How Much Can I Spend In Retirement with a $2 Million Portfolio?

We're going to take a look at their plan to see what are the things they need to be mindful of , what are the common roadblocks in front of them , and then what are the specific action items they can take to make the most of what they've worked so hard for . Take to make the most of what they've worked so hard for .

And as we go through these numbers , please keep this in mind it does not matter if you actually have $2 million in your portfolio , much more or much less . These strategies , the framework that we're going to work through , is what you need to understand if you want to make the most of your retirement strategy .

So let's take a look , and before we do , here's the before and after , with a few very basic changes that this couple made . This is what their portfolio looked like , and what we're going to show is how . This is what their new strategy looks like , their new portfolio projection looks like .

Not because they're working longer , not because they're doing some crazy thing that's going to actually impact their bottom line , but because they're avoiding some common pitfalls and making a couple of strategic changes that will make all the difference in their retirement strategy .

So with that in mind , with that outcome in mind , let's take a look at where they are today and show you the three things they need to be mindful of , the three things you probably need to be mindful of if you're in this situation , so that you can make the most of this .

So here's an overview of Michael and Lisa and , as we go through this , this is for educational purposes only . This is not a guarantee . None of this is intended to be advice . Just to illustrate how a couple of these concepts work in practice . Michael and Lisa have a couple million dollars you can see between their joint account , 401ks , iras , roth IRAs .

Then they also have their property . Their property is $800,000 , $900,000 or so of equity in it . Now , unless they sell that property , of course , that's not going to change in any type of retirement income , but still something we want to factor in for plain purposes . Their initial goal , their first goal , is to retire at the age of 65 .

So , number one can we do it ? And then number two how much can we spend ? If we do , as we start to work through how much can they spend ? We need to start with an understanding or an expectation of how much might you want to spend . And 14,000 is the number that they gave , and where that really comes from is $10,000 per month .

Keep in mind , this is after taxes but $10,000 per month for them to be able to maintain their lifestyle , and then an additional 4,000 per month , 48,000 per year they want to spend on travel . So these were their numbers .

Now , keep that in mind , because there's a very important change we're gonna make here that doesn't actually impact their lifestyle , but it's gonna dramatically change the projection of what's possible . So $14,000 per month , and on top of that , we're going to assume that they have funds that they need to set aside for healthcare .

So they're both going to be continuing to work . They have coverage through their current plans until Medicare age , but once they do retire at 65 , they'll be on Medicare . So their Medicare Part B and Part D premiums . And then , in addition to that , we're planning for $4,000 per year for each of them of out-of-pocket expenses . Today they have income .

That income , of course , is going to go away when they're done working , but they will have social security . Both of them intend to collect at age 70 . You can see that here in the software . Between now and retirement , they're both going to continue putting 10% per year into their 401ks . They have a little bit of a match .

But what we want to Can they do this ? Do they have enough money not just to last for the first few years of retirement but to last all the way throughout retirement ? And then , once we know the answer to that , how can we optimize that and give them some strategic action steps to take to make the most of all this

? So this is always what I like to do when helping someone to understand if they can retire . The lifeblood of anybody's retirement plan isn't their tax strategy , not their estate strategy , not even how they're invested . It's what will their cash flows look like .

So this cash flows page , what we're looking at , is all the various income sources Michael and Lisa will have from now throughout retirement and all the various expenses they will have now throughout their retirement . Now , I'll mention this a couple of times , but if you want access to the same software , you can get so in the Retirement Planning Academy link .

Link is in the show notes below . But if you want to follow along as we do this , planning Academy link Link is in the show notes below . But if you want to follow along as we do this , you are more than welcome to do so through that software as we go through this .

This is just a breakdown of what will their income source be for the next three years Salary you can see Michael's salary , lisa's salary that's going to cover their needs for the next three years . Then that goes away . Once salary goes away , social security kicks in , but not right away . As you can see here .

There's going to be a bunch of zeros until Social Security starts at the age of 70 . So , going back to summary , here's their total income flows and what we want to compare that to is what will their expenses be ? Their expenses are broken down into a few categories . One this is just that basic living expense $14,000 per month .

That starts at $168,000 per year , but inflation is going to happen . So how do we ensure that number keeps up with inflation ? Well , we index it by 3% every single year , using that as our assumption . Next is housing .

Housing is on top of this , and the reason we separate housing , as you can see here is because at some point that mortgage is going to be paid off , which means our property taxes , their insurance , that will continue forever . But the principal and interest stops at the age of 70 . So that's no longer an expense we need to factor into their plan .

And then , on top of that , we also have healthcare . We're shown zero for healthcare and that's simply because they're covered through work between now and age 65 . But after that , here's what their expenses will be Taxes and plan savings .

But really what we want to know here is , if we look at net flows , this takes their total expenses , it subtracts any income sources and the income flows and says this is the amount you need to pull from your portfolio . So you're one of retirement .

As you can see , if their total expenses are $252,000 , they have no social security , no salary they need to pull $252,000 from their portfolio . If we fast forward a few years , once they have paid off the mortgage , once social security is kicked in , you can start to see how this number really changes pretty dramatically . But that's what that is showing us .

Now here's what we want to do with that . We don't just want to know how much you've taken out of your portfolio . We want to know can your portfolio sustain that for the rest of your life ? And if we keep in mind , go back to what those numbers were , they were taken out about a quarter million dollars in the first few years of retirement .

Quarter million dollars divided by their portfolio value , it's a pretty high withdrawal rate . Today they have a couple million dollars in their portfolio by the time they retire , somewhere in the neighborhood of maybe low to two millions . It's about 10% per year they're taken out and rising . So what does that mean ?

Well , it means the next couple of years , the next few years , they keep adding to their portfolio , but then they retire and they pretty quickly start to draw their portfolio down . Not a successful outcome . So the immediate response to can I retire is no , and the secondary response of how much could I spend ?

That response would be well , less than we're looking at right now . But that's before we make a couple of key

changes . The first is this when we look at our retirement monthly expenses of $14,000 per month , this is a common mistake I see most people make . They look at all of their expenses that first year of retirement and they just use that number on a go-forward basis .

But if I look at that number , I look at 14,000 per month and I ask Michael and Lisa how much of that or how much of that is travel ? That's about 4,000 per month , 50,000 or so per year . I then ask how many years do you think you'll actually do that for ? At age 90 , are you still spending 50,000 per year on travel , like you are at age 65 ?

And the answer is , of course not . We're probably going to travel more so the first 10 years of retirement and really after that we don't see ourselves traveling all that often . Maybe little trips here and there , but not to the extent that we will the first decade . So I say , well , what if we simply do this ? What if we change this ?

What if we say the 10,000 per month on a go-forward basis is your monthly expenses and travel . What if we separate that out but we only include this for 10 years ? If we do that , what impact will that make ? So that's one change we're going to make Now .

Practically speaking , that is reducing how much they're going to spend compared to the original scenario , but it's a more accurate representation . They weren't really going to spend as much all those years . The second thing you can see right here , what's the retirement allocation ? This says moderate right here . Moderate in this case is assuming a 60-40 portfolio .

So many people go into retirement and think I'm 65 , I'm retired , I need a 60-40 allocation in my portfolio . Sometimes that is the case . Many times it is not . There's a far better , more intentional way of doing that , based upon what are your actual needs from your portfolio .

How will that change over time and , most importantly , what's your risk capacity versus what's your risk tolerance . So that's a topic for a different day . But when you start to understand that , you start to understand that moderate portfolio , at least for Michael and Lisa , might not be the most appropriate . So what if I change this to growth ?

Now , quick note here I could change this to anything . Just because I change this to something does not mean it's guaranteed to happen . So I just want to acknowledge that Just because you assume something's going to happen doesn't guarantee it's going to . But what this is looking at is a moderate portfolio .

Under these assumptions , it's going to grow at about 7% or so per year . A growth portfolio defined here it's a 70-30 portfolio is going to grow at about 7.5% per year . Guarantee , no , but practically speaking , if we look at history as our guide .

Is it unreasonable to expect that you would get a little bit better performance if you have a little bit more in stocks ? No , that's not unreasonable to expect . So that's the assumption we're going to make here . And then , finally , tax strategy .

If you recall , when you look at the breakdown of Michael and Lisa's assets , a lot was in pre-tax accounts , a lot was in taxable accounts . That is a perfect opportunity to implement a Roth conversion strategy .

In those first few years of retirement , start to systematically shift some pre-tax assets to Roth assets and in doing so , you get more of your money into tax-free or Roth accounts . Now I'm not going to show you the full modeling out on the back end , but what we did is we said what if , every single year , they converted up to the 12% bracket ?

So in a year they were under the 12% tax bracket , maybe even under the 10% bracket . Convert enough of their pre-tax accounts to Roth accounts to get them to max out that full 12% bracket . So if they do all of these things ? So keep in mind , nothing dramatically changed here . They didn't have to work longer . They didn't have to work longer .

They didn't have to save more . They didn't have to make any serious sacrifices to their retirement lifestyle . Yes , we better accounted for the fact that they're not going to be spending $14,000 per month indefinitely , just the first few years of retirement .

But in doing so , you can start to see that this scenario analysis , this portfolio projection , started like this . Now it looks far more like this If you go to the probability of success here . The probability of success for Michael and Lisa started at 32% , now up to 74% Now . This is why retirement planning is so important .

Retirement planning isn't just saying start with your assumptions and see what the output is . It's saying start with the assumptions , see where that gets you , and then what are the little things we can tweak and change along the way . What if we took this a step further and said Michael , lisa , do you think you're going to be in your home forever ?

They say no , at some point we're going to downsize . What does downsizing look like In this case ? I modeled out . What if they downsize in 15 years and they buy something in today's dollars worth about $700,000, ?

Well , when you start to model all this out , their new projection took them from looking something like this you can't retire , you need to work longer , you need to save more .

You need to make some serious cuts to look in something like this , we're saying not only can you retire , but the amount you can spend might actually be more than you initially thought that you

could . So , as we look at this plan for Michael and Lisa , what can we take away from this ? Your numbers are going to be different than their numbers , but the framework , the takeaways , are this Number one have an accurate accounting of what your expenses will actually be , not just day one , but how many of those expenses will change over time .

Will the mortgage be paid off ? Will your travel expenses go down ? Will expenses go up over time because of medical bills or long-term care ? That needs to be modeled properly for you to have an accurate sense of how much are you actually going to need to support throughout your retirement .

Number two is your portfolio allocation the right allocation for you , or is it based upon some rule of thumb , someone else's idea of what your portfolio allocation should be ?

Little shifts , little allocation changes maybe don't seem like a big deal , but when those are compounded over years and decades , it can have a huge impact on what's possible for your retirement . And number three do not neglect tax strategy .

If you're neglecting tax strategy , you may be leaving tens or hundreds of thousands of dollars , or even more , on the table , which , practically speaking , means there's less left over for you to actually spend and enjoy in your retirement

. So , if you don't have the plan , get access to something . Work with a financial advisor . If you want to work with someone , we do this all day , every day , for our clients . Reach out to us here at Root Financial . You can go to our website Link is in the show notes below to schedule a time to talk with someone here .

Or if you're not ready to talk to a financial advisor , that's okay too , but get access to a planning software and get access to a framework . You can get this one , if this looks attractive to you , using the link below for the Retirement Planning Academy .

But at the end of the day , there's too much to be left on the table if you're not planning proactively for your retirement . And then , finally , for those of you that don't have a financial plan in place , but maybe justifying it as , as long as I keep saving and working and growing my portfolio , that will cover my lack of an actual financial strategy .

Well , take a look at this video right here . In this video , I lay out five reasons that might be time for you to retire right now , because , as much as you're focused on the financial side of things , there's a tremendous cost to your actual strategy by continuing to work even after you no longer need to .