Almost every day we have conversations with clients and friends about their concerns about having enough money to enjoy retirement.  I mean truly enjoying all the years after retiring without watching budgets and constant concerns about running out of money. 

To answer that question, it takes a serious evaluation of many moving parts that include changes in your budget, inflation, tax law, family needs, the stock market, healthcare, the economy, etc.  It is such a relief to our clients when we can construct the financial parameters that determine a high probability of never running out of money. 

The breakthrough is like someone has been driving down a dark country road with headlamps that only project 10’ that suddenly beam brightly for 100 yards. Formerly, one would be driving very cautiously not being able to see more than 10’.  However, one can drive faster and more confidently once the headlights illuminate 100 yards ahead. 

As this example applies to financial planning, many people we first meet are too conservative with their investments and typically have significant amount of funds in bank savings.  This is due to their uncertainty about their future finances and they would rather not take any risks even while the stock market or real estate is in solid growth cycles.  This decision to remain cautious compromises their portfolio return by missing good opportunities and ironically their ability to sustain financial independence.

Let’s look at a case study on this topic of sustainable financial independence that had a different twist to their situation.  A long-term husband and wife client of Up Capital Management (we will refer to as John and Angela) was invested in our Growth & Income model portfolio with a small but comfortable amount of cash in bank savings. 

The last financial plan we prepared in 2020 indicated they were financially stable, and the Up Capital Model Growth & Income portfolio had been exceeding the baseline target projection by almost 50%.  They had both retired and were comfortably enjoying their retirement.  However, in the subsequent years, Angela’s health had declined and in 2024 Angela had tragically died.  John obviously struggled emotionally, and I had the privilege to spend time with him during the following months to share his pain and discuss his plans.  It was a memorable time for both of us.

Recently, I called John, who is doing much better, to schedule time to update his financial plan and discuss his goals going forward.  Surprisingly, his monthly spending increased above the original forecast in the 2020 financial plan primarily due to upgrades and repairs he is doing on their multi-acre property.  One of the first reports we prepared is assuming no changes with the amount he was withdrawing from his investment accounts to supplement his social security and pension.  We needed to determine his current financial trajectory and if there were any issues later.  This is the equivalent of shining a beam of light miles down the road to see if there are any potholes to avoid. In John’s case, if he maintains the same budget and withdrawal rate, he will deplete his entire investment portfolio in 2044!  The chart below illustrates his account values that slowly declined in his early years and then plummeted in later years when it was too late to make changes.  Increases in withdrawals due to inflation accelerate account declines as investment earnings can’t keep up with redemptions. Ugly.

Since John’s mother is in her nineties and still doing well, this was not good news.  So, we had to roll up our sleeves and start looking for alternatives. 

Sometimes the solution for clients is to delay retirement and work a few extra years.  Delaying retirement has three key benefits.  The first is investment accounts have a few more years to appreciate. Second, withdrawals are delayed and third, one can continue contributing to a 401(k) plan during these extra years of employment.  Also, many employers offer additional matching contributions to the 401(k). 

However, John is retired and not interested in going back to work.  He discussed his desire to sell the property in a couple of years with significant equity and a small mortgage.  He mentioned he would like to move to another state close to his family.  He said that if he did this the various properties he was looking at were about $200,000 or so less than his California property.  The extra $200,000 could be invested and available for passive income.  Also, the new out-of-state property would be bought with all cash and eliminate his $1500 per month mortgage payment.   The result was magic and now he maintains financial independence for the rest of his life.  The chart below illustrates his retirement account values in light blue and the $200,000 taxable account values in dark blue.

Now with one successful alternative defined, we began to explore other options.  John asked what if the out-of-state property ended up costing more and there was no extra money from the sale of his California property?  John mentioned that if he did pay more, he would not take on a mortgage and there would still be the savings of $1500 each month by not having a mortgage payment.  In this scenario, again John maintains his financial independence.  Notice the chart below that illustrates an appreciating taxable account in later years as some IRS mandatory retirement distributions flow into a taxable account for investing.

Then John asks what if he decides not to move or make any real changes in his budget.  Even though his mortgage will be paid off in a couple of years, he would like to maintain the same budget and spend that savings from not having a mortgage on travel or buying a new Harley. His question is, without the $200,000 investment, exactly how much does he need to reduce his withdrawals from his retirement accounts now and still maintain financial independence?  After running several scenarios, the surprising adjustment in his withdrawals was only $375 per month!  His investment account has declined over the years but still has a projected value of over $550,000 in 2024 and he still owns his property without a mortgage.  The chart below shows the slow decline in his investment accounts over the next 20 years.

Due to the time we spent with John and doing this exercise we determined his current situation was on track to financial ruin that occurs in his later years when he will have few options to recover.  Most importantly, we discovered that small adjustments in his budget now have significant improvements in his financial future.  John may or may not sell his property or move out of state.  However, he made the smart decision to reduce his monthly account withdrawals immediately by $375 until he decides what he will do. 

If he wanted to build greater wealth, his options include reducing his account withdrawals by more than $375 per month, investing some of the equity should he move out of state, and/or investing the savings from not having a mortgage.  Three successful options that don’t include doing the same thing.  

Lastly, this process is not a one-and-done exercise.  We will be meeting with John every year to update his financial plan as life is a continual experience of change as John very well knows.

What Does This Mean to Me?

Knowing now the trajectory of your financial future is gold. For John, it was the proverbial experience of turning on the beam of light 100 yards down the road and seeing some real potholes that could be avoided now with a few adjustments.  If you have not done this type of financial analysis of your situation and don’t know the financial path you are on, we welcome the opportunity to discuss how we may be able to assist you and your family in achieving your financial goals.