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When someone comes to me and says, “I think I want to retire at 65,” that’s usually where the conversation starts, not where it ends.
For a lot of people, 65 is simply the age they’ve always had in their head. Maybe that’s when their friends or coworkers retired, or maybe it just feels like a normal retirement age. But there’s nothing inherently special about 65 when it comes to determining whether someone can actually retire.
The more important question is whether the retirement they want is financially sustainable, and whether they might have the flexibility to retire earlier.
That’s what I wanted to demonstrate with Robert and Denise, a hypothetical couple who represent a fairly typical retirement planning scenario. Robert is 62, Denise is 58, and they have $3 million spread across taxable, tax-deferred, and Roth accounts. Robert initially thinks he will retire at 65, but as we start talking about what they actually want their retirement to look like, it becomes worth testing whether he needs to wait that long.
Their goals are pretty common. They want more time together, they want to travel and visit their children and grandchildren, and they would like to have the ability to help their family while they’re still around to enjoy it. They also want a comfortable retirement without constantly worrying about what the markets are doing.
That gives us something much more useful to plan around than simply saying, “They have $3 million, so can they retire?”
Before I can test whether a retirement date works, I need to understand what the plan is actually asking the portfolio to provide.
For Robert and Denise, we estimated their spending at approximately $11,000 per month. But I don't want to treat that as one big expense because not every dollar of spending behaves the same way.
About $6,000 per month is essential spending, including some healthcare costs. They also have a $2,000 monthly mortgage that will eventually disappear, and approximately $3,000 of flexible spending that includes things like travel and gifting.
If the markets have a difficult period, I don't necessarily want to tell someone they need to immediately cut everything they're spending. Instead, we can identify which expenses are essential and which ones have some flexibility.
There are also expenses that are difficult to predict precisely. A roof eventually needs to be replaced. An HVAC system breaks. A car needs repairs. Healthcare costs change. There will always be things that we can't know ten years in advance.
That doesn't mean we can't plan.
The goal isn't to predict every expense down to the dollar. It's to build reasonable assumptions, account for the major liabilities we know about, and create enough flexibility to deal with the things we don't know.
Taxes and healthcare are two areas where this becomes particularly important, and we'll build those into the plan as we go.
Once we've defined the retirement we're trying to fund, I don't want to rely on a single number to tell us whether it works.
I typically look at the plan in three different ways: Monte Carlo analysis, funded ratio, and historical stress testing.
Monte Carlo is probably the analysis most people are familiar with. It runs the retirement plan through thousands of different potential sequences of investment returns and shows us how often the plan remains on track.
One of the things this helps us evaluate is sequence-of-returns risk. Two people can earn the same average return over retirement but have very different outcomes depending on when those returns occur.
For example, a major market decline shortly after retirement can be much more damaging than that same decline occurring 15 years into retirement.
Monte Carlo gives us a useful way to see how sensitive the plan is to those different return sequences.
But I don't want to stop there.
A Monte Carlo result doesn't tell me everything I need to know about the plan, particularly when we're trying to make decisions around taxes and how much flexibility the client actually has.
The funded ratio gives me a different way to look at the same retirement plan.
In simple terms, we're projecting the future liabilities of the plan and discounting those future dollars back to today's value. We can then compare those liabilities with the portfolio the client has available today. This is a similar analysis that pension funds use.
It produces a ratio that helps categorize the plan as overfunded, constrained, or underfunded.
The discount rate we use matters here. A lower discount rate makes it more difficult for the plan to appear overfunded because we're assuming less growth on the portfolio.
I like this analysis because it gives us another way to think about the question. Instead of simply saying, “Your Monte Carlo is 90%,” we can also ask whether the portfolio today provides enough assets to cover the liabilities we're projecting.
It can also help guide some of the other decisions we'll make later in the planning process, mainly with tax planning.
The third piece is historical stress testing.
This is often the analysis that resonates most with clients because it makes the risk more tangible.
Instead of showing someone a hypothetical probability, we can ask what would have happened if they retired immediately before a particularly difficult period.
What if Robert and Denise had retired right before the Global Financial Crisis? What if they had retired during the high inflation and poor market returns of the 1970s?
Those historical periods aren't predictions of what will happen in the future. They're simply ways to stress-test the plan against environments that have actually occurred.
In Robert and Denise's case, even some of these difficult historical periods would not have required them to completely abandon their retirement. There were circumstances where spending adjustments would have been appropriate, but the plan still provided a meaningful amount of flexibility.
That's an important distinction.
A retirement plan doesn't necessarily need to work perfectly in every possible environment. What matters is understanding what adjustments might be necessary and whether those adjustments are realistic for the client.
Once the initial plan looks strong, we can start testing the client's actual options.
For Robert and Denise, the first scenario has Robert retiring at 65. In that scenario, the plan looks very healthy, with a 90% Monte Carlo result and a funded ratio above 100%.
That leads me to a different question: if the plan is this strong, do they want to spend more, or would they rather retire sooner?
They would rather retire sooner, so the next scenario is retiring at 62.
But this is where it's important not to simply change the retirement age in the software and assume the analysis is complete.
Retiring three years earlier means inputs in the plan will change, the biggest being health insurance costs.
Someone retiring at 62 may have significantly different health insurance costs than they would have at 65. That's why I don't recommend simply using a national average for this expense. We want to get as close as possible to the actual cost for that household and their situation.
Once we make those adjustments, the numbers change. In this example, the Monte Carlo result falls from 90% to 81%, while the funded ratio remains above 100% using the more conservative assumption.
That's not a failure of the plan. It's exactly what we want the analysis to show us.
Retiring earlier comes with trade-offs.
The question is whether those trade-offs are acceptable given what the client values.
For Robert and Denise, the answer is yes. The plan still looks strong enough that I'm comfortable with the possibility of retiring earlier, while recognizing that we'll continue to monitor the plan and make adjustments if circumstances change.
Even after we've determined that Robert can potentially retire at 62, there are still important decisions to make.
When should they claim Social Security? How should we account for healthcare costs before Medicare? How should we manage taxes across their taxable, tax-deferred, and Roth accounts? And once we understand the income plan, how should the portfolio actually be constructed to support it?
Those questions build on one another.
That's why I don't view retirement planning as simply putting someone's information into a calculator and producing a probability of success.
The real value comes from testing different decisions, understanding the trade-offs, and building a plan that can adapt as circumstances change.
For Robert and Denise, the original question was whether Robert could retire at 65.
After testing the plan, we were able to ask a much more useful question:
What happens if he retires at 62 instead?
That's the type of question I want a retirement plan to help answer.
Retirement stress testing is the process of evaluating how a retirement plan would perform under different investment returns, spending levels, economic environments, and planning assumptions. The goal is to understand not only whether a plan works, but also where it may be vulnerable and what adjustments could be made.
Monte Carlo analysis runs a retirement plan through many different potential sequences of investment returns. It helps estimate how often the portfolio can support the planned spending without requiring adjustments. It is particularly useful for evaluating sequence-of-returns risk, but it should generally be considered alongside other planning analysis.
A funded ratio compares the assets available today with the present value of the future liabilities that the retirement plan needs to fund. A ratio above 100% generally indicates that the plan is overfunded under the assumptions being used, while a ratio below 100% indicates that additional resources, lower spending, or other changes may be necessary.
There isn't one Monte Carlo percentage that automatically determines whether someone can retire. A result needs to be considered alongside spending flexibility, Social Security, taxes, healthcare, portfolio construction, and the client's willingness to make adjustments. A plan with an 80% result may be more resilient than the number suggests if the client has significant flexibility in their spending.
That depends on the specific retirement plan. Retiring at 62 generally means more years of portfolio withdrawals, fewer years of accumulation, and potentially higher healthcare costs before Medicare. Waiting until 65 may provide more financial flexibility, but if the plan is strong enough, retiring earlier may still be a reasonable choice.
Healthcare can be a significant consideration for anyone retiring before Medicare eligibility. A retirement plan should account for the actual expected cost of health insurance and healthcare rather than relying solely on a broad national average.
Historical stress testing helps demonstrate how a retirement plan would have responded to difficult environments that have actually occurred, such as the Great Financial Crisis or the high inflation of the 1970s. It doesn't predict the future, but it can help identify how much flexibility a retirement plan has during challenging periods.
A complete retirement plan should consider spending, longevity, Social Security, taxes, healthcare, investment risk, portfolio construction, and the client's personal goals. The goal isn't simply to determine whether you have enough money. It's to understand how your financial resources can support the retirement you actually want.
Beau Kemp, CFP®, RMA®
Founder, Financial Advisor
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