Approaching retirement with a healthy 401(k) balance is a great achievement, but knowing if it’s enough to retire comfortably—and sustain you through your golden years—requires careful planning. In this article, we’ll walk through a real-life case study of “Andy,” a client with $1 million in his 401(k) who wants to retire at 62. We’ll cover essential topics such as retirement income planning, tax strategies, and investment allocation.
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Andy, like many diligent savers, has invested consistently in his company’s 401(k) plan, accumulating $1 million by age 60. Here’s a snapshot of his financial situation:
We start Andy’s retirement analysis with a Monte Carlo simulation, a statistical model that forecasts the likelihood of a successful retirement by running 1,000 different scenarios of investment returns, inflation rates, and expenses. Initially, Andy’s simulation indicated only a 27% probability of success if he retired at 62. Let’s explore how strategic adjustments to his retirement plan improved his outlook.
Andy’s portfolio was heavily invested in a target-date fund that leaned conservative, with less than 50% in stocks and the rest in bonds. For a retiree planning for 25+ years in retirement, this approach could expose him to inflation risk, which erodes purchasing power over time.
Updated Allocation Strategy:
This change boosted his probability of success to 49%, a significant improvement.
After discussing options with Andy, we considered delaying his retirement until age 65. This adjustment would provide him with several benefits:
Delaying retirement to age 65 raised his probability of success to 74%. This shows how even a few additional working years can dramatically improve retirement outcomes.
Claiming Social Security at the right age is a critical decision for retirees. For those with other financial resources, delaying Social Security until full retirement age or even later can provide a significantly higher monthly benefit. In Andy’s case:
Ultimately, Andy chose to claim at 65, as the additional working years made him more comfortable with this option. This approach provided him with a stable income floor while balancing his desire to retire earlier than the traditional full retirement age.
A common assumption in retirement planning is that expenses will rise steadily with inflation. However, retirees often experience varying spending needs over time. The Retirement Spending Smile strategy addresses this by recognizing three distinct spending phases:
By applying this spending model, we aligned Andy’s budget to better reflect his retirement lifestyle, increasing his probability of success to 83%.
Once Andy enters retirement, the sequence and location of withdrawals become vital to reducing taxes and maximizing his savings.
Since Andy has both a traditional and Roth 401(k), we recommended he roll over his accounts into a Traditional IRA and Roth IRA upon retirement. Using asset location, we:
This adjustment alone added over $520,000 to his projected lifetime assets by reducing tax liabilities on withdrawals.
By structuring withdrawals in a specific order, Andy can minimize his taxes and extend the longevity of his portfolio:
This strategy not only saved Andy on taxes but added over $300,000 to his projected end balance.
Roth conversions can be beneficial for some retirees by reducing future RMDs and allowing for tax-free withdrawals. However, since Andy is likely to be in a lower tax bracket in retirement than he was while working, Roth conversions wouldn’t yield significant tax savings for him.
Instead, we recommended monitoring this option on a yearly basis, especially if tax brackets or Andy’s income needs change.
Andy’s situation is a classic example of how small adjustments can yield significant results in retirement planning. By taking a comprehensive approach, we improved his retirement outlook from a 27% to an 83% probability of success. Here’s a summary of the strategic steps that made a difference:
Each of these changes not only brought Andy closer to his dream retirement but also demonstrated the value of personalized financial planning.
For anyone approaching retirement, understanding the interplay between retirement income planning, taxes, and asset allocation is vital. If you’d like more guidance on navigating your own retirement plan, reach out to us at Spark Wealth Advisors for a consultation. And for more insights on retirement and financial planning, subscribe to our channel for future updates.
With the right strategies, retirement doesn’t have to be daunting—it can be a well-planned, fulfilling journey.