Most people assume working two extra years means significantly more retirement income. But with a $2 million portfolio, the difference might surprise you. After 40 years of helping clients with retirement planning, we’ve found that many people work longer than they actually need to. In this video, we walk through an income projection analysis comparing retiring at age 60 versus age 62 with a $2 million portfolio. Using a Monte Carlo simulation with a 99% success rate, we show you how much potential additional annual income you gain by working those extra two years. The answer? It could help you make a more informed decision about when to retire.
Full transcript includes subheadings:
Does working an extra two years actually make that big of a difference when it comes to retiring if you have a $2 million portfolio?
Today we’re going to quantify the extra amount of income you would have if you worked just another two years with a $2 million portfolio.
Mark and Kathy Johnson Example
So to illustrate how big of a difference it makes working an extra two years with a $2 million portfolio, I’m using a very, very simple example.
We’ve got Mark and Kathy Johnson here, and the assumptions that I use for this is that they’re both looking at retiring at 60 years old.
It says annual expenses here, but I would equate this more to total income. So total income coming in. So from this amount that they could safely withdraw from their nest egg and get from other various sources of income, we’re assuming that their total income coming in is $105,000.
And so from that $105,000, they’re going to have to pay federal income taxes and potentially state income taxes, depending on the state they reside in, and whatever they have left over after that is what they can spend. So for total income, I assumed $105,000 is where they’re at. And for both Mark and Kathy, I assume that at 67 years old, they’re both going to draw Social Security and each of their Social Security totals $30,000 apiece or $60,000 total.
So again, I know this is a very simplistic and crude example, but it at least gives us kind of a baseline on how big of a difference this makes. You can see with those assumptions up here, it shows a 99% overall probability of success. And for those of you who aren’t familiar with income projections that use a probability of success, sometimes you’ll hear this referred to as a Monte Carlo analysis.
Understanding Monte Carlo Success Probability
Essentially, what this means is, in this example, we’re assuming that they’re going to have a 30 year retirement. They want enough income to get them to 90 years old. And we don’t know what 30 year time horizon they’re walking into. The markets, the investment markets for their $2 million portfolio could be very good, could be kind of good, could be average, could be below average, or could be awful.
If it’s awful, there’s a chance that they could run out of money. As you can tell by this 99% overall probability of success, which means there’s a 1% chance that they’ll run out of money before they hit 90 years old in this example. And it’s also worth noting for this example, we used a hypothetical 3% inflation rate.
With that said, with all these different variables, they have a 99% success ratio under these assumptions. And now if we just change one thing and say, well, gosh, what happens if they retire two years later at age 62 with all the exact same assumptions that we had before? And you can see instead of having $105,000 of total income coming in, they have $110,000 worth of income coming in. So it increases their annual income that they can safely withdraw and still have a 99% success ratio by $5,000 from $105,000 to $110,000.
$5,000 Annual Increase Breakdown
So what one has to ask themselves is, in this situation, if they were thinking about working an extra two years, is an extra, roughly a little over $400 a month, worth it? If it is, then it’s worth working an extra two years. If it’s not, well, then it’s worth considering retiring a little bit earlier. And obviously there are more things that come into play than what we’ve illustrated here, which will make this a little bit more complex.
But in a nutshell, working another two years on a $2 million portfolio isn’t a landslide difference of extra money coming in. And hopefully this gives you a better understanding of what working another two years with a $2 million portfolio would add to your annual amount of income that you have coming in.
Next Steps with Bernicke Wealth Management
I hope that a quick analysis that we did with the income projection, with somebody that had a hypothetical $2 million portfolio, and how big of a difference it made was helpful for you, understanding how much of a difference it can make if you decide to retire. If this is something that you would like to talk about in more detail, our financial advisors and Certified Financial Planners at Bernicke Wealth Management would be happy to give you a second opinion on your current situation, to make sure that you’re thinking of all the different variables as it applies to your unique circumstances. You can set up a 15 minute call by going to Bernicke.com or clicking on the link that we’ve provided. Thank you very much for your time today.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
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