A Keen Wealth Advisors Case Study: “Can We Retire With a $3.3 Million Nest Egg?”
Formulating a one-time, bulletproof financial plan would be incredibly simple if you could supply an advisor with just two pieces of information: exactly how much money you're going to spend every single year in retirement, and your date of death.
Absent those two impossible data points, an effective, comprehensive financial plan has to be an ongoing, personalized, and adjustable process, no matter what size your nest egg is.
On today's show, we talk through another case study to illustrate how my team at Keen Wealth helps folks plan for a retirement that's much more than just their numbers.
Meet "The Smiths"
"The Smiths" have $3.3 million in investible assets. Their home is worth about $1 million, and they will have their mortgage paid off in the next 12 months.
Mr. Smith wants to retire at the end of the year, when he will be 70. His wife, 66, likes her job and doesn't have a set retirement date in mind. For the purposes of their financial plan, we assumed they're going to retire at the same time. Like just about every other aspect of their plan, we can always go back, change her retirement date, and recalibrate.
The Smiths have both been good earners throughout their careers, and if they were to take Social Security when Mr. Smith turns 70, they'd receive $85,000 per year in combined benefits.
So, on first blush, it sounds like the Smiths are in pretty good shape, especially if you were to compare their situation to some broader data on retirement savings. According to the Federal Reserve's 2022 Economic Well-Being of U.S. Households, mean household retirement savings is only $100,000. For folks aged 56-61, the average is $250,000 saved.
Needs, Wants, and Wishes
In just about any financial plan, the single biggest lever that you can pull is spending. We want seniors to enjoy themselves in retirement, but we also want to make sure they don't spend indiscriminately or treat their nest egg like a jackpot.
A good starting place with a sustainable spending plan is to create three spending categories: Needs, Wants, and Wishes.
The Smiths estimate that they will "need" to spend about $113,000 per year, after taxes. In our planning process, that figure actually went up, because we estimated they would spend $11,000 per year on Medicare premiums and out-of-pocket Medicare expenses. They're also currently paying monthly premiums on a term life insurance policy that expires in a couple years. Considering their current assets, it is likely we would advise them against extending that coverage.
The Smiths "want" to spend an additional $42,000 per year: $15,000 in gifts to family and charity; $20,000 on a couple annual vacations; and another $7,000 on ordinary entertainment, like a few nights out every month.
And they "wish" to do a household remodel. When folks don't have specific designs or quotes, we typically estimate a major remodel will cost 10-20% of the home's value. Of course, their home will be paid off in about a year, so if this is still a wish, the Smiths might consider tapping into their equity to fund this project.
Helping folks arrange these Needs, Wants, and Wishes into a comprehensive financial plan is one of the most rewarding parts of being a financial advisor. It's so fun having discussions about how folks plan to arrange their schedules around the things they love doing while also fulfilling lifelong dreams one bucket list adventure at a time.
But sometimes this part of the discussion also recalibrates the expectations folks have about retirement. For example, we might have to ask a couple, "What's more important? Retiring when you want to retire, or realizing this exact retirement spending plan?" Faced with that scenario, some folks will decide to work longer and earn more. Others might rearrange their Needs, Wants, and Wishes, and adjust their spending plan accordingly.
Finally, we have to analyze how spending goals affect a plan's longevity and flexibility. We want folks to be able to take a cruise every year, or make that dream move to Florida. But we also know that the plan has to be durable enough to last decades, and flexible enough to adjust to happy surprises, like a new grandbaby, and unexpected challenges, like a slip-and-fall.
The Result
If you've been doing some back-of-the-napkin math throughout this case study, you probably figured out that the Smiths' $85,000 Social Security benefits are going to go a long way towards covering their spending plan. To arrive at a more complete analysis of a plan's potential for success, Keen Wealth relies on our professional expertise, and a final review by powerful Monte Carlo computer simulations, which test a plan against a wide range of financial scenarios.
The Smiths' plan came back with a 95% probability of success, which wasn't surprising given their asset base and spending goals.
But that figure also assumes that none of the data fed into the simulation changes during decades of retirement. And that's just not how retirement works! Markets fluctuate. Your interests change. Your goals change. Your relationships evolve.
And that's why, the next time we meet with the Smiths, the first thing we're going to do is review their plan and make any adjustments that are necessary to keep them on course for the retirement they’ve worked so hard to achieve. At Keen Wealth, our planning process is never “done,” it’s a continually evolving process that responds to the unique details of each person’s life.
No matter what you need, want, or wish for from retirement, come visit Keen Wealth and let’s talk about how we can help.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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