Are We Saving Enough For Retirement - Client Example

hey what's up everyone and welcome to the school of personal finance in today's video we are going to do a case study for a family in their mid-40s with two children where we're going to try to figure out are they saving enough to be able to retire comfortably I hope that you find this one helpful let's get to it all right so let's Jump Right In we're going to keep it high level the married couple their names are Ron and Lori they have two children as we could see here with their net worth statement starting at the bottom here their Primary Home their residence they own their home it's worth 50 Grand they have a mortgage of $315,000 Ron currently has $300,000 in his 401k $50,000 in a Roth IRA now Lori she has a Roth 401k that she just recently started with $6,000 in it and she also has a Roth IRA with $40,000 they also have a $20,000 emergency fund and $5,000 in their checking account all right so let's take a quick look at their income and their EXP expenses so Ron makes $110,000 Lor salary is $60,000 Ron is currently contributing 12% to his 401k and he's also maxing out his Roth IRA Lor is maxing out her Roth and she's contributing 5% to her Roth 401k their current living expenses are $6,000 a month plus their mortgage payment which includes principal and interest and taxes and insurance so now Ron would like to be able to retire at age 65 and Lori would be able to stop working at age 60 and they have a goal of taking a nice vacation every year so we have a $4,000 vacation goal baked in here as as well and they always want to keep at least 20 grand in that emergency fund indexed for inflation so their question to me is am I saving enough for retirement are we going to be able to retire comfortably when the time comes and is it possible that we could even retire a little bit earlier if we would like to so let's look at a breakdown of their cash flow Year bye now this does look like a lot of numbers let's simplify it if we start on this first line right here in 2024 we see a breakdown of their cash inflows which is their income basically right so their salaries 110,000 and 60,000 then their cash outflows their annual expenses so we could see the expenses right here we have this $6,000 a month of living expenses plus their housing expenses which comes out to a little bit more than $2,000 a month so throughout the course of the year that's a little over $997,000 now they have their vacation goal which you could see we index for inflation each year and then their tax liability which is mostly withheld from their paychecks throughout the year but their entire liability for the year is is 34,43 if we click on this we can see the breakdown between federal state and their FICA taxes and now their planned savings so this is how much they are saving for retirement each year so let's click on this so 401K so we can see that Ron is saving $13,200 inside the 401K the Roth 401k which is Lori doing $3,000 and then they're both maxing out their Roth IRA so this is that $14,000 that's where we come up with this $3,200 now Ron he does have a 3% match on his 401k which is not included here that is shown on the different screen so it is calculated but we're just looking at how much they are currently saving for retirement right now so we have their total outflows and we can see the net flows the amount that would be left over which they're just saving in their emergency fund in a taxable type of savings account is 4,000 bucks for the year all right so now that we know how much they're contributing every year let's take a quick look of how that money is invested so if we look at their investment allocation we could see that they are invested aggressively in 8020 portfolio 80% stock 20% Bond so in this assumption we are going to use a 7.7% annual rate of return and now in the software we are able to use what's called a Glide path which means as they get closer to retirement and in through retirement we make the assumption that this portfolio will get a little bit more conservative because that matches reality right as you approach retirement as you start taking distributions from the account in retirement you are not investing as aggressively so we are going to use a Glide path here so as the numbers go pull forward we will be using a lower rate of return in the future and I always like to look at the tax allocation summary as well well so this shows I always talk about tax diversification so this shows how much money they currently have in tax deferred accounts like traditional 401ks traditional IAS versus Roth accounts Roth 401ks and Roth IAS so as we can see we have $300,000 in those traditional accounts and $96,000 in those tax-free those WTH types of accounts all right so now let's quickly look at a projection of how these accounts might grow over time and then we'll go back and we'll actually run a Monte Carlos simulation and see are they on track to be able to retire at age 65 for Ron and at age 60 for Lori all right so let's take a quick look at the ending balance in these accounts after their contributions and the growth year in and year out and see how much money they're going to accumulate all right so at the end of 20124 they would have almost $500,000 after their contributions and their growth in the accounts and you can see they cross over the million dooll threshold in the year 2030 so we can see the balance is growing nice in here right cuz we're using a 7.7% grow growth rate plus the money that that they are contributing they cross over the $1.5 million Mark in 2034 you can see that the Roth money right it is growing nicely they're growing this tax-free bucket along with the traditional money now this taxable account this money is growing because they have cash flow left over every year so that cash flow they are going ahead and they are investing in a taxable brokerage account and that's why we see this account growing as well now they cross over the $2 million threshold in the year 2037 and they're getting close to retirement so we could see here between 2038 and 2039 the amount in their taxable brokage account has gone down and the reason for that is because this is when Lori retires so their cash flow is no longer sufficient to cover their expenses so this is the first account that they're going to draw from that's why this taxable account is going lower eventually till it reaches zero but even with that you could see that their portfolio is still growing because they've amassed a large amount of money in here and with it growing and still contributing to retirement accounts the portfolio itself is still going up in value and then we get to the point where they are both going to be retir and you can see that they are pretty close to having almost $3 million in retirement accounts once they get to this point so you would think that that's enough you would hope that that's enough but let's go ahead and we'll take a look and see so it's interesting to look in the year 2043 this is when Ron retires and they have zero income so in that year their expenses are still pretty high $217,000 between their living expenses they still have a mortgage payment at this time the taxes that they're going to owe because now they're taking distributions from retirement accounts so they have $217,000 that they are withdrawing just to be able to live during that year and you can see they have a few years where it's up that high before Social Security starts to kick in for each of them now for Social Security let's just take a look at it real quick we have at 67 so we have them taking it at their full retirement age in this example right now now and there numbers that we could play with once we run that Monte Carlos simulation we could see does it make sense to take it at 67 for each of them or should they delay and wait till age 70 so that their Social Security will be higher at that point but we can see that social security income kicking in at full retirement age and you can see that they're living off their portfolios right there's never a point where their social security income covers their monthly expenses that $3 million that they have in retirement portfolios they need it to live on all right so let's go ahead and run a Monte Carlo simulation here so now basically what this Monte Carlo simulation is it runs a thousand different scenarios good markets bad markets everything in between to come up with a probability of success of them not running out of money at age 90 so 76% of the time they get to the end of plan which is age 90 without running out of money all right and that this bar right here with this $1.8 million that is the median amount that they end with out of those thousand simulations all right so now would we feel very confident in this portfolio in them being okay to retire at the ages that they want to retire at a 76% honestly I feel pretty okay with that and the main reason why is because this is a living breathing plan right so much stuff is going to happen to them between now in their mid-40s to the end of their plan and you have to adjust you can't just come up with a plan at age 45 and say all right this is the road map and this is what we're going to do and that's it right life throws so many curveballs at you there's so many things that's going to happen happen that they're going to have to adjust as time goes on all right so my initial thought is yes we could make this work I think they're saving enough money but would we like that percentage to be higher yes of course we would so now one thing that does jump out right out of the gate is that we are using the same expense in retirement as we were before retirement so a lot of times your expenses in retirement they might be higher initially the first few years out of retirement but then they usually start to come down a little bit as you start getting older and especially right now you know they have their mortgage they have their kids life is expensive during these years odds are they will spend less in retirement than they are currently spending right now but it's always okay to plan for a worst case scenario right but in this example I'm hoping that they're able to bring down those expenses and another thing that we're doing here is we are using just a steady expense throughout retirement right so you can see right here retirement spending inflation adjusted so it's just a steady amount they're spending the same amounts every year in retirement adjusted for inflation where I like to use What's called the retirement spending smile which I believe is a little bit more realistic where you spend a little bit more in the first few years right the go- go years where your expenses might be a little bit higher and then as you start to get older you start to see it dipping down and then as you get later on in life your expenses start to come back up because your medical expenses go up at that point and there's been different studies based on this um this is actually a good website right here what is the retirement spending smile where it's through the retirement researcher and they go through like this is what the smile looks like right so this was after a study was done where somebody who spends $100,000 a year this is what it might look like as they get older right and then as towards the end of life it actually goes up above the $100,000 so I like to use that in the retirement plans that I run cuz I think it's a little bit more realistic and you can see when I change that it actually makes a pretty tremendous difference right so we went up 10 percentage points right there just from changing to the retirement spending uh smile and then on top of that what if we chose the optimal strategy for social security for the two of them so let's click that and see so the optimal strategy is age 70 for each of them now with Social Security everybody feels a little bit differently about this it depends on a lot of factors right on your health on what your benefits are on if one spouse's benefit is tremendously higher than the other spouse so in this example we're assuming that they both live to age 90 so in that situation this is the optimal strategy for both of them to delay and take social security at age 70 so let's go ahead and refresh there and we'll see what that does so that brings us up to 90% 3.28 million right as the median amount that they pass away with so that starts to make me feel a lot better in this scenario all right so now let's go over and let's look at their savings rate I always like to look at savings rate so total annual savings for the two of them this is the 37,6 18 they are at a savings rate of 22% which is great right if you're over 20% savings rate you know that's the uh that's the Tipping Point for me if you get over 20% Then I think that's great obviously the higher your savings rate the earlier you could retire but over 20% is a solid savings rate and we could look their savings over time all right so this is how much they're saving in um in the current year and then we could see each year right they're increasing it a little bit because their salaries are going up and they're maxing out their Roth IRA every year so they're continuing to save more and more each and every year we want to retire early right so we're going to keep this retirement spending uh smile we are going to keep age 70 for social security for both of those we are going to try to cut living expenses a little bit we'll say $5,000 a month compared to what they're currently spending which is $6,000 a month which I think is very realistic and we're going to say that you know what Ron would like to retire at age 60 and Lori would like to retire at age 55 no good right so in that scenario it still doesn't work they just don't have enough money to be able to retire that soon so let's try age 6 2 for Ron and see if that makes any difference whatsoever yeah it jumps it up a little bit right so then let's say 57 for Lor and see how much that jumps it up all right we're getting there we're getting there right so uh so it is possible that they could retire early but there's just risk involved right it's going to depend on what the market looks like how much their retirement accounts have grown and what the environment is if we change this to 58 let's see so now we're getting two years off a little bit early right now we're getting there let's say two years early for each of them or what they initially thought and there are other scenarios that we could look at that would also be very realistic that we're not accounting for here like for example maybe they would sell their home and downsize once the kids move out so selling the home moving into maybe a condo or a smaller house having no mortgage also having the cash left over from selling the house that could make all the difference in the world as well so there are things that we can play with and do but we'll leave it here for this one I hope that you found this one helpful and that you enjoy looking at the numbers and kind of working through it but altogether I would say that they are doing a pretty good job saving and they will be able to retire comfortably in life but we might need to make some tweaks and some movements along the way as life goes on and things get thrown at them but overall I would say that they're doing a pretty good job saving money for retirement let me know down below if you enjoy these types of case studies and working through the numbers let me know if you have any questions on this one and I'll see you again in the next one thanks