Retirement should be a time of relaxation and enjoyment, not a source of stress. In this article, we’ll explore how a couple, who we’ll refer to as our clients, is on track for an easy retirement. Their biggest concern? Choosing which cruise to take this year! Let’s dive into the five key strategies that will help them achieve their retirement goals.
Our clients are 56 years old and plan to retire at 62, giving them six years to prepare. With a net worth of $2.4 million and an 85% probability of success in their retirement plan, they are in a strong position. Their effective federal tax rate is just under 18%, and they have $90,000 in cash, $1.1 million in invested assets, and two real estate properties. Their investment strategy currently allocates 82% to equities and 18% to fixed income, which includes cash.
One of the first adjustments we made was to their savings rate. They plan to save nearly $120,000 this year by maxing out their 401(k) and contributing additional funds to a taxable brokerage account. This strategy not only builds tax flexibility but also ensures they are saving enough to meet their retirement goals. With a 22% savings rate, they can afford to be aggressive while still enjoying their current lifestyle.
Next, we focused on their withdrawal rate, which is crucial for long-term financial health. Initially set at around 3%, this rate is designed to be flexible, allowing for adjustments based on their income and market performance. They have additional income sources for the first ten years of retirement, which will help them avoid withdrawing from their investments during market downturns. This strategy minimizes the impact of sequence of returns risk, ensuring their portfolio remains viable throughout retirement.
Our clients have chosen a more aggressive investment allocation, with 80% in equities and 20% in fixed income. While some may worry about the risks associated with this strategy, we have accounted for market volatility and have a plan in place to protect their assets. By not needing to withdraw from their portfolio in the early years of retirement, they can ride out market fluctuations without jeopardizing their long-term financial stability.
Interestingly, our clients maintain a low to moderate spending lifestyle. They have minimal debt and have developed a budget that allows them to live comfortably without excessive expenses. This financial discipline provides them with the flexibility to enjoy their retirement without the stress of financial strain. Additionally, their low spending needs allow for larger distributions later in life, ensuring they can cover any unexpected medical or long-term care expenses.
Finally, we implemented a social security maximization strategy. Mrs. Retiree will apply for her benefit at age 67, while Mr. Retiree will wait until age 70 to maximize his benefit. This approach allows Mrs. Retiree to receive income for a few years, and when Mr. Retiree begins his benefits, she will receive a spousal add-on, significantly increasing their total social security income.
By implementing these five strategies—aggressive savings, flexible withdrawal rates, an aggressive investment allocation, low spending, and a smart social security strategy—our clients are well on their way to a stress-free retirement. They have transformed their initial worries into a plan that allows them to focus on enjoying life. If you’re looking to achieve similar peace of mind in your retirement planning, consider these strategies and consult with a financial planner to tailor a plan that fits your unique situation.