William and Debbie McKinney (71)

William retired from his job as a finance executive for a jewelry company in New York at age 57. Seven years later, William and Debbie moved to Newport, North Carolina where they still reside. They enjoy boating, scuba diving, managing their investments, and spending time with their grandchildren.

Balance Sheet

Cash-Flows

* Plan assumptions: Both live to 95 with a 5% annualized investment return

Will They Run Out of Money?

It’s not likely, we estimate there is a 2-25% chance that the McKinney Family runs out of money.

One contributing factor to their financial success was their move to North Carolina where it costs about 60% less to live than in New York. If they had not moved, it’s almost certain they would run out of money. Increasing their expenses by 60% only gives them a 1%-12% estimated rate of success. Likewise, the McKinney’s other successful practice is close management of their budget. An increase of $1,500/month in expenses causes a 23% decrease in their probability of success.

One item that could rock the boat is their investment strategy. Mr. McKinney recently found no value in bonds and moved their entire account to stocks. This was a costly move with the S&P 500 down 19.44% last year. Realistically, Mr. McKinney could have lost even more than that; many individuals struggle to trade their own accounts because they can’t remain objective when their life’s savings is on the line. Taking on this unnecessary risk in their portfolio could significantly impact their plan. Using our stress testing technology, if Mr. McKinney can’t produce the annualized 5% return assumed in the plan but instead achieves 4%, the likelihood that they run out of money rises to 34%. In this case, they would likely need to adjust their spending even more to get their plan back on track.

Ironically, bonds currently provide a low-risk 4-6% yield. So, they could maintain their plan’s high probability of success by locking in their target return of 5% using mostly bonds.

Irma Clement (60)

Balance Sheet

Cash-Flows

Goals

• Documenting her travels through photography
• Pay off mortgage in 2023
• Sell NJ home and build a home in NC
• Help with nephew’s college tuition

* Plan assumptions: Live to 95, 5% annualized investment return, home relocation nets $0.

Ms. Clement is an exemplar of the FIRE Movement which embodies financial freedom, an early retirement, and closely managing a budget. When she retired at 46 her portfolio was $1,100,000 and it has now grown to $1,600,000, during which time she also withdrew living expenses. We like to call this stage escape velocity—when investments start earning more than withdrawal needs, with the net result that clients actually save money in retirement. How do you save money in retirement? Let’s look at Ms. Clements first year if retirement as an example: Assuming she gets a 5% return, her portfolio makes $55,000 ($1,100,000 * 5%) in her first year of retirement. However, she only spends $50,000 each year, leaving an extra $5,000 ($55,000 – $50,000) to save into her portfolio, which will continue to grow along with the other funds invested. Overall, Ms. Clement has done a great job of living off her investments and finding a passion that keeps her busy.

Will She Run Out of Money?

With a 94% probability of success, Ms. Clement’s financial plan looks set. So, what could go wrong? By the software’s estimates, if Ms. Clement continues to spend less than her portfolio makes, her estate could be worth $4,800,000 when she dies. Consequently, she could look at increasing her budget or spending more than my estimate on building a home in North Carolina. But, even after that she might still have a sizeable estate.  Then the question becomes what kind of legacy does she want to leave? There are ways for a retiree to begin leaving their legacy during their lifetime. Ms. Clement is starting to do this by helping with her nephew’s college tuition; but what’s next?

Setting aside the numbers, each case demonstrates how important hobbies are in a financial plan. Mr. McKinney’s love for scuba diving consumes most of his time and played a role in their move to North Carolina. Ms. Clement’s love for traveling the world helps her find purpose and she can share her journeys through photography. They have both found their passion which is difficult for many once they achieve financial freedom. If you no longer needed to work, what would you do?

Jeff and Deborah Goldman (65)

Jeff is a retired pilot who suffered a disabling injury in 2010. His wife Deborah previously served in the Israeli army and was diagnosed with polycystic disease in 2009. They currently reside in Mesquite Nevada and spend much of their time at home due to their medical conditions, but they enjoy watching movies together.

Balance Sheet

Cash-Flows

* Plan assumptions: Both are currently 65 and live to 95, 5% annualized investment return, military pension is only income currently, SS benefits estimated off $100,000 salary for Jeff.

Will They Run Out of Money?

It’s not likely. Our software estimates they have a 100% probability of success.

Their budget flexibility is the driver of their plan’s achievements. The Goldmans cut their spending by almost 44% to accommodate their lack of disability income in the past year. The new budget forces them to make dramatic lifestyle changes, but what if they didn’t need to? Mr. Goldman made the choice to delay taking his social security benefits until age 70 to maximize their lifetime benefits. However, our estimates show that he could start taking social security benefits now, providing the latitude to maintain their previous budget of $110,000/year. This option only decreases their plan’s success by 4%, so why wouldn’t they start taking their benefits now? Mr. Goldman is only focusing on one factor used for determining when to claim of social security benefits.  

The other piece of piece of the puzzle is life expectancy or the number of years you can expect to live. There’s a breakeven point with social security benefits that depends on how long you’ll live. It’s true that delaying social security until age 70 provides a higher benefit but what if you then pass away at 72? With Mr. and Mrs. Goldman’s complex health needs their life expectancy may differ from the average retiree. Therefore, it might make sense for them to claim social security before age 70 to maximize their lifetime benefits—depending on their personalized break-even point.

The last item they may need to consider with their chronic conditions is long term care. The Goldmans signaled that they want their savings to fund future medical developments for their chronic conditions however those funds might be better allocated towards their future medical care needs. Usually, medical expenses increase over your lifetime, but with both Mr. and Mrs. Goldman having chronic conditions it’s easy to see the need for in-home help or specialized care coming sooner than expected. Rather than waiting for medical innovations, they may want to develop a long-term care plan that details the kind of care they wish to receive and get an estimate of how long they will need it. Unexpected long-term care can be a huge financial burden, so it’s better for them to start planning for the realities of this expense.

Connie Gores (68)

Connie is a retired university president living in Forest North Carolina. She has found many new hobbies since retiring and even picked up some old ones like dancing and playing piano. She stays busy by spending time with her grandchildren, working part-time as a head coach and consultant, and holding board member positions at various charitable organizations.

Balance Sheet

Cash-Flows

* Plan assumptions: Live to 95, 5% annualized investment return.

Will She Run Out of Money?

It’s not likely. Our software estimates she has a 98% probability of success.

We are estimating that Ms. Gores’ estate will be about $3,100,000. So, she has the same issue as Ms. Clement, planning for the legacy they want to leave. It’s likely she may want to leave some of that to the charitable organizations she serves. Ms. Gores also cares deeply for her grandchildren and devotes much of her time to volunteering at their school and being present in their life. What if her legacy could provide that same level of support through finances? One avenue I might suggest is setting up 529s for her grandchildren.

With a 529, Ms. Gores could invest in her grandkids’ futures by helping with education expenses and providing them with retirement savings. Imagine how Ms. Gores would feel giving the gift of a million-dollar retirement to her grandkids. The best part is, she doesn’t need to wait to start leaving this legacy, she could get started today. Thanks to the Secure Act 2.0, beginning in 2024 conversions from a 529 account to a Roth IRA will be permitted up to the lifetime maximum. This could grow to $500,000-$800,000 in tax free savings by the time the child reaches retirement age.

Both plans are successful because of how well Mr. Goldman and Ms. Gores have managed their budgets. At the end of the day, the financials are important but finding your values matters much more. These stories demonstrate how we should plan for spending that reflects our values. The Goldmans value their health and Ms. Gores her family, which is reflected in the way they devote their time and how they should plan on using their savings.

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