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Are We Going to Be Ok? A Keen On Retirement Case Study Thumbnail

Are We Going to Be Ok? A Keen On Retirement Case Study

"Ben" and "Shirley" are 62 years old and married. Shirley retired at the beginning of 2022. Ben is still working, earning $130,000 per year and taking home about $7,000 every month.

If Ben retired right now, he'd be eligible for $24,000 per year in Social Security; Shirley could collect $20,000.

Ben has a 401(k) worth $1.1 million; Shirley's 401(k) is worth $300,000. They have $45,000 in Roth IRA accounts and $50,000 spread across their checking and savings.

Their home is worth $400,000. In 2021, they refinanced the $100,000 balance on their mortgage for 30 years at 2.75%.

They have $500,000 in life insurance coverage on Ben, and they're paying $13,000 a year in annual premiums. In part, they're paying those premiums because they have a special needs son, and Ben recently had a stent put in.

At Keen Wealth, we call these financial details a person or couple's "case facts." And on today's show, we use these facts to help this fictitious couple answer the number one question on their minds, and on the minds of many of our listeners: If "Ben" retires this year, will they be able to replace the $7,000 post-tax income they have been living on and ultimately – will they be OK?

1. The 4% Rule

As we've mentioned before, the old back-of-the-napkin calculation of withdrawing 4% per year from your retirement accounts is by no means perfect. In this scenario, Ben and Shirley are retiring relatively young, and it's unlikely that their spending is going to progress at a flat rate as they age. 

Having said that, given that this couple has approximately $1.5 million in assets, the 4% rule could provide Ben and Shirley $60,000 per year from their investment portfolio to work with, adjusted for inflation. As mentioned above, they would also have around $44,000 per year in Social Security.

Is that enough? 

Well, if Ben and Shirley were sitting in front of me, I’d ask more detailed questions about their retirement plan. For example, what's on their bucket list for their Go-Go Years? Are either of them planning to work part time? Are they concerned Ben or Shirley might need long-term care?

Much more than the 4% calculation, these answers are going to help us figure out how much money Ben and Shirley will need during retirement. And as we revisit their plan annually, it's very likely that their withdrawal rate and other aspects of that plan will look very different 5, 10, and 20 years down the road. Life happens, and our comprehensive Keen Wealth plans are designed to adjust when necessary.

2. Social Security

In most cases, we recommend folks delay taking Social Security as long as they can to maximize their benefits. Ben and Shirley's early-ish retirement scenario presents some potential exceptions to that rule. Social Security might help them cover monthly expenses or pay for health care premiums as they bridge the gap to Medicare eligibility at age 65. Or, they might need the extra income to help them care for their son.

Again, all things being equal, delaying Social Security until your full retirement age is usually the best move. But it may make sense for Ben, or Shirley, or both of them to take early benefits if it helps them answer these questions more positively.

For more information on Social Security, I highly recommend this podcast and webinar hosted by Matt Wilson, our President and Chief Investment Officer, in which he discusses some important changes coming in 2023.  

3. Life Insurance

Going back to Ben and Shirley’s income needs in retirement, paying $13,000 per year in life insurance premiums is a lot when they are shooting for living on approximately $72,000 annually after tax. Even considering Ben's health issues and care for the couple's special needs son, it's hard to gauge if keeping the $500,000 worth of coverage is worth it because we don't know one variable: the exact date of Ben's death.

It’s possible that we may advise Ben and Shirley to convert this policy into a term policy. This would lower the premiums and give us the opportunity to determine the best use for the policy's cash value without triggering big tax consequences. Although, with Ben’s recent stent, we would want to make sure he was insurable before cancelling any of the in-force insurance. And for some added peace of mind, we would explore coordinating with an attorney that specializes in setting up a special needs trust to support their son.

4. Housing

30-year mortgage rates have climbed near 7% in 2022, so refinancing last year was a great move for Ben and Shirley. Given that they have over $1.5 million in assets at their disposal, this couple might be wondering if they should consider paying off the balance on that mortgage when Ben retires. But since withdrawals from a retirement account are considered taxable income, Ben and Shirley would have to withdraw more than $135,000 to clear enough after taxes to cover the $100,000 balance on their mortgage. In this case, we would probably advise them to keep paying the monthly payment, which is a fixed expense at a low rate that we can continue to build into their plan. And, they can always choose to pay it off sooner than the 29 years but over time in a tax smart way.

5. The Markets

Many seniors in Ben and Shirley's situation might be worried that with so much market volatility, this isn't a good time to retire. I understand that concern.

But think about this from a different perspective: if you're worried that retirement and market volatility are incompatible, are you planning to jump back into the workforce every time the markets are down?

I hope not!

While the specific details surrounding a downturn can make investors feel like "This time is different," the truth is that market corrections are normal. And a good financial plan should be designed to help you keep living the life you've worked so hard to secure whether the Dow Jones is up or down.

For "Ben and Shirley" to have reached this point, where they've built up a million-dollar-plus nest egg, own their home at an affordable price, and have multiple financial tools at their disposal to help them adjust if needed, I suspect that they've both worked very hard and stuck to a professionally designed, comprehensive financial plan. And while past performance is no guarantee of future returns, I would expect that their investments will continue to generate wealth for them throughout their retirement.

And so, based on these case facts, my answer to them would be, "Yes! You're going to be OK. Let's start working on a plan to transition Ben into retirement."

As long as folks were allocated properly, that would probably be my answer to most seniors who were preparing for retirement at the beginning of this year and are feeling jittery about the markets right now. But there are no one-size-fits all answers in financial planning. Before you throw in the towel on your 2022 or 2023 retirement plans, please set up a meeting with a Keen Wealth advisor so we can discuss your personal case facts and how we can help you continue to progress towards your financial goals.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in 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 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.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

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