Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today, we’ll be reviewing a retirement plan for a 40-year-old. In this blog post, we’ll go over a case study and discuss some crucial aspects of retirement planning. Join me as we explore how John and Sarah, a hypothetical husband and wife with two children, can achieve their retirement goals. By following these strategies, you too can gain valuable insights and ideas for your own retirement plan.
Case Study: John and Sarah’s Retirement Plan
John and Sarah, both 40 years old, have a combined income of $150,000 per year. They contribute 10% of their salary to their 401(k) accounts, and they also have Roth IRAs. Dre emphasizes the importance of diversifying retirement assets, not only based on asset class and risk tolerance but also based on taxes. By considering the tax implications of their retirement accounts, John and Sarah can avoid potential tax burdens in the future. Dre suggests a balanced asset allocation strategy known as the Golden Butterfly, which allocates 20% to each of the following: total stock market, small caps, long-term bonds, short-term bonds, and gold.
Expenses and Net Worth:
John and Sarah have an approximate pre-tax retirement expense of $7,200 per month. They have various financial assets, including $100,000 in investments, $10,000 in an emergency fund, and a property valued at $380,000 with a mortgage balance of $200,000. Dre explains the importance of maintaining an emergency fund and suggests considering insurance options, particularly if they have two children.
Retirement Goals:
John and Sarah desire to retire at the age of 65 while maintaining their current lifestyle. They aim to eliminate debts, including the mortgage and credit card payments, and estimate annual retirement health costs based on the national average. Dre also addresses the potential need for long-term care, recommending preparing for such scenarios as 70% of individuals aged 65 and older will require long-term care.
Education Planning:
Regarding their children’s college education, Dre advises prioritizing retirement planning but provides a strategy for combining savings and financial aid options. He suggests aiming for $20,000 in scholarships for each child and utilizing student loans for the remaining expenses, which can later be repaid after retirement.
Retirement Spending and Withdrawal Strategies:
Dre introduces a framework for retirement spending based on guardrails. The plan involves setting withdrawal rates and adjusting spending based on market conditions. Additionally, he explains the potential benefits of Roth conversions, which allow John and Sarah to convert funds from their 401(k) to a Roth IRA with lower tax rates during certain years. This strategy aims to maximize tax efficiency and mitigate future tax burdens.
Projection and Probability:
Using a Monte Carlo simulation, Dre projects that John and Sarah have an 83% probability of success in achieving their retirement goals. Their estimated median retirement portfolio value is $4.7 million. Dre explains that making adjustments over time is necessary and encourages annual reviews to ensure the plan remains on track.
Possibility for Higher Success Probability:
Dre presents a hypothetical scenario demonstrating the potential impact of working an additional year before retirement. By investing more during their highest income year and allowing compounding interest to work, the projected retirement portfolio value increases to $6.1 million, with a 90% probability of success.
Final Thoughts:
Retirement planning is a complex puzzle, but with the right strategies and tools, you can create a solid plan for a comfortable retirement. By examining the case study of John and Sarah, we’ve gained valuable insights into diversifying retirement assets, considering taxes, managing expenses, implementing withdrawal strategies, and leveraging Roth conversions. Remember, retirement planning is a dynamic process that requires periodic review and adjustments. Start planning early, utilize valuable resources like retirement planning software, and take control of your financial future.