retirement math in your head. At Financial Consulate, we do what we call a Financial Physical. We’ll look at everything: investments, tax returns, your insurance policies, your estate plan. We’ll build projections like what I just showed you and we do all of that before we ever ask you to become a client.

So if you’re asking yourself, can I actually retire? Let’s find out. One of my specialized areas of expertise is exactly this: retirement planning. If you plan on retiring in the next five years, let me show you how to best accomplish that. Go to financialconsulate.com or give me a call at 410-823-7283. We’re based in Hunt Valley, Maryland, but we work with clients all over the country.