Can They Retire? A Real Case Study

Print Friendly, PDF & Email

Can They Retire at 55?

How Much Will They Be Able To Spend?

Will They Run Out Of Money?

A reader contacted me this week with their detailed scenario, and asked for my input on their retirement plan.  I’ve been considering Retirement Coaching as an idea after my retirement, so I was excited to review this reader’s situation as a test case for my future coaching activity.

In today’s article, we’ll go through the things you need to look at when evaluating retirement readiness.  I’ve also created a simplified retirement cash flow spreadsheet for all of my readers to use, which I’ll be explaining in this article.  (To access a copy of this spreadsheet, click here)

The reader was gracious in agreeing to allow me to share this with you as today’s blog (in return, they received a free analysis!).  To protect their confidentiality, I’ve changed their names and won’t share any specific employer information, but all financial numbers are accurate. .

Let’s See If We Can Help Them Achieve A Great Retirement!

The Family & Their Goals


The Family:

  • Husband:  “Don Smith”, 46 years old with a 25+ year career.
  • Wife:  “Sue Smith”, stay at home Mom for 20 years.
  • Son:  Senior in college, will be independent before Don retires.
  • Daughter:  Freshman in college, will be independent by retirement.


  1. Don to retire at age 55 (in 8.5 years)
  2. Generate predictable income stream to insure investments last through retirement.


  1. Pension at retirement:  ~$200k lump sum payable at retirement
  2. 401(k) balance of $625k – 780k at time of retirement (all in before-tax IRA).
  3. Roth Account:  $20k at time of retirement
  4. Social Security:  Plan to claim at age 70 ($3800 / month)

Asset Allocation:

  • Vanguard LargeCap Fund 35%
  • Vanguard MidCap Fund 31%
  • Vanguard Small Cap 10%
  • Vanguard Int’l Stock 9%
  • Loomis Core Plus Fxd 15%

Spending Plan:

  1. $4k/month of spending (excluding federal taxes)
  2. Health insurance provided by employer post-retirement until Age 65
  3. Downsizing of home included as part of the $4k spending plan.

Tax Considerations:

  1. The state where the Smith’s live does not tax pensions < $80k
  2. 401(k) distributions are also exempt from state income tax.


  1. Would we be better off taking our lump sum pension and investing in a 15 year annuity, or a life long annuity?
  2. Have we saved enough to be able to retire at 55?
  3. Will we run out of money?

The Approach We’ll Use In This Case Study


I’ve built a simplified Retirement Cash Flow Model (click on the title to save your own copy).  Using this model, this study will analyze 2 Scenarios, summarized below:

Scenario 1:  The Smith’s would like to convert their $200k lump sum pension into a 15 year annuity at Age 55.  After 15 years, they’ll start drawing from Social Security.  Any shortfall between the annuity/social security income and spending needs will be withdrawn from their investment accounts.

Scenario 2:  Alternatively, The Smith’s could convert their $200k lump sum into a life long annuity at Age 55.  This would reduce initial payout, but would provide “longevity insurance” if they live to Age 95 or beyond.  Again, any shortfall will be withdrawn from investment accounts.

Scenario 1 & The Results:

The Smith’s are planning on converting their $200k lump sum pension into a 15 year annuity, which will bridge them to Social Security at Age 70.  By using a 15 year annuity, they’ll get higher annual income between Ages 55-70 than if they purchased a life long annuity.  However, they’ll be depended on only Social Security after the annuity expires at Age 70.

Here’s what the cash flow would look like – you can see the annuity paying $16k a year until it expires at Age 70, when Social Security kicks in at $46k per year::

scen1 incomeaa

Since the Smith’s require $45k in living expenses (before taxes), they’ll need to withdraw money from their investment accounts to make up the shortfall.  The withdrawals also have to cover the tax burden of withdrawing from their pre-tax IRA, so they will need to withdraw $38k from their investments at Age 55 to fund the gap:

Scen1 incomea


Do They Have Enough Money For Scenario 1?

In order to meet their spending requirements, The Smith’s would need to withdraw $38.6k from their investment accounts in Year 1.  This equates to a 5.5% Withdrawal Rate, well above the “rule of thumb” 4% (or the more conservative assumption of 3-3.5%).  As you would expect, this leads to them running out of money in their early 80’s as shown below:

scen1 results

Conclusion – Scenario 1:

Due to the high withdrawal rate, The Smith’s cannot expect to retire at Age 55 under Scenario 1 without a higher than recommended risk of outliving their savings.

Scenario 2 & The Results:

Alternatively, The Smith’s could convert their $200k lump sum pension into a lifetime annuity. Unfortunately, this will reduce the initial annual payout from their annuity, but they would be protected in the event they live longer than projected.

Here’s what the cash flow would look like – you can see the annuity continuing for perpetuity, and Social Security kicking in at Age 70 as in Scenario 1:

scen2 income a

Since the Smith’s still require $45k in living expenses (before taxes), they’ll need to withdraw even more money from their investment accounts than under Scenario 1 to make up the shortfall of the lower lifetime annuity.  The withdrawals also have to cover the tax burden of withdrawing from their pre-tax IRA, so they will need to withdraw $43.5k from their investments at Age 55 to fund the gap:

scen2 income b

Do They Have Enough Money For Scenario 2?

In order to meet their spending requirements, The Smith’s would need to withdraw $43.5k from their investment accounts in Year 1, more than under Scenario 1 due to the lower annuity contribution in Scenario 2.  This equates to a 6.2% Withdrawal Rate, well above the “rule of thumb” 4% (or the more conservative assumption of 3-3.5%).  However, since the annuity continues past Age 70 (where it ended under Scenario 1), they need less withdrawals from their account after Age 70.  Regardless, the heavy early withdrawals lead them to again running out of money in their early 80’s as shown below:

scen3 results

Conclusion – Scenario 2:

Scenario 2 is slightly more favorable than Scenario 1, with the investment balance on 12/31/51 $22k higher under Scenario 2.  However, The Smith’s are still not able to retire at Age 55 under Scenario 2 without a higher than recommended risk of outliving their savings.

Recommendations for The Smith’s


1.  The Smith’s should check with their employer on their pension specifics.  They initially believe the “lump sum” is the only option available to them.  They should confirm if an “annuity payout” structure is available, as employer sponsored pensions typically pay more via an annuity structure than what can be purchased via a lump sum in the market.

2. If The Smith’s would still like to target Age 55 for retirement, they have two options.  Option 1 is to increase their projected savings rate between now and retirement.  If they can achieve a projected starting investment balance of ~$1.1M, their $38k withdrawal in Scenario 1 would be ~3.5%.  Alternatively, they could attempt to generate additional income streams to increase savings now and provide some additional income in retirement.  Option 2, in the event they are not able to increase savings, would be to reduce their projected spending to a level that could be supported by a 3 – 4% withdrawal rate from their investment account balance.

3. If The Smith’s are unable to either increase savings or reduce living expenses, the unfortunate reality is that they will be unable to retire by Age 55 at their current pace.  They’re fortunate in having a good career, and should continue to focus on their work and enjoying life with their children, with an annual review of their retirement outlook.  Using the attached Retirement Cash Flow model, they can run alternative scenarios to determine at which age they would be able to retire without making any changes to their existing lifestyle (unfortunately, that’s beyond the scope of this free review!)

4. Regarding Asset Allocation, The Smiths’ should work toward building a 1-2 year “retirement cash reserve” in an after-tax account prior to retirement (“Bucket Strategy”)to avoid having to sell any of their equities in a down year (“sequence risk”, one of the highest risk faced in the first 5-10 years of retirement).  I wrote about The Bucket Strategy here. (the link includes an Infographic on the topic)

5. Finally, regarding post-retirement medical insurance.  You’re very fortunate to have Don’s employee cover retiree medical costs until he’s eligible for Medicare at age 65.  However, you should recognize that most employers don’t “guarantee” this coverage, and many (including mine) are cancelling it on folks who have already retired.  To be conservative, you should include a spending scenario where you’ll have to pick up your medical insurance cost at some point between Age 55 – 65.  I’ve always assumed I’d have to pay the entire bill (~$1500/month), so it didn’t “shock my system” when my employer discontinued the coverage about a year ago.

How The Smith’s Responded

I was pleased to receive the following response from The Smith’s upon reviewing my case study:

Thank you so much for taking so much time with our numbers. You have opened my eyes to some things, and I see that we will need to either save more or work longer or reduce expenses to get these numbers to the age of 95. I think once we get our children through college, we can really try to make some improvements!


Hopefully this case study has given you some ideas on ways in which you can evaluate your potential retirement dates.  Run various scenarios, use the retirement cash flow tool I’ve created for you, and compare it to online retirement calculators as a cross check against any single tool.  Read other material, like this, to insure you’re not relying on any one resource.  It’s better to know before you retire if there are risks with your plan.  Better yet, as in the case with The Smith’s, it’s best to know 5-10 years out, so you still have time to make adjustments in order to achieve your dream retirement.

I welcome any comments that could help The Smiths, and thank Don and Sue again for letting us all use their real life situation as a learning case for The Retirement Manifesto community!!


PS – If you’re interested in having me take a look at your situation and providing a personalized analysis, feel free to reply to this email.  While I did “The Smith’s” for no charge as a Case Study for this article, I’m afraid I can’t be as charitable for all.  Since I’m new at this, I’ll charge a reasonable rate to compensate for my time.


  1. Fritz – This is a great tool. It’s very similar to one I developed but yours is more polished. I was originally concerned because I wasn’t getting a similar answer until I realized you handle the taxes separate of the spending budget. I was essentially double counting taxes.

    It’s also great how this tool provided insights to the Smith’s well ahead of their planned retirement date. By planning to save more or work a little longer a workable solution can be found. You’re proving yourself to be a great retirement coach.


  2. Fritz;
    I always love the articles, however the “actual events” always hit home for me a little stronger. Please pass along my “Thank You” to your friends for allowing you to use their data in this article and I absolutely agree with your analysis. You mentioned in the article, “could they increase their projected savings rate” of which I am a huge fan. Mona and I were able to not only have the experience of living off the amount we expect for retirement and invest everything else for the last couple of working years (from 2013 – 2015) it was a tremendous boost to our portfolio and to our confidence of being able to live on the amount of income we assumed would be sufficient. Now with 3 months of actual retirement under our belt we realize we are under spending our actual by 20%. While we are not really sure yet how this is happening as we are too busy traveling and relaxing to conduct analysis, we are excited to see the extra every month in the account. Thanks again for the blog, it is always great to get advice from someone we trust and value.

    All The Best

  3. Nice work up! I know I’m a bit late to chime in but one thing they could do to increase that income is to find Mrs Smith a job. Now that both kids are in college she should have some time to pick up a little extra money wether it be part or full time in house or out of the house. That extra boost income will get them to where they need to be a little bit faster. 🙂

  4. Do the Smiths own a home? Some mention was made of downsizing after retirement, but I wasn’t sure exactly how. If the kids are no longer living at home (unclear from article), can they downsize now? Also if Mrs Smith could pick up some work, then they could direct all that to savings without having to reduce cut back on expenses too much.

    1. They do still have a child at home, but expect to downsize after they’re “Empty Nest”. Their spending projection did already assume downsizing was part of the plan, so afraid that’s not going to help close their immediate gap. Good point about Mrs. Smith picking up some work…. thx for stopping by!

  5. Only 20k in the Roth? Money that has been in there at least 5 years can be taken back out…with 8.5 years, not counting catch up after age 50, they could have $46k instead of 20k. That might help bridge the gap. If Mrs. Smith gets a job / side hustle they could double that. If they both contributed they could withdraw ~11k/year or approximately 2-3 months of expenses.
    Thanks for sharing how you performed the analysis and giving 2 scenarios.

  6. How much are you calculating for taxes? It is possible not to pay any taxes if they are in the 15% tax bracket. see go curry cracker blog for explanation of this.

  7. No annuity scenario

    I downloaded and copy the workbook. Instead of an annuity of any kind add the $200,000 to the $700,000 for starting balance of $900,000. Replace the row labelled “annuity” with “Dividend income ” and assume a conservative 2.5% annual income on investment balance row 13

  8. In your scenario number 1, after withdrawing $43k from $700k, you added an expected investment yield of $27K or 4%. Is that too conservative? Even with adding two years in a retirement bucket and converting some to lower risk investments, is 4% an expected yield that is too conservative?

    I am trying to figure out how much I am out of the norm because I plan to keep a bulk of my funds in an aggressive growth fund well into my retirement years. I have built in options for not having to take out money from there for a few years if the market goes into a downtown and I am wondering how other people are approaching this possibility of retiring at 55 and having to decide how much of their portfolio should go into conservative investments.

    1. Dr. Phil, thanks for your engagement on my site. I used a conservative 4%, which you could argue has some upside. However, if you’re going to use an upside return assumption, you’ll also have to inflate your living expenses annually based on your expected inflation levels. If you assume a 3% inflation, the 4% could be viewed as a 7% gross return.

      As for keeping the majority of your investments invested aggressively, that’s fine as long as you have enough “dry powder options” to avoid selling anything through a long bear (assume ~3 years, pessimistically). I retired at 55, and I have a ~60/40 split (equities/bonds+other). I’m concerned at current valuations that we’re facing a looming bear, so I have a conservative tilt in my early years of retirement.

Comments are closed.