Why You Can Retire Two Years Early with $2 Million Dollars

Full transcript includes subheadings:

Introduction: The Flaw in Traditional Retirement Planning

So the title of the video today is Why You Can Retire Two Years Early with $2 Million.

And in my opinion, the reason that you can do this is because of a flaw with traditional retirement planning.

And to explain what I perceive to be a flaw, I’m going to explain how traditional retirement planning has worked.

How Traditional Retirement Planning Works

So traditional retirement planning in the context of determining is your nest egg big enough to support your desired income stream throughout your retirement years?

And my opinion is flawed by a little bit. And I’m going to explain why and why it has some pretty significant implications as it pertains to when you retire.

So usually when you do an income projection to see if you have a nest egg big enough to retire, most of those projections will assume that you have a certain amount of income in your very first year of retirement, and the amount of money that you need each year increases with an inflation rate.

Sometimes you’ll see that inflation rate at 3%, I would say, is the most common I’ve seen. A lot of advisors will use 4% to be on the cautious side. And what that means is if you start off with $90,000 of income your first year of retirement, five years down the road because of inflation, you’re going to need to withdraw $105,287 just to keep the same lifestyle.

And then each year, the amount goes up and 30 years down the road, instead of needing $90,000 to live the same lifestyle, you would need to pull out $280,000 of total income to live the same lifestyle that you did in year one.

And so obviously, that’s going to put a lot of pressure on your investment portfolio to support.

The Real-World Truth About Retirement Spending

The problem with this, and where I think the flaw comes in, is that I’ve been doing this for 29 years now, and normally what I find with a very high percentage of my clients is the amount that they spend in their early years tends to go down.

They tend to spend less as time goes on. So they don’t need to keep up with inflation.

And in addition to me seeing this in practice over the last 29 years, the Bureau of Labor Statistics does something called the Consumer Expenditure Survey, which shows that spending on average throughout the country tends to decrease as age increases, especially throughout retirement.

Why Does Spending Decrease?

So then the next question is, well, does it decrease because people just don’t have money to spend? Or does it decrease because they just don’t need to spend as much because they’re not as active?

My personal observations on average is that people tend to spend less just because they’re not as active as they were in their early retirement years.

And what I have witnessed in my practice is similar to what I’ve seen in other research. The National Bureau of Economic Research did a study, and they found the fraction of people satisfied with their economic situation is considerably higher at older ages than at ages near retirement, which would imply that people are spending less as their age increases, not because they don’t have any money left in their nest egg, but because they’re simply not as active.

So if you believe that you’re going to spend less in those later years of retirement, there’s a good chance you can retire earlier than what those traditional income plans are telling you.

The $2 Million Portfolio Example

And to do a little example on this, I tried to keep this as simple as I could. And on the internet, there’s a lot of free calculators out there where you can mess around with this.

But Dinkytown.net has a variety of different retirement calculators, and one of them just allows you to put in the total amount of your nest egg. In this example, $2 million. And I just put that this person wanted to spend $90,000 out of that nest egg per year. I assumed a real conservative investment rate of return of 5%, and I put down an expected inflation rate of 4%.

Traditional Projection: Money Runs Out

And what this shows you is that this $2 million runs out of money in about a year, a little before 2050. So the money doesn’t even last 25 years in this example. And if you’re a person that wants to make sure you have at least 30 years, which a lot of retirement income projections will do, I would say that’s the most common number.

So if you want to make your money last 30 years, this is telling you you don’t have enough money.

Adjusted Projection: One Simple Change

But if we just change one variable in this example and the only thing I changed is I used a 2% inflation rate instead of a 4% inflation rate, you can see in this example the money lasts almost 35 years.

So in this example it’s showing, hey, you can retire if you want your money to last 30 years with these assumptions. So a pretty huge difference. A difference of almost ten years extra that your money lasts simply by reducing the inflation rate. Well, why would I reduce the inflation rate? Because in my opinion, most people don’t spend as much in their later years, so they’re not going to keep up with inflation when they’re spending throughout their retirement years.

And so again, I do think that there is a flaw in traditional retirement planning that’s making people work in many cases years longer than what they actually have to and still have a comfortable retirement.

Beyond the Income Projection: What Else You Need

So if you’re going to be retiring a little bit earlier, if you want this type of research done and you’re looking at, well, what else do you have to have in order—you know, there’s a lot more that goes into it than just running an income projection.

Tax Planning

You have to make sure that your income streams are lined up properly to minimize your taxes.

Social Security Strategy

You need to know when and how to take Social Security.

Health Insurance Before Medicare

It’s important to make sure that you know if you’re going to be retiring before the age of 65, what are you going to be doing for health insurance to get you to Medicare age?

And there’s a lot of planning you can do with the Affordable Care Act insurance, or a state-sponsored version of Affordable Care Act insurance.

But those costs are based on your modified adjusted gross income. And it’s important to have all of these different things in order before you pull the trigger. It’s not as simple, in my opinion, as just running an income projection that says you have enough income and calling it quits.

You got to make sure all your ducks are in a row.

Get Professional Guidance

If you want to take a closer look at this with an advisor, you can meet with one of our Certified Financial Planners here on a free 15-minute, no obligation call. It’s a great way to just see if you’re on the right track. You can sign up for this by going to BernickeWealth.com, or you can click the link we’ve provided in the video.

So if you are in a situation where you’re wondering if you can retire, but you don’t want to have a firm that specialized in this, I’ve written multiple articles on this for the Journal of Financial Planning, Forbes, and a variety of others.

And every all the Certified Financial Planners in our office are very in tune with this type of planning.

And if you want to get a second opinion, we’d love to help you out. I hope you learned something from the video today and can’t thank you enough for your time.