Breaking Down Retirement with $5M Net Worth

Speaker 1 – 00:00
Welcome to EWA’s FinLit podcast. EWA is a fee only RIA based out of Pittsburgh, Pennsylvania. We hope all listeners
of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And
we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your
family and also save time.
Speaker 2 – 00:29
All right, welcome to another episode of FinLit by Ewa. I’m here, I’m joined with my colleague Ben Rutenberg.
Welcome. Okay, Ben, so today’s topic is what does $5 million get you in retirement? We meet a lot of folks, a lot of
clients that kind of have that goal in mind of reaching that level of net worth. And the question is, what does that
actually get you? You know, some people have a goal of 1 million, some people it’s 10 million. Five feels a healthy but
very common milestone for a lot of folks these days. Right. So we’re going to walk through what exactly that means.
Is it enough, is it not enough? What factors go into that analysis, et cetera.
Speaker 3 – 01:08
Right. Yeah. And we’ve talked about this on other podcasts before, but this kind of started because oftentimes if you
go on, like your 401k provider’s website and you type in your assets, your age, how you know, and you ask it, how
much do I need? They all, they do all these, like, retirement simulators and it’ll spit out a big number. And oftentimes
that’s what people who have a financial plan are working towards is getting their assets to a certain number before
they feel that they can comfortably retire, when really there’s a lot more that goes into what you need before you can
retire. It’s all case by case dependent. And so for someone, 5 million might be, you know, 10 times more what they
actually need. For another family, it might not be nearly enough.
Speaker 3 – 01:52
It’s all depending on what your circumstances are, what your goals are, and then what risks you might face over the
next, you know, 30, 40 years to support your retirement. So we’re going to break down, like you said, Devin, what does
5 million get you in retirement? Is it enough? Is it not enough? Well, that all depends on your circumstances. And
we’ll get into more of that in the actual meat of the podcast.
Speaker 2 – 02:11
Yeah, yeah. So quickly though, what do you, what are your thoughts on those gauges? We see them all the time on
the various platforms. What do you, what do you. I have my thoughts. What do you think?
Speaker 3 – 02:21
Yeah, I mean, it’s, it’s hard because it said it at least gets people working towards a goal and oftentimes it’s helps be
a catalyst for like actually getting savings done and getting, working towards a certain number. But it’s so general
and I have a hard time with just getting to a certain number, excuse me, before you feel like you can retire because
feels a bit self serving. And the same thing is like, you know, it does not take into effect your goals. If you wanted to
work towards a five million dollar retirement, but you wanted to leave X amount for your three kids, then 5 million,
you know, that might not be enough. But if you wanted to, if you didn’t have any kids and legacy planning wasn’t
important, well, 5 million might be more than what you needed.
Speaker 3 – 03:12
You maybe could have retired five years earlier with a lower number. So there’s a lot more than just like what your
balance sheet is and what Your 401k contribution rate is that there’s a lot more that goes into that than I think a lot
of those exercises take into account.
Speaker 2 – 03:30
Completely agree. Which is a great segue into kind of the next segment per se, which is what are the factors that go
into this analysis. We talked about how these platforms make it very generalized and overly simplistic. But it can be
a nice guideline. Sometimes it scares folks. Right, 5 million, there’s no way I’m ever going to get there. What’s the
point?
Speaker 3 – 03:49
Right.
Speaker 2 – 03:49
But that aside, there are some assumptions and questions and factors that go into it. So we could maybe break
them out into factors that we can control, we or the client can control and then factors that are out of our control. I
think the factors that are out of our control are things like the return of the portfolio tax rates. I guess that would be.
Those are probably the two main ones, the things that are in our control, primarily what we’re going to spend, what
the client is going to spend, their age. And then like you mentioned, and this is very important, their goals, what they
want to do with that money.
Speaker 3 – 04:26
Let’s start with okay, you have 5 million. What is, what does that mean? Like what can you safely spend? What does
it look like? And I would say if you have a $5 million net worth, if you assume annual withdrawal rate of between 3
and 5%, you’re probably looking at between 150 and 250,000 of gross income. Now depending on how that 5 million
is structured, that can look a lot differently. So if you have $5 million in your investment portfolio and it’s all in a, you
know, let’s say most of it is in a pre tax IRA or like an old traditional 401k that you’re rolled over. Well, you’re paying
ordinary income tax every time you take a distribution from that account. So you have 5 million gross, but after taxes
are taken into account, you have significantly less.
Speaker 3 – 05:09
On the flip side, if you have a lot of money in a Roth account or a brokerage account that’s been direct indexed and
you’re cognizant of what that cost basis looks like, you could have very close to 5 million even after taxes. So 5
million is the number. But what are the tax consequences for when you take the money out? That’s extremely
important.
Speaker 2 – 05:33
So sometimes what we’re trying to say is sometimes 5 million is not actually 5 million.
Speaker 3 – 05:38
Exactly.
Speaker 2 – 05:38
You have to discount it by tax rate for sure.
Speaker 3 – 05:40
Right, Absolutely. So back to that example. If you think you’re spending between 3 and 5%, from a withdrawal rate
standpoint, you could be looking at between 100 and 200,000 of net income that you’d be spending annually. So just
to give you an example, 15,000amonth is 180,000 a year. Right. You know, depending on your age. That’s a good rule
of thumb spend to be thinking about if you have a $5 million net worth.
Speaker 2 – 06:06
Yep, yep. And so 15, 20K a month net gross, what is that generally getting somebody who’s in their retirement years,
let’s say 60s and 70s.
Speaker 3 – 06:15
Yeah, I mean, if you’re thinking about, you know, what are retired people spending money on, maybe this is a good
case by case conversation. But if you had a family that was spending 15,000amonth in their working years, well, a
common pushback would be, well, hey, my mortgage is paid off, my kids are out of the house. Do I need
15,000amonth in retirement? Well, we often see, yes, those expenses do drop off, but you have significantly more
time on your hands now that you’re retired. You want to take all these trips that you’ve been putting off when your
kids were in the house, when you were working, you didn’t have time to do it. So while those big expenses do drop
off, typically people are spending more on the variable side in retirement. So as the fixed expenses come down,
generally variable expenses go up.
Speaker 3 – 07:02
So in theory it makes sense that you would be spending less in retirement. But we always try to model out, hey, if you
spent 15,000amonth in your working lifetime, let’s just Assume conservatively that you’re spending 15,000amonth in
retirement.
Speaker 2 – 07:15
So a similar or a bit more extravagant lifestyle than how you’re living now. Sure, absolutely. So that’s one of the
primary factors we talked about a minute ago. What about goals? So we have this discussion of, okay, not that it
begins and ends with goals and kind of what you want to do in your lifestyle, but ultimately that’s going to determine
how you are spending. Right. So talk to me a bit about how we go through that exercise of what do you want to do in
retirement?
Speaker 3 – 07:40
Right, exactly. And we’ll even ask someone on a scale of 1 to 10, kind of rank, how important these things would be
to you. So we can help design the plan to help support what’s most important to you. So the first question would be,
how important is it to leave a legacy for your kids, your grandkids, make sure that they have, there’s money left over
for them, be it, you know, inheritance through a trust, whatever the mechanism may be. But how important is it to
leave a legacy? Have a client rank it between a scale of 1 to 10. Second question would be, well, how important is it
to prioritize your financial independence? Make sure that you are spending up to your limits, you’re not having any
regrets with the trips you’re taking.
Speaker 3 – 08:22
You want to buy a vacation home, if you want to travel, all the things. How much do you want to enjoy your
retirement? Rank that on a scale of 1 to 10.
Speaker 2 – 08:32
Another big one that started interrupt is philanthropy.
Speaker 3 – 08:35
Sure.
Speaker 2 – 08:35
Charitable giving.
Speaker 3 – 08:36
Absolutely. So, you know, how important is leaving money to charity and being charitably inclined on a scale of 110.
And so having clients rank those, because I think oftentimes clients will think, well, I want to do all three of those
things. Like that. All three of those things sound good to me. But when you actually put pen to paper, you kind of
have to make a decision when you’re living on 15,000amonth. Okay, how much do I actually need to spend? How
much do I actually want to leave? There’s, there’s, you need to take action on some of those things. So ranking those
on a scale of 1 to 10, I think helps clients prioritize. Okay, what’s. These are all important, but what’s actually going to
be number one when push comes to show up?
Speaker 3 – 09:12
So, yeah, if someone says, hey, you know, legacy Planning is a 10 out of 10, I want to make sure my kids are, you
know, have a head start when we pass and they have a nest egg and things like that, you know, but they’re spending,
their spending habits are upwards on that upper echelon of what they can be spending. Well, it’s important for us to
do our jobs and say, hey, you prioritize legacy planning at a 10 out of 10 when you answered it. And right now based
on your spending, it’s probably at like a 3 or 4 out of 10 and just kind of working with clients to help realign the plan
with what’s most important.
Speaker 3 – 09:47
And so if they can get their spending down to help increase their legacy planning, then that’s more in line with what
they said was most important. And then vice versa, if they said, hey, legacy is like a 2 out of 10, you know, we really
want to make sure that we’re, you know, we worked hard for this money. We want to do X, Y and Z that we didn’t get
to do in our working years. And let’s say they’re spending way less than what they could. Same exact thing. We
would say, hey, you’ve said financial independence and enjoying it is a 10 out of 10. And based on what you’re
spending right now, you’re living as if it’s a 3 out of 10.
Speaker 3 – 10:18
So it’s just, it’s, it’s working with clients to make sure that they’re not only ranking what’s most important for them,
but it’s, they’re, they’re taking action based on those goals.
Speaker 2 – 10:27
Yeah, absolutely. And this is not a set it and forget it exercise either. We can have these discussions, you know, once
a year, every six months, every month. It just depends on how often and how dynamic their life is and things like that.
Maybe a quick side note, so we talked about travel, we talked about college for the grandkids, we talked about
mortgages. And things like that are generally fun or on the positive side, on the negative side, so to speak, of
spending. We’ve got things like medical expenses, long term care, et cetera. So how do you factor those things in
that people, 40s, 50s, 60s, whatever, they generally don’t like or want to think about. So how do you factor those in?
Speaker 3 – 11:05
Yeah, I would say biggest risks to someone in a net worth range of 5 million in retirement is like you said, market
volatility. So they retire, let’s say, at 65 and the very next year we see a 20% market drop. You know, what plan do we
have? In place because we’re not working anymore. You know, the, the plan and if you were 30, would be, hey, we got
30 more years until your retirement. You know, time’s on our side. Well, we’re in our 60s. Time’s not really on our side
anymore. We need to have a plan in place. And so that requires a lot of, you know, kind of hindsight planning. Do we
have enough safe money planned within either our bonds, our cash?
Speaker 3 – 11:45
If we have cash value inside of life insurance, do we have enough safe money structured where we can withstand a
market drop? For at EWA, we prefer to have between 7 to 10 years of safe money at all times. And that’s a huge point
because if you don’t have that safe money and you have the 20% market drop and then you need to start taking
money out, you’re locking in a lot of those losses. And what could have been a plan that was super on track, could
easily come, you know, hit a pothole and kind of go sideways is when you have to lock in a 20% loss in your first year
in retirement because you didn’t have that other bucket where you can be pulling money from to avoid that loss. So
that’s a huge risk.
Speaker 3 – 12:27
Market volatility, the second one, like you said, healthcare, you know, right now, assisted living, skilled nursing, in
home care. You know, the average cost of a facility like that could be anywhere between 10 and 12,000amonth. So
what is your plan? Are you planning to just pay that out of cash flow if and when you need the care? Well, you know,
that’s 10 and 12,000amonth on top of what you were planning on spending. You know, can your plan support that?
Oftentimes the answer is no. How would you, how else would you be funding it? Do you have long term care
insurance? Whether it’s a standalone policy, we generally don’t see that a lot. Maybe it’s a, a rider on a whole life or
permanent life insurance policy that’s becoming a really efficient way to plan for those costs now.
Speaker 3 – 13:13
So, you know, how are you planning for that? Another thing would be, you know, inflation, longevity. People are living
longer. You know, right now we like to see our financial plans run through age 100 if possible. Right now people are
living longer and inflation is, you know, rising. So there’s want to make sure that we have those buffers in place
where your plan can sustain. If you retire at the people that want to retire at, you know, mid-50s and you live until
100. I mean, you’re. I’m not a. That’s 45 years old. Quick mental math there. But that’s 45 years that your plan is to
support you. And if you have a 20% market drop that first year and you know, you really don’t want to go back to
work, that can put a lot of stress on the plan. So it’s important to.
Speaker 3 – 14:06
The hardest part about this is these aren’t. You can’t wake up at 60 and say, all right, I’m ready to plan for all these
risks. Like, let’s deal with it. On the insurance standpoint, it’s all based on your age and your health. So the younger
you are when you get life insurance or long term care insurance, the less expensive it is and you can medically
qualify for it. Oftentimes when people feel like they need that insurance is when they can qualify for it. So that’s a
huge factor. And then the safe money portion, again, that’s something that’s a bucket that you to kind of build before
you retire. It’s a lot harder to get into retirement and say, okay, it’s time to do all these rebalancing and get there. So
that was a bit of a ramp.
Speaker 3 – 14:48
But those are the three, I would say, biggest risks. Market risk, your health and then inflation and just outliving your
money. Living too long.
Speaker 2 – 14:57
Yeah, absolutely. So to that point of what we call sequence of returns risk, meaning that in the early years of your
retirement, the market underperforms what we historically have seen. What are some of our strategies at a high
level? Because we’ve got other podcasts to cover this. What are some of our strategies to help mitigate that risk?
Speaker 3 – 15:11
Yeah, so there’s a really good resource. We’ll include this in the podcast too. But it’s a. It’s like an example of three
people that are retiring with the exact same net worth at the exact same age and getting the exact same market
returns. One person gets them straight down the line, the other person gets them reversed. This is going to be up on
the screen here. So this will make sense if you’re watching it. And then one person gets the same return every year
and it shows the person that had the negative return in that first year. They still have to take their distributions, they
lock in those losses, they actually run out of money even though they had the exact same returns just flipped
because you weren’t able to ride out any of those downswings anymore because you need the money.
Speaker 3 – 15:53
So best ways to avoid sequence of returns, risk is having that safe bucket of money to pull from if and when we see
that market drop. Just as an example, let’s say someone needs $100,000 to live on in their life. That would probably
be less than what someone in this net worth range would be living on. But just to do the math, let’s say Social
Security is paying them 40,000 a year. And so there’s that 60,000 a year gap that we always want to make sure that
we have in safe money at all times to avoid taking a distribution when we see that 20% market drop. So do the math.
60,000 times seven, that’s 420,000. So at minimum, seven years worth of safe money in that example would be
420,000. You know, 10 years would be 600,000.
Speaker 3 – 16:44
So that’s the amount that at EWA, we’re saying, hey, we want to make sure we have that range in bonds, cash value,
and life insurance all summed up CDs.
Speaker 2 – 16:55
That’s what, essentially seven years.
Speaker 3 – 16:57
Seven years.
Speaker 2 – 16:58
Assets of safe assets mitigate the risk that you’re take. You’re taking withdrawals from your portfolio during down
market years.
Speaker 3 – 17:04
Yes. And so let’s go to that example. There’s a 20% drop. You’ve got a $5 million net worth. You’ve got bonds in your
portfolio that have maintained their value that aren’t working alongside the equities. You pull the 60,000 from that.
Speaker 2 – 17:20
Bingo.
Speaker 3 – 17:20
And the very next year, let’s say the market, you know, is up 10% and it recovers in the next few years. Well, you never
locked in any losses. That’s super important. And you had enough safe money where you were able to withstand that
blip in the radar. The problem becomes when you don’t have that safe bucket, you just have, you’re all in equities and
you don’t have that safe money and you have a 20% drop and there’s nowhere to turn to. You need, you need the
money. And Social Security doesn’t cover your lifestyle. So yeah, that’s a huge risk in retirement. And it’s something
that needs to be addressed early.
Speaker 2 – 17:58
Yeah. And to your point, a few minutes ago, I guess you can. But it’s very tough to wake up at 60 or 65 and say, okay,
let’s get planning for retirement. This is something that typically has to happen over decades.
Speaker 3 – 18:10
For sure.
Speaker 2 – 18:11
Yeah, for sure. And that’s kind of theme of our discussion here, is that, you know, you either have $5 million in assets
or you’re gunning for $5 million in assets. But 5 million is not. 5 million is not 5 million. What are you holding? What
risks is it mitigating? What is your spending? There are so many factors that go into that too. And you really got to sit
down and be intentional about what that number means and what that can do for you and your family and your
lifestyle.
Speaker 3 – 18:40
Yeah, and that’s of math behind that. I, you know, the example I gave with the seven to 10 years, that’s a very
mathematical approach to this. But there’s probably even more psychological and psychological considerations. The
first thing I think about is how’d you get the 5 million? You know, did you live below your means? Did you, did you
pinch every penny? Did you grind for 40 years and earn 5 million? That’s a lot different than someone that inherited 5
million. I mean, we’ve often see it all the times. The really good savers of money are really bad at spending it
because it’s a muscle to earn that money. And you feel connected to it and tied to it. You don’t want to give it up.
Whereas someone who doesn’t have that same.
Speaker 3 – 19:26
I’m not saying this is always the case, but it’s maybe easier to spend money that you inherited because you don’t feel
attached to it the way that you feel attached to money that you earned over 40 years. So that’s hard too. And that
kind of goes back to the legacy versus charity versus financial independence discussion, is how you earned your
money, I think helps dictate that conversation because people have a hard time spending money that they’ve earned.
They can very easily spend Social Security because they feel like they’ve paid into that. And that’s an easy check that
can be spent. But money that you are physically taking out of your portfolio oftentimes is harder to do for a lot of
people.
Speaker 3 – 20:09
And that goes back to the conversation of, hey, you said financial dependence was a 10 out of 10, and you’re living
off of a 3 out of 10 right now. And so it’s working with clients in that financial, and, excuse me, in that psychological
part of it, and saying, hey, it’s okay to spend. We have stress tested your plan, you are on track, and, you know, it’s on
us to push people to do the things they want to do and give them the freedom to do it.
Speaker 2 – 20:39
Yeah, absolutely. I mean, we see people all the time where their spending rate is so low. And their needs are so low
as well. Where 5 million might as well be 5 billion. They’re never going to spend that. Yeah, we see other folks where
5 million, you’re like Greg from Succession, 5 million is nothing.
Speaker 3 – 20:55
Right.
Speaker 2 – 20:55
And it just, it really just depends. And that’s kind of theme of this conversation. So bringing it back to the beginning is
it’s less about the number and it’s more about what do you want to do with your money? Do you want to give it to
your heirs? Do you want to give it to charity? How much do you want to spend? What do you want to do? And then
back to our kind of more of the mathematical assumptions. What is the inflation rate, what are the tax rates going to
be, what are our assumptions about the growth of the portfolio, et cetera. So you mix the financial with the
psychological and you have a plan and you reassess it at least once or twice a year. And then when you retire, you’re
ideally you’re all set.
Speaker 3 – 21:28
Absolutely. And another thing, back to the retirement calculator not only will spit a big number, but oftentimes it’ll
spit out how you should be allocated. So it’ll say like, hey, you need 3 million to retire. But then once you turn X age,
you should be 70, 30 and then X age you should be 60, 40 and 50. 50 and vice versa. And you know, but we barely
touched.
Speaker 2 – 21:49
Upon asset allocation itself, which is a whole other topic in and of itself. Sure, let’s leave that for another podcast.
But very, very important.
Speaker 3 – 21:56
Absolutely, absolutely. Devin, anything else? I mean, I think the hardest part about this is it’s all on a case by case,
individual basis. Like we kind of started the podcast. 5 million for someone is, it might feel very differently than 5
million for someone else. But I would say high level strategies that make sense for everyone with 5 million would be
from a preservation standpoint, having a mix of pre tax dollars, Roth dollars and brokerage dollars. If we, you know,
all three of those accounts have their advantages and disadvantages. So having not too much in one bucket I think
makes a lot of sense for someone in this net worth standpoint. And then, you know, how do you get money into a
Roth account? You can do Roth conversions. Again, these are all things that we’ve done numerous podcasts and
resources about.
Speaker 3 – 22:46
But I would say the biggest thing with having 5 million in retirement is assessing your goals. What’s most important
to you? Assessing your age and making sure that your portfolio sustains the rest of your life. And then do you have a
plan for the risks that we mentioned? What are you going to do when there is a market drop? Because if you retire at
60 and you live until 95, there will be multiple market drops in that 35 year time horizon. What’s, what is your plan?
What’s your plan for long term care, health care if your health fails? And then what’s your plan to address inflation?
You know, how are your, how are your positions growing more than inflation? All those things. If you have answers to
all those questions, you’re in a, you’re in a really good place, a much better.
Speaker 2 – 23:41
Spot than the gauge on your 4.1K.
Speaker 3 – 23:44
Again, those questions aren’t answered by getting to a certain number. You know, you can’t say, I have, I got my 5
million. The calculator said I’m good. You know, you need answers to those questions before you can, I think, have
that peace of mind to actually live the life you want to live in retirement.
Speaker 2 – 24:03
Absolutely. Absolutely. And for those listening, if you have any questions, please reach out. See you next week.
Speaker 1 – 24:09
Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful
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