3 Simple Steps to Ensure Your Portfolio Can Support Your Retirement
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- Опубліковано 1 чер 2024
- John and Jane have saved diligently and planned meticulously, but uncertainty looms. Can they retire? Can they maintain their desired lifestyle without the fear of financial ruin? These questions drive the discussion as we stress-test their retirement plan.
Step 1: We start with the "rough draft" of their financial plan, which outlines their goals, assets, and income sources. It's a snapshot of their current financial landscape, a starting point from which we can chart their retirement journey.
Next, we discuss their retirement lifestyle, monthly expenses, and aspirations for travel and leisure, which helps us understand what retirement means to them and guides our planning process.
Step 2: With their goals and financial details, we move on to the next step: cash flow analysis. This is where we see how their income stacks up against their expenses throughout retirement.
As we crunch the numbers, patterns begin to emerge, driven by milestones like paying off their mortgage and the start of their Social Security benefits. But perhaps most importantly, we confront the reality of their withdrawal rate.
At first glance, withdrawing nearly 9% of their portfolio in the first year of retirement seems unsustainable. But as we delve deeper into the projections, we see how expenses decrease, income sources kick in, and the trajectory of their portfolio begins to stabilize.
Yet, uncertainty still lingers. What if the market takes a nosedive? What about inflation? What if healthcare costs skyrocket?
Step 3: That's where the Monte Carlo analysis comes in. By running thousands of simulations, we gain insight into the probability of success and the severity of failure.
We explore the impact of potential risks, from Social Security cuts to higher taxes to unexpected healthcare expenses. And we consider the flip side, the potential windfalls that could bolster their financial security.
Retirement planning isn't just about numbers. It's about peace of mind, the confidence to embrace the next chapter of life without fear or regret. And as we wrap up our discussions with John and Jane, we’re reminded of the power of preparation, the freedom that comes from knowing that no matter what the future holds, they're ready to face it head-on.
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⏱Timestamps:⏱
0:00 - Step 1: Rough draft financial plan
4:27 - Step 2: Assessing cash flow
8:37 - Graphing the cash flow
9:53 - Step 3: Stress testing
12:22 - Straight line projection
14:51 - Probability of success
19:24 - Other potential stressors
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JAMES, I keep saying after watching one of your videos, “How can James, who seems to be under 40, exhibit such wisdom and understanding of the process of retirement planning, and at the same time understand all the different types of people who watch these videos-their goals, dreams, and fears?” That was especially true as I watched this video, which is one of your best, because the couple’s initial hope was really not practical. In addition, you threw lots of curveballs during the stress test. If I had access to your videos 20 years ago when my husband retired at 42, I would never have agreed. But for his health I did agree, and I’ve spent years catching up our retirement savings. Now we are in a good place, but there’s a lot of worry that I could have avoided. I hope lots of people in their 40s and 50s watch your videos so they have time to do course corrections without the pain. Keep up the high quality of your videos!
I’ve said the same myself.
James appears to have taken his CFP certification seriously. When it comes to this material, those are the letters after the name that matter.
Really? What young people need to do is fund a ROTH IRA or workplace 401K if ROTH is available to the max amount if possible in a growth fund from Vanguard or Fidelity or a fund that tracks the S and P 500. The stock market is a marathon not a sprint and 40 years investing each year in these funds provides tremendous growth. But..when we are young the mind is elsewhere?🤣
@@Jack51971Wait, are you replying to Jane? She said her husband retired due to health. There are many serious health conditions that can keep someone from working at 42. Count yourself lucky if you don't know what they are
To be realistic, I'd prefer a deep dive that includes advisory fees. Presuming that a good plan adds value, it still has an expense and that could affect the overall outcome.
This is a lot more sophisticated than the material out there on UA-cam. Thank you sir.
Excellent video - very good to see all the steps clearly explained. I hope you can do this for a single person as well. Living expenses for one person may not be much less than for two, but the effects of various risks can have a much greater impact. And, two social security benefits, pensions, inheritances, etc. is better than for one.
Those healthcare costs before Medicare seem extremely high.
We both retired at 58. Our ACA for health, vision, and dental are below $500 per month for the 2 of us, and our max out of pocket is $13k. We are both healthy, I'm 62 and my wife is 60, and we live in Georgia. Maybe other states are much higher?
I agree totally with your definition of "failure". Running out of money in your IRA, but having $5k coming in AND a home worth $700k is not a failed retirement. I guess some people are attached to their home, but I have no intention of staying here(we live on acreage) past age 80. By then this property will be worth a million because, generally speaking, land values increase with time.
If I were them I would look at a couple of SS plans to help mitigate that big drop in the 1st 10 years and I would pull the trigger to retire yesterday.
You can always take a $10k vacation instead of a $20k trip.
Drive the car an extra 2 years if markets underperform.
Generally speaking, your base living expenses will almost always go down after age 70-75. We've actually increased our spending since retirement and plan to do that until age 70, when we will reevaluate things. Of course we are looking at things 2x a year with our financial guy, in case we need to make corrections based on current conditions. Fortunately, we have not had to make any reductions in the 4 years since I retired.
Expenses generally go down after 70 or 75, except if you end up in a full time nursing facility which can cost upwards of $100,000.00 a year. I saw this happen to friends of ours.
You can always take a $10,000.00 vacation rather than a $20,000.00 vacation!! Must be nice! Most retirees couldn't even imagine blowing that kind of money on a vacation!
Nicely done scenario. One modification I haven’t seen planners mention in a plan like the “first draft” where you’re heavily hitting your portfolio while delaying starting Social Security…
If you are simply tired of working due to stress, whatever, an option might be to phase into your longer term plan. That is, retire now, but delay spending on the extra stuff like travel for a year or two, even three. That can reduce the early stress on your portfolio at the same time it reduces your personal stress.
And with that retire now, delayed ramp up retirement plan, prior to Medicare, if you manage your 1040 income to modest levels (either by spending less if most of your money is tied up in tax-deferred accounts, or spending from brokerage accounts), ACA credits can dramatically, even eliminate pre-Medicare healthcare insurance premiums.
That sounds like a nice happy medium. Would be interesting to see that play out.
Good catch about the ACA credits if AGI is low enough.
Another great video, James! You are consistently amazing! Thank you!
This is one of your best videos. A lot of detail, and clearly explained.
Excellent material. One of his best videos.
I’ve watched a lot of your videos and I think you’ve made some of the clearest points in this one. The end ‘worst case’ discussion will give a lot of people confidence and few people talk about this.
Love these videos. Great job
Excellent information and walkthrough of the steps to evaluate retirement timing. Thank you!
First! I really enjoy the content that you provide! It is helping me map out my retirement strategies. Thank you.
Excellent info and clear example of what needs to be examined and why. Thank you!
Excellent explanations James! Rich
Thanks James for explaining the steps that you go through to ensure a portfolio can support the retirement goals. You have a great way of explaining each step in easy to understand language.
Great information! Thank you
James, thank you for that very clear and thoughtful presentation on how to assess a retirement plan. Well done.
Steve in Concord MA
This content is extremely helpful, giving me refreshing peace of mind and knowing that I can rewatch your talks to stay grounded. It keeps me on track making sensible lifestyle choices, balancing financial security AND more difficultly spending money whilst we have the health and motivation to do so, THANK YOU
Great video and must watch
Nice video. They clearly needed your guidance as they were very clearly planning to overspend early on (especially on silly stuff like a new car every 5 years)
James, how much do you or any CFP typically charge a client if all we wanted was for someone to plug our numbers into the software like you did without managing our assets or anything else?
Great discussion. Have you done any scenarios for federal employees with TSP? Federal special provisions here retiring in less than two years. Just found your site and have learned a lot!
I had initially planned to retire at 62, work part-time, and save money, but the impact of high prices on various goods and services has significantly disrupted my retirement plan. I'm worried about whether those who experienced the 2008 financial crisis had it easier than I currently am. The volatility of the stock market is a concern as my income has decreased, and I fear that I won't be able to contribute as much as before, potentially jeopardizing my retirement savings.
That software is incredible. Is that something that could purchased or is it in-house only?
Great information.
James, I love your videos and have been trying to apply them to my own scenario, with some success and piece of mind. Have you ever broken down a scenario that involves per say a military retirement starting at 39 then starting their next career till 55 or 60?
Great videos!
A couple housing expenses to consider in retirement are insurance and HOA dues, along with taxes they will increase over time.
I'm assuming since you're allocating $25K for a car that it is a used car. Very smart!! My car buying rules are: at least 4 years old and pay cash! They depreciate too fast to be putting more money than necessary into them.
You can lease a new car for under $5K/year. If you have that amount allocated in your budget, it would make more sense to continuously lease new vehicles. You will face lower maintenance costs and minimize the likelihood of a breakdown on the road - which is a significant concern for us old folks.
$25k on top of a trade-in seems like a fair guesstimate. But we keep our cars longer than most folks.
One of your better videos, James. Good balance of getting into some of the planning details while also keeping it focused on the steps.
I especially liked the concept of the "severity of failure". So many planning tools just determine if you go bankrupt or not, but I like your emphasis that you can modify spending in retirement and still make it through. If the market goes down 20% austerity measures might need to be taken, at least short term.
You make very clear videos. Based on these videos and various calculators I am much better prepared for my eventual retirement. I always knew it was beneficial to have a federal pension + social security but I now understand how beneficial it will be. And yet, we all worry about health care and ending up homeless, sigh. Thanks for helping alleviate some of those catastrophizing thoughts. Cheers
They have a lot of ways to cut back if they have a poor sequence of returns, and can also take Social Security earlier if needed. An interesting case study!
Should you add in house maintenance to be more accurate?
Awesome vid! I would have been interested to see the level of success if they both decided to take social security at an earlier age and get a lower withdrawal rate from portfolio in the first 10 years.
Question: When calculating your 4%, do you calculate this on all accounts or just what is currently accessible. Eg. If I'm looking at retiring at 45 with 100k of 3mil (3% rate), is this 3m both retirement accounts and taxable brokerage? Eg. 2m in taxable and 1m in 401k. Or is this 3m in taxable and whatever is in 401k is calculated when it becomes accessible?
I live in Singapore, I wonder if your retirement academy can be applied to other jurisdictions?
The problem I have with the Monte Carlo simulations that I’ve used before (with USAA, Fidelity, First Command, and Pinnacle) is that I don’t think their worst case scenarios are bad enough. So what if you did 10,000 runs; what are the parameters within that black box that we can’t see?
Thoughts on selling out of the money covered calls within ROTH IRA to generate income or invest in covered call ETF's like JEPQ/JEPI that return about 9% dividend?
James, what do you think of the concept presented in the book, "Die with Zero"? It kind of looks like that in order to get the Monte Carlo analysis to give you a Likelihood of success in the 90+% range, that you are more than likely going to die with 1 to 2 times what you started with when you retired.
Dave Ramsey will be so happy with that 8.8% withdrawal figure if it can be sustained throughout. But I do agree with the explanation. It does seem doable as long as this scenario and lower withdrawals and higher inflow of money is met
I understand this is a rough plan but assuming zero housing costs after mortage is paid off is missing a big expense home maintenance assuming 1 to 4% of the home value per year that is $7500 to $30,000 or $625 to $2500 a month that is a pretty big chunk of change
What is the risk ratio of these portfolios?
James, was the $9600 per year pre-Medicare insurance premium cost per person or for both of them together? Same question for the $4000 annual Medicare out-of-pocket estimate. Thank you,
It’s Right Capital. Good program, but user license is expensive.
Great video James. Very similar situation to ours in about 5 years time with similar goals. We will definitely be travelling. Here is a thought. Taking 3-4 big trips a year for $20K is costly and can be stressful (think long flights, packing, go-go-go). Rather, pick a region and go live as an Expat for 6-12 months. Living expenses in Asia, South America, many parts of Europe can be 1/5 to 1/2 as much as the US and many countries offer Retirement Visas allowing you to stay for a 1yr+ with proven retirement income/assets starting at age 50. Local regional travel also tends to be frequent, easy and cheap. Additionally, it gives you a better chance slow down and absorb local culture, language, and food. Lastly, many countries have inexpensive country health plans you can pay into with a standard of care as good as the USA. Summary: Your living and travel expenses could be less than $30K year! Happy Retirement!
That’s what we’re thinking too! We know our current home isn’t our retirement home, so we’re thinking to sell and travel for a few years with either no home or a cheap rental crash pad while we figure out where we want to settle down long term.
Your medical costs were probably low, you only included the cost of the premiums, you should include $4-5K for the deductible as well, since the deductible needs to be paid before the insurance kicks in.
He puts in $4,000 for what he called "additional out of pocket costs" @ 3:25. He didn't separate it very well in his speaking from medicare, but he did call it additional out of pocket costs so I think he has that entered.
I like your videos, I didn't see anything about the income earned from their $1.2 mil IRA's? They can still lock in a 2 yr cd for 4.5%, guaranteeing $54,000 with no risk. They should stay in equities and would do even better.
Where are you accounting for long-term care costs, like assisted living or nursing home care?
No one accounts for these. Because there's a very low percentage of people that has to go into a nursing home.
Car every 5 years? My car is model 2011 , maintenance is only oil change.
Yep should be every 10 at their age
How does the 4% rule stand up against having two well diversified etfs that grow their dividends year by year? That way, they live from dividends versus selling 4% of their investments?
What type of software do you use?
That is Wright Capital Software. He is showing only a fraction of what it can do.
Why not run one of these with a blue collar couple with no more than 500K. More real world sample.
Well, old school “blue collar” would have had a pension. Perhaps less money, but generally guaranteed to keep up with cost of living.
If you want to just see a similar example where they spend less, just divide by 2.
Realistically, that's not enough most of the time
If they sell their 700k house move to a 300k house would be safer plan?
What software do you use? How can I get a session or do this at home?
Here's another question James. Please what do you think will be the next APPL in terms of growth, considering the unpredictable market volatility?
@@katrinaotto7545lol
I certainly wouldn't feel comfortable drawing down a portfolio. I'd rather continue to save and increase my net worth while retired, and that's just what I've done. It really depends on how willing you are to take considerable risks.
Question for you smart boys? Girls? I am in the 24 per cent tax bracket and the tax table for 24 goes to like 191000 then it goes to 32 per cent. Question? If my taxable income is total $100000 for 2024 then can I convert another $91000 from a traditional workplace 401K to Roth without going into that 32 per cent bracket? Or can I go over 191000 up 14600 with the personal exemption? The personal exemption lowers my taxes down to $17600 or so could I now convert $91000 plus the 14600 from the traditional to a ROTH? So up to 191000 after the exemption is still the goal to not trigger the higher 32 pc? 😊
since so many people are not married it would help if your examples didn't focus so much on married couples. Also if you considered the case case of people forced to retire.
I am 74 and spending more time and money traveling than ever.🎉
And a lot more than $20,000.
All depends on how you travel. There's traveling UA-camrs that only spend 3,000 a month and travel the world.
Pay off the house before you retire kiddos.
Agree and make sure your cars are paid off so you back into retirement without these expenses since there's no social security yet.
James, love your content. Would you include more diverse names when you do the case studies?
You can't be serious
Why not take social security earlier so you have income and not draw down your portfolio so drastically over the first 10 years?
Yep this is another thing. I'm pulling at 62.
They have plenty of money. They should just enjoy their yourth, and adjust the plan if shit goes south in the future. I used to think Monte Carlo was the way to go, but its pointless. You can always adjust in the future. Because you adjust every year, the Monte Carlo servers no purpose. Your better off using flat percentages.
My gut feeling was telling me they did not have enough for that kind of distribution for 1.6M. I would be more comfortable if they had 2 to 2.5M.
I would have retired based off his numbers. I would have worked until the mortgage, cars were paid off for sure.
I keep hearing these examples with people assuming that they won’t be traveling as much after 80, but my parents are traveling more after 80 on nice cruises than they ever had before.
The reality is most people are dead before they get to 80.
@@fialee8ca132correct the average age of life is 76. Anything past that and you're in overtime
At 60, you prob have 12 good/ok years of life left. Working 2 more years is using up 20% of your life. Is working really worth 20% of your life? By the time you hit 73yo, you prob don't want to travel as much, your body really starts to break down, and that's if you make it that long,.
survey says... no! stop at 60 if you can, no later.
🤘
Seems to me that they have enough cash to live off for the first couple years thus driving their health care expenses under ACA to practically zero for those years
👍🇺🇸
I really like your process, best I have seen on UA-cam. The only place I see that you may be missing is related to home ownership. Every 25 years your home needs a new roof, which is a big dollar item. Then the HVAC system every 10 years, another big ticket. How about your house needed new carpet, paint, furniture, applicances, etc. I don't see you adding money every so often to provide for them.
$20k a year for travel? That is only for two round trip international first class tickets. Also, $25k every 5 year for car? What car could you buy for $25k?
If you buy a $35,000 car and then trade it in after a certain amount of time it might work.
Presumably they’d be trading in (or privately selling) their well maintained 10 year old car each time, so add that value to the 25K.
The couple chose their travel budget. Presumably they are not planning to buy $10K RT airline tickets. Maybe they are flying coach or traveling domestically. Their call.
We use points/miles to travel and rarely pay cash for tickets. We travel internationally several times a year for far less than $20k.
Toyota Corolla LE
When you have 8 mil you can retire.
FIRST
First!
I could have told them they could retire with that 2 million dollar portfolio without all the gymnastics.
But would they believe you and be comfortable with the plan without the gymnastics?
In your envy you missed the point.
Too complicated, too optimistic and too risky.
This video is too slow and drawn out- I just can't watch it.
If Frankie Munez kept his good looks growing up.
😂