$1M vs. $2M vs. $5M Retirement: What Actually Changes?

0:00 Let's start with a question I think a lot of people have wondered about, but maybe they haven't ever sat down and worked through the math. What if you retired with a million dollars? How much could you have as an income in retirement? What if instead you retired with 2 million? Do things change drastically? What if you had 5 million? Is money even a constraint at that point? These are the numbers I want to walk through today. And I want to get very specific. I'm not going to give vague ranges or hypotheticals that don't apply to anyone. I want to look at the real spending levels that these portfolios could potentially support from a practical and a psychologically sound manner. Hey guys, what's up? I'm Aaron and welcome back to the channel.

0:41 Here's the scenario we're going to work with. We're going to assume someone retiring at the age of 60. So obviously they've worked hard, they've saved, they've invested, they've built up a considerable portfolio in each of these situations. We're going to have them step away from the workforce just a little bit on the side of early, but still in that traditional retirement range. They are retiring prior to social security age. We're not going to ignore social security. We don't do that on this channel and we will factor it in when the time comes. We're going to have our individual claim social security at full retirement age, so 67. We're also going to assume you want to retire well to actually live and enjoy what you've built. Travel when you're healthy enough to enjoy it. Spend on the things that matter. Have a real life. So, how much could you sustainably spend in a way that's aggressive but realistic at each portfolio level? And then we're going to flip the entire conversation on its head because what these portfolios could theoretically support and what we see retirees who actually have these types of portfolios spend are two wildly different numbers. and that gap. I think that's one of the most important things you can understand about retirement and spending in retirement. So, with that said, let's start with the math. Before we get into the specific numbers, I want to walk you through the strategy we're using to think about this because often the framework matters just as much as the dollar amount you have invested. So, with this video, we're going to use a bucket strategy. And something I love about a bucket strategy is that it kind of mirrors how retirement really unfolds. Rather than looking at our money as one big pot that we draw uniformally from forever, it allows us to kind of time segment our money and use it in different phases. So here's what it's going to look like. Bucket number one, the bridge bucket. This is the short-term bucket. It exists for one purpose, to fund the years between when you retire and when Social Security begins. If you retire at 60 and claim Social Security at 67, which could be a smart move because this allows you to increase what your Social Security benefit would be, which ultimately increases your income floor in retirement, you have seven full years that you're going to need to fund from your portfolio. The bridge bucket is here to cover those years. And within this bucket, we're invested conservatively. We're talking money market funds, treasury bills, short duration CDs, things that are stable, things that won't drop 30% in a bad market year. And the reason for this is simple. The biggest risk to retirement is what happens in those early years. If the market takes a steep drop in the early years of your retirement, and you're in a position where you're forced to sell shares, this can damage your portfolio in a way that is hard to recover from. This is called sequence of returns risk. And this is really what the bucket strategy is designed to protect against. The bridge bucket says you're covered in those early years of retirement. Even if the market falls, you don't need to touch the equities in your long-term bucket. It says you can wait for those to hopefully recover.

3:54 Bucket number two is the growth bucket. This is the long-term bucket. It's invested in equities, diversified index funds, growth oriented assets. And because the bridge bucket is handling your near-term spending, this bucket gets something incredibly valuable, and that is time. Markets go up and down, but historically speaking, given enough time, they tend to recover and grow. So what you're invested in in this long-term bucket is designed for long-term growth, to fight inflation, to preserve your purchasing power. And then hopefully when you turn to this bucket later on and social security turns on, all of a sudden your portfolio would likely be carrying a lesser burden of your spending. So really, the bridge bucket isn't there to fund your entire retirement. It's there to protect the years before retirement gets easier. And retirement does tend to get easier, but really most people don't think about it that way. If you retire early prior to any other income sources like social security once those income streams do turn on, it lightens the load that your portfolio has to carry. So the funding of your retirement should theoretically get easier. So really that's the core idea. Now let's apply it to the portfolios. Let's start with the $1 million portfolio. We'll say we have a single retiree retiring at the age of 60. They're going to claim social security at 67. Let's say at this point, Social Security brings in $35,000 per year, which is a reasonable estimate for someone who had moderate to solid earnings history and slightly delayed claiming. So, the question is, what level of income could this portfolio support? And the answer with our bucket strategy is around $70,000 a year, but we have to be upfront. We're building this in two distinct phases. In the beginning, the withdrawals are coming solely from the portfolio. Then we have social security turning on in the later stages of retirement or a few years into retirement. So we're looking at both stages together. These are the bridge years. During these seven years, there is no social security income yet. The entire $70,000 per year is coming from the portfolio. Now, that's a 7% withdrawal rate. And if you've heard of the 4% rule, that might make you have a moment of pause. But here's the thing.

6:16 This is an intentionally temporary phase of this retirement. The bridge bucket, in this case, roughly $300 to $400,000 of our $1 million portfolio is set aside in stable assets specifically to fund this phase. It's sitting in treasuries and money market funds, ready to cover spending without forcing stock sales. Meanwhile, the remaining $600 to $700,000 is sitting in our growth bucket. It's invested in equities. It's compounding over time and hopefully if we run into a rough market early on in our retirement, hopefully it has enough time to recover before it's called upon.

6:56 Then we get to age 67. Social Security turns on. This is going to bring in $35,000 per year and suddenly the portfolio no longer needs to fund the entire lifestyle. Now the portfolio only needs to generate around $35,000 per year. And on a $1 million portfolio, which could be what this $600 to $700,000 invested and not touched, could grow to in about 7 years time, or whatever's left after those 7 years, that's a much more sustainable withdrawal rate. Maybe something closer to 3.5% or even less.

7:32 The hardest years really are those bridge years where your portfolio is covering 100% of your total income and your total spending. Once you have other income streams kick on later on in retirement, it gets easier. And often that's not how most people think about retirement. A few things to note. The plan works best if you maintain some level of flexibility. If you see that you retire into a very rough market, even adjusting your spending slightly, even when pulling from your cash bucket, that could allow you to preserve more of your cash, and it gives your long-term bucket more time to recover should it need more time. So maintaining flexibility even by a few thousand can have a big long-term impact on your overall portfolio. And you'll see in this example and in the other examples going forward, we intentionally delayed social security until full retirement age. Yes, you can claim social security as early as the age of 62. But if you do, you lock in a lower lifetime benefit, so you have a lower income floor. I deliberately like the idea of increasing our income floor in retirement because this takes pressure off our portfolio. Ultimately, when you claim is up to you, but the stronger your income floor, the less the long-term burden of your portfolio. Now, let's scale up to the $2 million portfolio. And I'm going to shift our example here to a married household. Two earners, both retiring at 60, both planning to claim social security at 67.

8:56 combined, their expected social security benefit is around $65,000 per year. Now, I'm deliberately going to use married couples for the next two examples because the research overwhelmingly shows that households at higher net worths are married. So, now our question becomes, what level of income or spending could these portfolios support? Using the same flexible twobucket framework, I think we could realistically target $125 to $140,000 per year. And let's talk about why. Ages 60 to 67. Here are our bridge years.

9:34 Again, this is before Social Security begins, the household is drawing the full spending amount from the portfolio. We'll target this specific example at $130,000 per year on a $2 million portfolio. That's a 6 and 12% initial withdrawal rate. Again, that withdrawal rate may sound high, but remember it's intentionally temporary. We are not at this withdrawal rate for the entirety of the retirement. The bridge bucket for this household is probably somewhere around $600 to $800,000 held in stable short-term assets. The remaining 1.2 to 1.4 million is in the growth bucket invested for the long term. This structure means that if the market falls early on in retirement in say year 2, three or four, our individual or our couple is not forced to sell their equities. This portion of their retirement, the early years is already fully funded. Then at age 67, $65,000 per year of social security income starts to arrive. And this is where things get kind of powerful. Now, instead of the portfolio funding the entire $130,000 lifestyle, it only needs to cover roughly 60 to $80,000 per year. That is a massive reduction in withdrawal pressure. Think about that. At the age of 60, the portfolio is carrying the entire retirement, but by the time we get to the age of 67, it might only be carrying half of it. And that's exactly why I still like to talk about social security even when we get to higher net worths and higher income levels because at this point it still matters. This is not a marginal improvement. This is an entire structural shift in the sustainability of our plan. The first and hardest seven years are behind them.

11:23 We now have a reliable income stream that's turned on and doing a good portion of the heavy lifting. our portfolio is now in more supporting role and hopefully if there was any rough market conditions hopefully our portfolio has had time to recover. So again we find ourselves in a position where over time our retirement becomes more sustainable. Now let's look at the $5 million scenario. This is the level where the numbers start to almost feel abstract until you run them of course.

11:53 Again here we have a married couple. We had two strong earners. They had long careers. They're retiring at 60 and claiming social security at 67. The combined benefit is around $80,000 per year. This portfolio level is overwhelmingly associated with dual highincome earners. So, this kind of framing fits. What type of income or spending level could we realistically expect? The range that becomes mathematically realistic here is somewhere around $250 to $325,000 per year. Let's call it $275,000 a year as a working figure for our example. From ages 60 to 67 before social security turns on, the household is drawing $275,000 per year from the portfolio. on a $5 million portfolio. That's roughly a 5.5% initial withdrawal rate. The bridge bucket here could be anywhere from say 1.5 to $2 million held in treasuries, T bills, short duration bonds, and perhaps money market funds. This number might sound enormous, but remember, we have a highinccome household and they want to support high levels of spending, especially early on in their retirement.

13:11 So what they're doing is intentionally segmenting part of their portfolio into secure stable investments rather than keeping the entire thing invested in equities and fully exposed to market conditions. We are protecting against sequence risk. The remaining $3 to $3.5 million sits in the growth bucket. It is invested heavily in equities and it has a full seven years to compound before we're expected to touch this bucket. Then at the age of 67, $80,000 per year of inflationadjusted social security begins. Now the portfolio only needs to fund roughly 175 to $225,000 of the lifestyle, not the whole thing.

13:55 Likely, we'll be in a position where our withdrawal rate drops. Rather than focusing on a 5.5% withdrawal rate, we might be drawing something closer to 4% or even less because this growth bucket is likely $3 million plus. Remember, it's had 7 years of compounding. So, it's likely that the hardest years are behind them. We could very well be in a position where this household is becoming more secure over time. Because remember, once Social Security kicks on, we're saying that this household is receiving $80,000 of inflationadjusted income from Social Security. That's a darn high income floor even for a highincome household. So, this puts them in a more secure position. It's likely that compounding is continuing. And if they maintain some level of flexibility with their spending, it's very likely that their portfolio is growing at a faster rate than they're likely spending. So let's pause and summarize what we've covered so far. Using a flexible two bucket strategy and delaying social security slightly until full retirement age in each of our examples. Here's mathematically what these portfolios might be able to support. A single retiree with a million-doll portfolio and $35,000 of social security at 67 might be able to have an income of about $70,000.

15:10 A married couple with $2 million in investable assets and about $65,000 of social security at age 67, they might have an income closer to $125 to $140,000 a year. And for a married couple with $5 million in investable assets and $80,000 a year in social security at 67, they might have an income closer to $250 to $325,000 a year. These are very real and meaningful incomes. And you'll notice that as the portfolio grows, so does the potential lifestyle. There's a meaningful difference between what a million-doll portfolio and a $5 million portfolio can support in terms of income and spending. But now I want to tell you something that I think might be one of the most important pieces of this entire video. Most retirees who have portfolios at these levels are not actually spending an income anywhere close to what we just talked about. So this is where I want to flip the entire conversation. Up until this point, we've spent a good portion of this video going over what these portfolios could support, doing the math. Our strategy is sound. We're using a flexible two-bucket approach. We delayed social security to create that stronger income floor. We deliberately wanted to allow for more aggressive early spending without sacrificing long-term security. But here's what the research consistently shows. Affluent retirees tend to underspend often dramatically relative to what their portfolios could support.

16:43 JP Morgan Chase analyzed actual household spending data across different wealth levels. For households with 1 million to $2 million in investable assets, they found the average annual spending looked like this. Between the ages of 60 and 64, it was about $94,000. 65 to 69, about $84,000. 70 to 74, it dropped down to about $76,000. from 75 to 79 around $71,000. As households entered their 80s, that spending dropped to around 66 or $67,000.

17:19 A few things jump out here when we look at this data. First and foremost, people tend to spend less as they age. This is a well doumented pattern throughout retirement research. The most expensive spending years tend to be the early years of retirement. Second, even with households with $2 million in investable assets, their income and their spending levels aren't approaching anywhere near the maximums we discussed in our examples. It's often well below. And JP Morgan noticed this declining spending pattern with even higher net worth households, households with 2 million, 3 million, 4 million, and even 5 million and beyond as a net worth. They noticed that over time spending tended to decline. As household net worth did increase though, they did see that spending started at higher levels. So that is worth taking into consideration.

18:06 But notably, those higher spending levels, they were only slightly higher. They weren't near the max thresholds we discussed. Separate research from David Blanchett and Michael Frink gets at something even deeper. Their work found that retirees tend to spend about 80% of their more reliable income streams like social security, pensions, or annuities. But from savings and portfolio assets, they spend at a rate much closer to about 2% roughly half of the often cited 4% role benchmark. In other words, retirees look at these more reliable income streams as spendable, but then they tend to look at their portfolio as a safety net that's not meant to be touched. Now, let's put it all together.

18:51 Here's what the math says that these portfolios could support as an income level for a household versus what we truly see these households take as an income. With a $1 million portfolio, the math might suggest $70,000 as an income, but real world behavior is actually closer to 55 to maybe $75,000 a year. With a $2 million investable asset portfolio, the math might suggest $125 to $145,000 a year as an income. Real world behavior tends to be closer to 90 to $125,000 a year. With a $5 million portfolio, the math might suggest an income of $275 to $325,000 a year. Real world behavior tends to be closer to 140 to $180,000 a year. Often what we see is as the portfolio gets larger, the real world spending tends to lag behind significantly more what these retirees could otherwise be taking as an income. And as a result, we tend to see that these portfolios continue to compound at a faster rate than what these people are spending. So their income and their net worth tends to grow. So why does this happen? Well, there are four big reasons that the research points to. First, retirees spend a guaranteed income more freely than portfolio assets. When money feels stable and reoccurring, like a paycheck, people tend to spend it. when it's sitting in a brokerage account or an investment account, people tend to view it as a nest egg and they treat it differently. They don't treat it as spendable or they don't treat it as spendable. So, psychologically, we look at this money differently. Second, spending naturally declines with age.

20:40 What we tend to see is that most retirees are most active and healthiest and spend the most early on in their retirement. And then as they progress through their 70s and enter into their 80s, we see that spending naturally tends to fall across all income levels. Wealthier retirees are often lifelong savers. For a lifelong saver, making that mental shift from accumulation to deumulation can be hard, if not impossible. They've kept score by growing this number over time. And once you get to retirement, even if you're intentionally or deliberately trying to draw from this portfolio, it can feel wrong. Long-term care anxiety. Many high- netw worth households or individuals tend to worry about a late life catastrophic health event that could be very expensive. And whether or not this is justified mathematically, it can influence spending. So the ultimate result for many affluent retirees is that they limit their spending or their draws from their portfolio psychologically. It's not a mathematically driven decision. So where does this leave us? Ultimately, I think it leaves us with a question that's more important than any spreadsheet can answer. What level of spending actually creates the life you want? Because here's what I don't want this video to do. I don't want you to feel like the ultimate goal is to simply accumulate the largest portfolio possible. If that is genuinely what you're going for, if you love the game of building wealth and investing, maybe you're growing a business and you want to see how far you can take it. If that is genuinely fulfilling to you, that's valid and you do you. You go after that goal. But instead, if your real goal is to ultimately support a specific lifestyle, rather than asking, "What is the highest net worth I can possibly achieve?" A better question to answer is, "How much does the lifestyle I want actually cost?" Because if the life you want costs $70,000 a year, you very well may be able to build that with a million-doll portfolio, slightly delayed social security, and thoughtfully done withdrawals. If the life you want costs $100,000 a year, you likely don't need $5 million invested. If the lifestyle you want is, say, $150,000 a year, maybe you need something closer to 2 or $3 million invested, but you almost certainly don't need 10 million invested. The data we covered today is actually quite empowering when you look at it this way. Many affluent retirees, people with multi-million dollar portfolios, are not living dramatically larger lives than retirees with smaller balances. Their portfolios are often growing faster than they spend them, which means at some point more money is not going to increase your lifestyle from a day-to-day standpoint. And that is worth sitting with. Maybe you don't need to work another decade chasing a bigger number if it's not actually going to change how you live. Maybe you can retire earlier. Maybe you can work fewer hours and enjoy your career more. Maybe you get more opportunity to spend more time with your children or your parents if they're still around. Maybe it means traveling while you're healthy enough to really enjoy it. Maybe it means giving more generously to the people and the causes you care about. Maybe it means pursuing work that is more meaningful rather than simply maximizing income. Or maybe you decide to keep building.

24:02 That's completely valid, too. Just make sure you're doing it intentionally. But most important of all, I think clarifying what you're actually trying to fund, the lifestyle, not the number, is one of the most important distinctions you can make for your own financial life. Because ultimately, financial freedom is not about chasing the biggest number. It's about maximizing the lifestyle you want to live. Finding that lifestyle that gives you maximum enjoyment and maximum freedom and permission to do what you really want to do. And you need to figure out the number that allows you to do that. So, you have to know what your dream lifestyle costs. So, what do you think your number is? Share it down below. And why did you choose that number? I post new videos every single week. If you got anything at all out of this one, please give it a like. If you're new here, please consider subscribing. Or if you know of someone who might get something out of this type of content, please consider sharing.

24:52 I'll see you soon. Bye. They built up a considerable. This is not a My chair is moving like slowly. I got to put my foot down. We're not going to ignore social sec. Social social security. I said these people and I hate that phrase. I'm sorry. It is in this video, but I said it and I didn't like it. I don't like the the phrase these people. Actually plans out. It plans out. Plans out $600 to $700,000 in I'm going to go have breakfast. I've been starting to do a new breakfast.

25:24 Usually I love breakfast, but like cottage cheese, kimchi, and avocado. Let me know. I don't