Every person and every family has different goals, whether that be retiring early, opening up a business, paying for their children’s college education, not running out of money during retirement and the list goes on. The one thing these goals all have in common is the question of whether or not they are attainable. We wanted to show you how we can help you project and plan for any of your goals that are tied to a monetary value. We have put together 3 scenarios for a sample family, Frank and Joanna Miller, to help them reach their goal of having enough money during their retirement. Based on their current situation the Millers will not reach their goal, but with the help of our Wealth Center we are able to make some changes to their situation that will help them reach financial stability throughout their retirement. Before we get into these scenarios let’s get to know the Millers.
Frank is 52 and Joanna is 51, they are married and have 3 children; Peter age 22, Mary Beth age 18 and Lucas age 16. Frank and Joanna wish to retire at 65 and have assumed a life expectancy of 100. Peter and Joanna have a gross income of $350,000 and their current living expenses are $140,000, but during retirement they expect their living expenses to decrease to $130,000, these expense values are adjusted annually at an inflation rate of 2.56%. Frank makes the maximum annual contribution, $25,000, to his 401k and Joanna makes an annual contribution of $3,500 to her 403b.
The Miller’s oldest son, Peter, has already graduated from college. Frank and Joanna are now preparing for Mary Beth to attend college in 2020 and for Lucas to attend college in 2022. They have estimated that it will cost them $50,000 per year per child for college education expenses. They have one 529 account for both Mary Beth and Lucas, but the account’s balance is very low and is expected to cover less than 10% of each child’s education expenses. The Millers will pay for the remainder of Mary Beth’s and Lucas’s college costs out of pocket.
Frank and Joanna currently have a net worth of $1,884,761. Their primary residence is valued at $850,000 but has a remaining mortgage balance of $330,000. They also own a vacation home worth $350,000 which has no mortgage. On top of their real estate properties the Miller’s total investment portfolio has over $1,000,000 worth of assets, which includes their joint account, Frank’s 401k, Joanna’s 403b, Joanna’s Roth IRA and an emergency fund. Their investment and retirement accounts assume a pre-retirement growth rate of 8% and a post-retirement growth rate of 5%.
They are projected to run out of money when Frank is 93 and Joanna is 92. This means they fall short of funding their retirement by 8 years worth of living expenses. In order to prevent the Millers from running out of money before age 100 we’ll look at different scenarios that can help the Millers solve their funding deficiency.
Scenario 1 – Delay Retirement
Frank and Joanna expressed that they would like to retire at 65, but if they both continue working for two more years, until they have reached 67, they will be in a more financially stable position. The additional two years of employment enables them to save more money and grow their investment portfolio, which has a substantial impact to their portfolio assets. The image below shows their current situation outlined in blue. The green represents the positive impact these two additional years of employment has on their retirement. Their portfolio assets will benefit greatly by gaining a value of over $3 million. The increase in their investment portfolio will extend their funds to surpass Frank and Joanna’s life expectancy.
Scenario 2 – Delay Social Security benefits until 70
Frank and Joanna are set to begin taking their Social Security benefits at their full retirement age. Choosing to delay Social Security benefits until age 70, rather than age 66, increases their annual Social Security benefits by 8% per year. If the Millers decide to delay their Social Security benefits until 70 they will see a positive impact just short of $500,000 to their investment portfolio. The image below outlines a period of grey from years 2034 to 2047, which reflects a decrease in their portfolio assets. The reason their portfolio assets are slightly lower during this time is because they will need to utilize more of their portfolio assets to cover their retirement expenses. The green in the image below depicts the positive impact the larger Social Security benefit will have. Delaying their Social Security benefit until 70 provides the Millers with an additional 3 years of retirement living expenses, which lasts Frank and Joanna until ages 95 and 94.
Scenario 3 – Sell Home and Downsize
The Millers purchased their primary residence for $850,000. If they choose to sell their home when they retire at age 65 it is estimated to be valued at $1,180,000. The Miller’s will profit approximately $1 million once they pay off the remainder of their mortgage. In the Miller’s situation we will assume that they want to downsize at retirement. The Millers will most likely want to reduce their living expenses and need less living space. Using a portion of the proceeds from the sale of their home they could purchase primary residence in cash for $500,000. The remainder of their profit from the sale of their primary residence, approximately $500,000, is assumed to be invested into their joint account growing at a rate of 5%. This transaction projects their money to outlive them and increases their portfolio assets just shy of $2.5 million.