$4 Million Saved, Here's How He Retired 5 Years Earlier

A client came to us with $4 million saved, convinced he had to work until 63. His advisor of 12 years said he was on track. But when we rebuilt his plan from the ground up, we found three assumptions that were costing him five of his healthiest retirement years.

In this episode, Taylor walks through the three specific changes we made to his plan, without adding a dollar to his savings or increasing his risk, that moved his retirement date from 63 to 58.

If your plan uses flat spending projections, a default investment allocation, and no Roth conversion strategy, this video will show you what you might be missing.

Watch next: The Truth About Retiring at 55 Versus 65 https://www.youtube.com/watch?v=7MqmdDqnWcQ&t=5s 

Resources:

Website:  https://www.demarsfinancial.com/

Phone: (509) 536-9556

Schedule an introduction call with Taylor: https://bit.ly/demarspodcast

Check out Taylor's YouTube Channel: https://www.youtube.com/@TaylorMadeRetirement

Taylor's Newsletter: https://demars-financial-group.kit.com/827c64fe0e

Disclaimer: Since we don't know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Demars Financial Group, LLC or its members cannot be held liable for any use or misuse of this content. Advisory services offered through Demars Financial Group LLC, a Registered Investment Advisor. Demars Financial Group is not affiliated with LPL Financial.

Transcript

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Today's content is pulled from Taylor's YouTube channel. If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description. Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life with third generation certified financial planner Taylor DeMars.

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What if the last five years you spent working turned out to be completely unnecessary? What if you already could have been retired? Traveling, spending your mornings however you wanted, and living life on your terms? And that's exactly what almost happened to a recent client of mine. He came to us convinced he had to work until age 63. That's what his advisor of 12 years had been telling him. But once we rebuilt his plan from the ground up, we found he could actually retire right now, at 58, using the exact same amount of savings and investments, but not by making more money, not by taking on more risk. And I don't think he's the only one. I feel that there's a lot of people out there working more years than they need to. Not because they don't know what they're doing, but because their advisor built them a plan that was designed to grow wealth, not actually used it in retirement. And those are two very different things. My name is Taylor Damaris, I'm a certified financial planner and tax strategist. And today's video, I'm going to show you the three things that we changed in his plan, the three assumptions that were costing him five of his healthiest years, how he fixed each one without changing his savings or his risk, and how you can check whether your own plan has the same blind spots. Let me introduce you to James, who's 58 and a senior engineer at his firm, and his wife Julie, who's 56, running an administration role at a regional hospital. Together, they've saved just over $4 million, just under $2 inside of Jane's 401k, 1.1 inside of Julie's 403B, about 800,000 inside of a joint brokerage account with a paid-off home. By almost any measure, they had done everything right, saved, invested, and stayed disciplined for over 30 years. And they've got a wish list of things they want to do, like celebrate their 35th anniversary by reliving their honeymoon, making the hike to Machu Picchu while they still got the knees for it, and do a cross-country road trip and an RV that they've been talking about doing for a decade. And every three years, they want to take their entire family on a vacation where James and Julie can cover all the expenses, because that's the type of memory making that matters to them. Their advisor, he's not bad, because for many of those 30 years, he did a great job at what he was good at building their Nasdaq, growing the portfolio, keeping them diversified, and staying in touch. But when James started asking different questions, the answers were vague. When can we actually stop working? Unclear. What does our drawdown look like? General. Should we be doing Roth conversions? Nothing specific. It wasn't bad advice, it was just the absence of the advice he was looking for that mattered most. And the urgency for James's questions spawned from retirement researcher Dan Heilett's recently published article called Your 12 Good Years. The idea of this article is that the average 60-year-old has roughly 12 to maybe 15 years of real vitality left. Not years until death, years where you've got the energy, mobility, and independence to actually do the things that you save for. Your active years end well before your total lifespan does. This means for James, his healthiest and most active years are right now. The hike to Machu Picchu doesn't get easier when he's 66. And each year that he works past what's necessary for a year, he trades a slightly larger account balance that he may never spend for years he'll never get back. And that math should bother anyone who's within five years of retirement. So James did what a lot of people in his situation do. Started watching retirement videos after long days of work, but not casually, deliberately. And that's where he found our channel, watched a few videos, and booked a call. When James came to work with us, we plugged in his plan and saw that the Monte Carlo score gave him a 95% chance of success with $13.8 million in ending assets. And most people would say that that was a grand success and the plan was doing its job. But for me, that was the first clue that something needed to change and arose certain questions. So when we started plugging things in, yes, he could easily retire at age 63 and make things work. And a 95% score means that out of 950 of a thousand possible scenarios, he doesn't run out of money. And in fact, he's projected to have a median outcome of $13.8 million, where it's frankly understandable how an advisor would say, this is great and stay the course. But there are three problems with this scenario that we saw that could be optimized for his specific situation. And the first is straightforward. It made the assumption, like most calculators and most advisors make, is that the $12,000 a month that they wanted to spend on their lifestyle was going to be adjusted upward for inflation every single year. So their 60-year-old cells and their 90-year-old cells would be essentially assumed to be living the same lifestyle. As if the younger, more vibrant version who's doing international trips is the same one who's wanting to do that at age 890. Second, his plan assumed he would have a standard 60-40 stock-to-bond asset allocation of a moderate growth portfolio inside of his retirement plan rather than figuring out what they needed for their specific life and risk tolerance. And the third problem, no tax strategy, no Roth conversion, no withdrawal sequencing, just a default order. And for someone who has spent 30 years building this, I can see where an ending asset projection of 13 plus million feels reassuring. But reassuring and ideal in my book are not the same thing. The 95% score doesn't mean that the plan is just great. It means that James and Julie might be leading years of their lives on the table, of their most healthy, vibrant lives to earn dollars they may actually never spend. So I had to ask James the question: what if we could get you to retire this year instead of in five years at 63? And to visualize it, this is what it turned out to be. The only difference between the scenarios was instead of them retiring at 63 and 61 respectively, at ages 58 and 56. And as you could tell, the Monte Carlo score looks a little different. No longer are we looking at 95%, but a 67%, where two-thirds of the outcomes are projected to work with an ending projected asset value of $3.7 million. And if I were to show this to most people, they would probably say the same thing as James's former advisor, which is uh let's just keep working a few more years. And when I showed this projection to James, he probably said the same thing that you're thinking right now, which is what are we even doing here? And I had to say that the numbers don't work here because the plan was built with accumulation phase assumptions. Every input, how you spend, how you're invested, how you're taxed is all on autopilot. And although there are levers to pull to modify, no one has been tinkering with any of them. So in the accumulation phase, this standard set actually works fine. Being on autopilot is great, but transforming your portfolio into a paycheck, unwinding it, creates additional complexity that requires a specific skill set. And in our opinion, in order to start this transition, you need to build a retirement readiness roadmap with five planning pillars to build a comprehensive foundation. We define those as being income, taxes, investments, estate planning, and healthcare planning. And sort of like a Rubik's Cube, they all affect each other. You can't modify one side without pretending it doesn't translate into something in the others. And being able to see the whole picture at once is where the magic comes together. And if you're sitting with a plan right now that looks solid on paper, but doesn't answer the question of when you can actually retire, the link is in the description where you can book a call with me and we can map it out together. So let's get started. The first thing we changed in his plan was one of the simplest, and the one I see wrong in most every plan I review. Where again, he assumed that he would be spending the same amount adjusted upward for the rest of his life. Which makes sense, except that I don't see my clients in their 70s, 80s, 90s spending an identical amount. Does this feel realistic to you? Think about the people you see in mid-80s. Are they making as many international trips as you're wanting to do right now? Are they spending the same way they did in their 60s? And for most, the answer is no. And the research backs it up. So, for our opinion, we want to model out what feels realistic. And you probably heard this concept as being the go-go, slow-go, and no-go years, where this initial years you're feeling right now are the go-go ones, where you have the most health, energy, and desire to do the traveling and checking things off your list. And you're spending the most that you likely will from a discretionary standpoint. The slow-go years for most people come in their mid to late 70s, where you're still active, but your mind or body makes you slow down. And then no-go years, spending naturally drops even more. But healthcare costs can go up meaningfully. So when we re when we rebuilt his plan, the first thing we changed was modifying to this retirement spending stages methodology, assuming that in his mid-70s, their lifestyle expenses would drop by 20%, and then again in their mid-80s. And this was only affecting those month-to-month expenses of the $12,000 figure that they had. And this is in addition to everything else in their plan, such as wanting to rotate their cars regularly, the regular family trips that they talked about, healthcare expenses, and more. Now, while that spending change alone moves the needle, it's the most intuitive of the three. And the next one is one that most people haven't questioned. It's the lever that gave James and Julie the most room to work with, which is starting with their portfolio allocation, assuming a moderate portfolio allocation of a balance of 60% stocks, 40% bonds. Pretty standard. At first glance, it feels responsible because you have a blend of aggressive and conservative, which is sensible. But what nobody had done for them was to reverse engineer what they actually needed for their particular lifestyle. And this is where we walk through clients our buckets income approach. Instead of treating all of their money the same way, we time segment it by when they need it. Money they need in the next, say, five years stays conservative. And then if they need more money beyond five years, we address uh invest it for growth. Because a dollar that doesn't need to be spent for that long can weather a few storms along the way. And we reverse engineer that by having gone through their plan to the point where we get familiar enough with what their expenses and cash flows look like so we can see on a year-by-year basis what is coming down the pike. So in their specific situation, we can see where their plan anticipated needing to be able to withdraw up to $475,000 in just the first year of retirement. And then thereafter, $376,000, $300, $386, and so on. These numbers are critical because it allows us to build out what is that forecast for their bond bunker. So heaven forbid we enter the next great recession, they know that they are able to weather another five years before the market recovers and still take care of their needs, wants, and wishes. And most people don't address this because it's easy to set and forget it rather than do the extra work to reverse engineer it. So for their situation, a 6040 model portfolio was actually far too conservative, and they could address something that is considered a growth portfolio, being a balance of about 70% stocks and 30% bonds. So this got them thinking about what else is in there that nothing that no one had else had checked. And this was the answer that made the biggest move of all. As you might recall, James and Julie have significant savings for retirement, and most of it is tied up inside of their tax-deferred bucket, between their his 401k and for her 403B. In their scenario, they have the vast majority of their assets there, which feels like a ticking tax time bomb. And at their age 75, the IRS is just salivating for those RMDs to kick in when they are forced into higher tax brackets because of these compounding growth assets inside of a wrapper that gets taxed at the most expensive rates for every dollar that exits that bubble. When we look at it visually, you can see how their projected taxable income is estimated to grow over time if they don't do anything about it. In these early years, they can see where their taxable income is going to be ultra low, and then they start taking regular withdrawals for years, which feels fine. But by the time that they start RMDs in their mid-70s, it's already too late, where they're locked into the 22% income tax bracket for many years and even forecasted to tip into the 24% just on the federal income tax level. So in contrast, we estimated what bracket made the most sense not to pay more in a lifetime tax liability than they had to. And then that's where we came in with filling in their tax bracket. And the green shaded area shows the contrast where, as opposed to bleeding up into higher and higher tax brackets, we're filling up the 12% tax bracket early in retirement so that they're able to capture and shuffle those dollars from the tax-deferred bucket into the tax-free one. Those essential five years may make a massive difference in their viability of their dollars. Being able to allow them to stretch it and put more dollars in their pocket versus IRSs. As simple as it might seem, being able to do Roth conversions to the tune of about $118,000 in the first year of retirement and about $125-ish,000 in the subsequent years until his age 62, that compounding growth inside of the tax-free bucket makes a massive difference. Where even by their age 75 with Roth conversions, instead of being forced into higher brackets because of RMDs, they've now been able to build up a nearly $2.5 million Roth IRA tax-free nest egg. These Roth conversions are not possible not only because they retired five years earlier, but because they were able to leverage and optimize the withdrawal sequencing of their accounts, prioritizing withdrawals from their taxable funds that have much more favorable tax rates. We're able to forecast how much we anticipate them to convert in each year because we know where the tax brackets land, but in each year, things out of their control and in their control may dictate that we convert a higher or lower number because convert too much and you bleed into the next tax bracket where you're essentially given the IRS a tip, convert too little against the target, and you're leaving money on the table. So it's that ongoing calibration that makes the magic work. And when you bring all these pieces together, you'd be surprised how the optimized spending strategy, optimized asset allocation, and the optimized tax strategy all come together to improve the strategy all at once. So instead of looking at a 67% Monte Carlo score with $3.7 million in ending assets, we can see what the optimized scenario looks like instead, refreshing it to increase the Monte Carlo score from 67 to 81% and up to $8.2 million in projected ending assets in today's dollars, just by changing those three levers. And I guess as a bonus, we were able to find in their scenario how instead of delaying their social security benefits to age 70, like most advisors do to maximize, understandably, we still delayed James' Social Security benefits until his age 70 to maximize their survivorship benefit, but turned on Julie's benefit at her age 62 in order to start a fixed income source so they could use their wealth while they had their health earlier in retirement. And you may be asking, why does it feel like a success when we still see such a discrepancy between an 81% monocolor score and a 95% one? Because yes, we're predicted to have a 19% possibility of running out of assets throughout their entire lifetimes. However, in our opinion, an 80% money color score is our sweet spot, because the closer you get to 100%, the more you're essentially guaranteeing yourself you'll be the richest person in the nursing home, which for us and most of our clients is not their definition of success. Obviously, if we get to a 50% money color score, it feels like making it through retirement is like a coin flip. And so instead, 80% seems to be a sweet spot where in the overwhelming cases will be fine, but 81% is still giving me confidence that this is an optimal retirement plan because of an unsaid assumption in any retirement plan, which is there are going to be things that we cannot possibly predict in the next couple of decades. But what's most important is being able to be agile and adapt to what may come our way. It's sort of like making a cross-country road trip where you'll plug into a GPS going from one end of the country to another, and Google Maps will tell you turn by turn how and when to turn to make it there at a certain destination. But inevitably, there are going to be things such as traffic, weather, and construction that are going to make you make certain detours and take a different path along the way. Not drastically, but just enough to make sure that you make it from end to end. And I feel it's the same way with retirement planning, where we're looking at a long enough stretch that rather than trying to overstave in these earlier years of retirement, we're able to set a plan that gives us confidence that to set the course and be willing to make course corrections as needed. And that's the real magic of what we're looking at here. As opposed to waiting until his age 63 to work so he could feel that confidence of a 95% score, just changing the levers of the spending strategy, the asset allocation, and a tax-optimized plan didn't make him have to add an additional dollar or take on any additional risk, just challenging three status quo assumptions that were baked in from his accumulation years. Redesigning this allows him to feel not only the confidence to retire, but the permission to be able to do those things that they need and want to do. It's giving James that confidence that he did pull the trigger to retire at age 58 instead of at age 63. It's the same building blocks and the same inputs that allows us to re-engineer for an optimized outcome that unlocks James and Julie's five healthiest, most active years to do their anniversary trip, the Machu Picchu hike, the RV trip across the country, and the ability to with confidence pick up the tab for their entire family, whether it be a nice dinner out on the town or a life-changing memory-making trip. And the difference between these two ages is of course not just money, but being able to ask better questions, looking under the hood and asking, are these assumptions still accurate? Is the spending realistic? And does this fit the phase of your plan? And if nobody in your life is asking you them, then you owe it to yourself to find yourself who will challenge you to find the right answers. Just last week, I had another client tell me that every year she worked past what was necessary would be a year that she can't buy back. And if you're curious about what this looks like for your specific situation, click the link in the description or scan the QR code on screen to book a call with me, where at our firm we don't hand you off to someone else. We'll pull up your numbers, your stress test, your plan, and see what's possible with what you've already saved. And if you want to go deeper on the biggest tax lever of all, which is the strategy we've talked about today, watch the video on screen now where I break down the hidden window between 55 and 65 and show you exactly how to convert the right amount of dollars in Roth strategy at the right time.