We all want to know, do we have enough,
can we retire and how long will our money last?
Well, the key in retirement
is to compound good decision after good decision.
What that does is that helps to optimize your overall retirement assets
and increase the probability that you do have enough and you can retire
and most importantly, you don't have to live with anxiety
throughout retirement worrying if you have enough or not.
In this video, we're going to look at a 66-year-old with $800,000 saved
and really get into some of the nuances of different decisions
that have to be made in the potential outcome of those various decisions.
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Hi, I'm Troy Sharpe, CEO of Oak Harvest Financial Group,
certified financial planner professional,
host of the retirement income show, and certified tax specialist.
The purpose of these videos is to help get you thinking
along the lines of what decisions need to be made
and how they are all interrelated from social security to healthcare,
to investments and asset allocation, to managing risk,
to taxes, to really get you thinking about all the decisions
that have to be made and how one decision impacts other decisions.
As we go through these, what you'll start to see with retirement
is that it's just as much an art as it is a science,
because everyone's situation is so unique.
Everyone's circumstances are so different.
We're going to look at some different variables here,
but we're going to start out with some very basic ones.
First, we have John and Jane, just a sample case, male, female,
both age 66 and just retired.
Now, we're in Texas.
We put Texas as a state residence, but obviously,
if you live in a state within an income tax,
there would be a little bit different scenario,
but that's why the customization is so important.
Retirement period.
We like to assume a long life expectancy and the reason
is that the age 85 population segment in this country
is the fastest-growing population segment out there.
Also, according to Pew Research, which I brought this article up here,
when we look at the projection of growth,
this is the estimated number of people over 100 years old,
over the next 30 years.
In 1990, there were 95,000 people over age, 100.
In 2015, 451,000. By 2050, this is a Pew Research study,
by the way, 3.6 million people estimated to be over the age of 100.
This is advances in science and technology,
and medicine and treatment to help people
overcome various diseases that they may find themselves within retirement.
Underestimating life expectancy is a big mistake for a retirement planner
because if we plan for 95 or 90 and you don't make it that far,
well, you have that money, you're secure.
If we plan to 82 and you make it to 90, well, guess what?
That's a big problem.
When we talk about life expectancy,
this is one of the pieces of financial planning
that is specialized to you and yourself.
You know, your health, you know your longevity,
you know what health problems you may or may not have.
Of course, we can customize this for your particular situation,
but most people from my experience underestimate the advances in medicine,
technology, and science that will continue
to extend our lives as time progresses.
We have treatment right now for various diseases
and cancers that even five, 10 years ago, we didn't have.
Underestimating our life expectancy is one of the big mistakes
that people make.
Now, if you do have health conditions, if you smoke,
if you drink, you're probably not making it to 95,
that would be customized for your particular situation.
Generally speaking, I'd much rather plan for you to live to 95
and you don't make it there than plan for you to live to 85
and then you make it to 95 and then the plan obviously would be insufficient
because there wouldn't be enough money to pay for healthcare,
to keep up with inflation, taxes, et cetera.
That's why we put the life expectancies at 95.
This particular couple, what we're trying to do
is account for spending and retirement of $60,000 per year.
Of course, this is after-tax.
If most of your money is inside a 401k or an IRA,
there is a tax problem there.
To get 60,000 out, we have to pull more than that after taxes to be left with 60.
Healthcare, this is the average Medicare cost
for a 66-year-old couple in this country.
Now, it may be a little bit more,
a little bit less for you depending on your prescriptions
and various out-of-pocket costs, but this 9,400, this is the average,
including Medicare premiums out-of-pocket costs
for healthcare expenses for a 66-year-old couple in this country.
Social security, John, he will file his normal application
at 66 and a half and receive $36,000.
Jane will then file spousal benefits.
This scenario, which is a lot of times what we see working with clients,
where the husband files social security
and then the wife files for spousal benefits.
Of course, your situation may be different.
Again, this is where customization comes in,
but 36,000 and 18,000 are the social security benefits.
Now, here's something very important.
When we look at the breakdown in assets,
this is where retirement planning starts to get very fun
for us because it's putting that puzzle together,
but where it becomes very complicated for most people
because they don't understand the challenges that come
with having too much money inside that 401k.
We did a breakdown here of 600,000 inside the 401k
and 200,000 inside the brokerage account.
There are literally millions and millions of different ways
that you could take retirement income from this breakdown of accounts,
you could take X amount from the 401k,
take X amount from the brokerage account.
Brokerage, Of course, when we say this,
this is a non-retirement account, a non-IRA.
Optimization comes into play when we identify what is the appropriate amount
to take out of that 401k and what is the appropriate amount
to take out of the non-IRA in order to not just reduce taxes today,
but look at the impact over the course of your retirement,
which income distribution strategy makes the most sense for not only today,
but over the next 20 to 30 years.
This is the breakdown here.
When we look at the tax analysis in a few minutes,
it's going to make a lot more sense.
We're going to look at the top 100
different income distribution possible strategies
and the impact that they have over a long period of time.
Very simple. We're not looking at real estate here.
A net worth of $800,000 because yes,
when you have equity in your home, it's a great thing to have.
You can pull that out for emergencies later.
We just want to isolate the financial assets that this couple has saved.
Look at them spending $60,000 a year after tax with inflation,
by the way, we have at 0.0225%.
I'll touch on that in a little bit
because we've received some comments about inflation and healthcare costs.
Now, healthcare obviously is increasing a lot more
than general inflation in the economy,
but we just want to isolate with these financial assets.
Is that enough to answer the big questions?
Can I retire, stay retired and maintain my standard of living?
When we
look over here
at a Monte Carlo analysis, so this button,
what we're going to do is we're going to hit it.
It's going to run a thousand different simulations,
looking at a thousand different market returns over the course of time.
We just have them in a basic 60, 40 portfolio.
Again, asset allocation is a big part of a successful retirement,
but we're just trying to provide information
based on what the majority of people out there
are currently doing with retirement.
This comes in at about 87%.
87% you may be saying, well, is that a good number?
Is that a bad number?
The truth is it doesn't really matter too much.
It's just a snapshot in time.
What's most important with a financial plan
and a retirement plan is that you stay connected to this over time.
When markets are up or down and you have various returns over time
and you're spending money as well,
you run into what's called sequence of returns risk,
which is the combination of taking money out and market losses.
If you take out 5%, you lose 20, you're down 25% in a single year.
Now, if that happens in consecutive years,
that's where the sequence of returns risk
comes in when you're in the distribution phase of retirement.
Yes, 87%. I would feel comfortable by self retiring.
If this came in at 87% for me,
because that means 870 out of a thousand simulations, I die with money.
Now, it's more nuanced than that, of course,
but what's most important is that we're tracking this over time.
Is it staying at 87%?
Is it going up? Is it going down?
That's what's really important.
This is nothing more than a snapshot in time.
Now, when we start to look at, before we get to the tax analysis,
I want to come over here to what's called the play zone
in this particular software that we use.
I like this because it shows what happens
if we spend a little bit more money or less money,
how does that impact our probability of success?
Right now, we have this couple spending $60,000 after taxes,
let's say they wanted to spend 70,000 though. 71.
Look at the impact that this has, it drops it from 87 to 41%.
That is a massive change in probability of success.
Now, what we would do in this situation,
if somebody wanted to spend $70,000,
of course, we can customize a plan where 70,000
is spent maybe in the first five years, seven years,
10 years with the intention of eventually tapering it
back down to an inflation-adjusted 60,000 per year.
Inflation-adjusted 60,000 per year.
What does that mean?
Well, 60,000 today, if you take that out of your portfolio,
it will buy more goods and services than
if you take 60, 000 out of your portfolio in the future.
This is a basic time value of money concept.
Inflation erodes our purchasing power over time.
To have the same purchasing power in the future of $60,000 today,
we probably need to pull out 68, 69, 70, 71000 something in that range.
We'll actually look at this in a second.
The 70,000, this assumes we spent 70,000 today after taxes
and it's just inflating at 0.0225% over time.
Now I said, I would talk a little bit
about inflation and right now what's going on.
As I record this video, we are going through a period
of a bit higher inflation in some areas.
Other areas, we absolutely don't have any serious inflation.
The truth of the matter is, whatever you believe inflation to be,
when we customize a plan like this for you,
we can look at various amounts of inflation,
but if you start to put it out at four or 5, 6, 7%,
it's very likely you're not going to have enough money
to keep up with that level of inflation unless the investment returns
are that or greater.
Now, positive news there is typically
in high periods of inflation stocks have performed well.
When we look at inflation inputs and inflation estimates,
it's been 12 plus years where general inflation
in the economy has been under 2%.
We are starting to see some inflation now,
most experts believe that it's transitory and by the time we get to next year,
inflation should normalize but we'll see.
Most importantly, again, what we do is we stay connected.
If inflation does start to sustain itself
in a way that gets above 2%, 2.5%, 3%, 3.5%, 4%.
Well, that's why we have a financial plan.
We start to adjust for those changes, same thing with taxes,
same thing with market, same thing, with everything in retirement,
our health, our goals, and in the circumstances we find ourselves in,
they change throughout retirement.
That's why, when we look at something like this,
it's just a snapshot in time.
We need to be able to be flexible and pivot
based on whatever circumstances come our way.
Taxes. I want to look at taxes now. We have this.
This is a different software that we use to look at taxes.
We'll overlay this software and the outputs
from this one to the other software, along with a few other ones that we use,
then of course the human element is the most important
when combining all of this together.
What we're looking at here is the top 100 distribution strategies
for this same couple.
Number one, tax planning and income distribution scenarios.
The number one ranked strategy of course is up top.
It shows an estimated ending balance of $663,000
and taxes paid over the course of retirement of 42,560
so ending balance of 660, taxes paid of about 42,000.
If we come down here to the very lowest ranked strategy.
I went to number 11, It's number 101 ranked,
cumulative taxes, 156,000 with an ending balance of 170.
That's over a $500,000 or so, change in an estimated ending balance
and 100,000+ in additional taxes pay.
What's cool about this software is,
it isolates everything else except your distribution strategy?
How much are you taking from the IRA?
How much are you taking from the non-IRA?
Are you doing any Roth conversions?
Being able to isolate everything else
and just looking at those variables shows us very clearly that the tax planning
and income planning component for this couple in this scenario,
John and Jane is extremely important.
It's the difference?
Isolating everything else between finishing
with about 170,000 estimated or 660,000.
As you can see, income planning, tax planning,
play a very critical part in the overall retirement plan.
This software that we looked at over here,
this one is assuming what we call
the conventional wisdom distribution strategy.
Now, this software is that's the software's weakness.
This does not do a great job tax planning,
but when we overlay the tax planning software
with the financial planning software here, when we get the 87%
and we get it all done, this gets it up to 90, 95, 96, 99% a lot of times.
The big takeaway here is that retirement is not just about your investments,
it's about having a plan that looks at your investments
and manages risk, but also generating income, tax planning,
and health care planning along with estate planning.
Estate planning is very important if it matters to you,
what happens to your assets when you're gone?
We always keep a link in the description.
If you want to reach out to us, set a consultation, have a phone call,
and see if this type of planning is appropriate for you.
It may not be appropriate for you.
You may not be a good fit for what we do and that's okay.
Hopefully, we still can provide value
and help you have a greater understanding of retirement.
If you do want to talk to us, there is a link below,
you can schedule an appointment and of course,
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