What's Your Retirement "Magic Number"?

Will: Hello, this is Will Allen with Sentara Capital, here with Jonathan Brummel, and we have a new format for you today. More of a conversation, a little more planning-focused than our normal market updates. Jonathan, how's it going?

Jonathan: It's going great, Will. We had Memorial Day weekend over this past weekend, so it was nice to finally breathe, get some stuff done around the house. It's also made for a crazy week of planning and all the things we're doing with clients, which is fantastic. How was your weekend?

Will: Good. But I have to ask, you said you had a chance to breathe? I didn't know you got to do that with 11 kids in the household.

Jonathan: No, not very much. How was yours?

Will: Well, one of our youngest boys got some sparklers for Memorial Day, and they had some kind of problem going on. They created ten times the amount of smoke they should have. We had six or eight of us using them, and it literally looked like our house was on fire. The neighbors got concerned, and our young one ended up having some kind of chemical reaction from the smoke later that evening. We had a little mini-ER visit the next day. Chemical reaction from sparkler smoke, what are we doing?

Will: Let's dive in. We want this to be planning-focused for a lot of these conversations. One of the things we've both talked about is the number one question that gets asked about retirement: what's the magic number? What do I need?

Jonathan: Everyone has a magic number. You can sit down with clients, and they all ask about it. Most people have something in the back of their head. The classic for the longest time was a million dollars, once I'm a millionaire, I can retire. But that's all relative, right? If you're making half a million dollars a year, a million dollars doesn't last very long.

Will: Right. I did nonprofit financial classes for about a 10-year period. We went out to over a hundred companies, Fortune 500, small businesses, other nonprofits. The last class I would do was retirement. Over and over, that was the big question. And what you quickly find when you run plans for people is that the real question is: what is your spending number?

I frequently saw people who never made more than $60–70,000 in their lives who were in amazing shape with $500,000 or $750,000, they had Social Security, they were drawing from that, and they weren't spending very much. They were in great shape. Meanwhile, other people who made $400,000 or $600,000 a year, who wanted $15,000 a month, that's not going to get done with just $500,000 or a million.

Jonathan: Right. If you're 65 and wanting to retire next year, there's only so much you can do. We're not doing some crazy scenario where we double your money in 12 months. You have to deal with what you've got. If you can live off Social Security, you can retire right away. So it is all about the expenses. For a lot of people, expenses get less in retirement. Sometimes they get more. Some people love to travel. Some people love to stay at home, I've had clients who had plenty of excess money but didn't love to travel. They just loved being at home and spending time with family.

Will: The other question that comes from that is, okay, how do I figure out how much I'm going to be spending in retirement? It's a little bit of art, because nobody knows, when you retire and have a lot more free time, you may be spending a lot more than you think. So you have to leave some room. One of the things we like to help people with is going through the process of creating a budget, and of course, when most people hear the word "budget," they have…

Jonathan: Yes. Exactly.

Will: A lot of people have had a bad experience trying to track every penny for an extended period. They try it for a couple of weeks, get bored, and throw it out the window. We did a video last year, we'll put the link in the description, just on budgeting, where we went step by step through a process that's very effective at helping someone come up with what they're spending. It doesn't take a lot of time. If you're not sure what your spending is, or you think you're spending too much and want to budget right, that's a good video to watch and implement.

Will: Speaking of retirement, you've been with us about eight months now. How has that been so far?

Jonathan: Oh, it's been fantastic. What a great place to be, working with you, learning, helping clients. Every day is something fun. I love numbers, I love people. It's a great place to be.

Will: And I paid you to say that, right? No, it's been awesome having you here. Some of the planning you've been doing, the tax analysis, the strategies like Roth conversions we've been rolling out for our clients in 2026, has been really beneficial. Let me ask: you're doing a lot of analysis, looking at taxes and pulling previous years' returns. Do you enjoy doing the tax work? It's a lot easier doing tax planning when you're not the one paying some of those taxes.

Jonathan: Yes. That's a good point. Eleven kids is very nice from a tax standpoint. Once they start getting off the payroll, it'll be a little more painful.

Will: A lot of what you're doing is helping clients figure out where they can save taxes. You've taken that to what some people might call the extreme. You're up to 11 kids now. Have you suggested that strategy to any of our clients?

Jonathan: I have. I get a little pushback there. Some of them say, "Hey, I'm a little too old for this." And I'll say, "Well, you're never too old."

Will: All right, let's walk through this. And for compliance: everything we talk about today is educational. This is not investment, tax, or legal advice. We're about to walk through a real prospect example, but this is one person's projection.

Jonathan: Why do we plan on top of the investments? One, planning helps dictate how you should have your investments. If you have a big purchase coming up in six months, you don't automatically stick it in the stock market when you can't fully predict the future. The other part is that planning can reduce your taxes. You're working with hypotheticals, nobody has a perfect crystal ball, but the more you can plan, the more you can save. Five or ten percent in taxes is real money back in your pocket. More money to spend, more money to give.

When we start running these numbers, we're not talking about $5,000 or $10,000 of potential tax savings. We're sometimes talking about hundreds of thousands of dollars.

Will: With the plans you've done so far, we've had more than just a handful of clients where we've been able to project, taxes policy can change in the future, over $100,000 in tax savings, often leading to several hundred thousand more at the end of the plan. So tell us about this couple. We won't use their real numbers.

Jonathan: This is an oversimplification, but we've seen this dynamic many times. Hypothetical Bob and Sue. They've got $2 million in their IRA. We do the plan, and they live pretty modestly. Between their Social Security and pensions, they really only need about $1 million of that to live off of, that fills the buckets for the next 10 years. So the extra million dollars, they don't need for another 10-plus years. What do we do with that?

We can look at making sure we're being as efficient as possible. They can take more risk on it because they don't need it for 10 years. But we can also do a much better job from a planning and tax standpoint. Even if we assume tax brackets stay exactly the same in 10 years, which we know they won't, and they probably won't be lower, that million dollars at a 22% bracket, growing at 7.2%, becomes about $2 million in 10 years. So now the taxes on that money double, even if the bracket is unchanged.

If we take that full million and convert it to a Roth where it grows tax-free, you're not paying that additional tax. You're talking about a couple hundred thousand dollars of pure tax savings. And hypothetically, we see this all the time, they get 10 years down the road and they're doing really well. They don't need the money. So it keeps doubling. Twenty years from now you're talking about not $2 million extra but $4 million extra for the heirs, and that can either be tax-free or very taxable.

Will: In that scenario, the second million, the longer-term bucket, goes from $1 million to $2 million in 10 years. The couple is hitting age 75 by that point, and that's when required minimum distributions become significant. Prior to 2019, RMDs started at 70½. It got moved to 72. It's currently 73 for people reaching that age, and it'll be 75. The government wants its hands on those taxes.

Jonathan: We get this question quite a bit. What is an RMD and how does it work? The government always wants their taxes. You defer your taxes, you got to deduct it when you made the money, so at some point they come knocking. The government, in their genius, instead of doing an even percentage, uses a table that's kind of like pi. At age 75, you have to withdraw 4.0650406504% of your IRA based on the December 31 value of the previous year.

Will: What if you withhold it by 0.001%? Are you going to get a knock on the door?

Jonathan: Depends who the auditor is. The penalty used to be severe, 50% of what you were supposed to take out. They made law changes recently that reduced that, but they still want you to take it out.

In this case, if that extra million had grown to two, and we preserved the first million because we lived off the income, they're at $3 million. But they only need $75,000 to live on. The government will say, based on the RMD percentage, you've got to take out about $122,000 a year. So they've got an extra $50,000 they don't need, but they have to take it out so the government can get its taxes.

That's what really causes problems. A portion of that gets pushed into the next tax bracket. And the bigger issue is the widow's tax. You're being forced to take out a higher amount than you need, whether you need it or not, when your tax bracket might be half of what the couple's bracket was. That's a big difference. If you can reduce that by taking money out earlier, when you have better control, you're better off. The more control you have over your taxes, the better.

Will: This is very complicated, and from client to client it can look very different. This is why clients have us do this, they don't want to dive in and learn all of this. We've already seen this make a big difference for many clients by cutting taxes they're going to pay and adding more to their accounts at the end.

Will: All right, we have some recent client questions. The biggest one right now: SpaceX. The excitement and interest is off the charts. The amount of time we're hearing about this from clients, I started in 1998 at Merrill Lynch. Lots of IPOs around 1998–99, leading into the dot-com bubble. Since then, a lot of big companies have gone public. I can't remember one having this much excitement and intrigue as SpaceX.

Part of it is Elon Musk, a controversial figure, but the success he had at Tesla, with shareholders doing so well, has made this interesting. The fact that we're talking about space makes it interesting too. But what a lot of people don't know is that SpaceX's primary business right now is Starlink internet. That's where most of their revenue comes from. There's a lot of hope for the future of the company.

Our approach: buyer beware. Often when companies go public, the shares open much higher than the official IPO price on opening day. Barron's had a piece on this last weekend that went back to 1980 and said that, on average, big IPOs dropped about 45% over the first three years. That's not all companies, and SpaceX could do really well. But Meta is a great example, a very successful company up a lot, and if you bought it six months in, you did much better than if you bought it that opening day. There was a lot of hype. In the six months after, insiders and workers who had shares cash in and sell, so there's selling pressure.

Jonathan: Their valuation right now, the IPO is what, $1.5 trillion?

Will: Yeah, $1.5 to $2 trillion.

Jonathan: Five, six years ago that would be the largest company. Apple finally hit $1 trillion in 2019, 2020. Listen, you're the market expert, but the IPOs happening nowadays are very different than 20, 30 years ago, where small companies worth maybe $1–2 billion would IPO to help raise money to grow. Now there's so much fundraising and valuation done prior that a lot of it is people just trying to cash out.

Will: It's gone so much later in the process too. That's why you have that pressure, people saying, "I've owned this for 10 years." As great as SpaceX is going to do, they're ready to cash out. At $1.5 to $2 trillion, you just have to sit back and observe.

Also this summer we're going to have Anthropic, the makers of Claude, and OpenAI, which makes ChatGPT. Three huge IPOs. All the companies are growing fast, so there's going to be a lot of excitement. But in the past, these companies would have come public a year or two ago without valuations of $1, $1.5, or $2 trillion. It's something clients have to be careful with.

Jonathan: Speaking of large numbers, inflation. That's the other question. A few years ago we were seeing outrageous inflation. We're seeing the numbers creep up again. Are we going to get back to inflation of the '70s?

Will: I don't think so. There are huge differences. Four or five years ago, in that post-Covid period, the government was spending trillions and trillions more than it was bringing in. Real estate was soaring. Wages were going up very fast. You had a 9% Social Security increase. Food costs were soaring. Pretty much everything was going up. That's kind of what happened for a lot of the 1970s.

This time around, inflation had been getting under control. People say, "Hey, everything's still far more expensive than it used to be, what do you mean under control?" We're never going back, unfortunately, to where prices were pre-Covid. What the Fed was trying to do is slow future price increases back to close to 2%. We were kind of there, inflation was very close to 2%. The conflict in the Middle East is what spiked it, because oil went above $100 a barrel. That's the main factor driving inflation right now.

Much different than the '70s. In the '70s it was chronic price increases; this is acute. When the conflict ends, oil will come back down. I don't know if it'll get back down to $57 a barrel quickly, but it's not going to stay up near $100. Inflation should cool back off later in the year. I don't think this is comparable in any real way to the '70s.

Jonathan: Is it mostly equatable to oil and gas and the conflict in the Middle East? That makes a lot of sense. It makes you feel both more in control of what's going on and a little less, because you can't always predict wars.

Will: That's absolutely true.

Jonathan: Question, Duke or North Carolina?

Will: Oh my goodness. Here's the thing, my family moved up to Raleigh, North Carolina when I was 7. Our church met on campus of NC State, the Wolfpack. I became a huge fan. We moved down to Atlanta in 1989. I stayed an NC State fan. The problem is, up in that area, Raleigh, Durham, Chapel Hill, you've got Duke and North Carolina. Those are the two teams everybody thinks of because they've both won tons of championships. NC State, meanwhile, has had virtually no success. Until a couple years ago, when they made a miracle run to the Final Four, I actually did a market update wearing an NC State t-shirt, that was my only real celebration. North Carolina is our hated rival. Duke is in the middle. I don't mind Duke as much. Want nothing to do with UNC.

Jonathan: And then we had multiple people ask: who taught you how to dance?

Will: Listen, first of all, I had no idea this was a luau. We did a client appreciation event, and I had no clue the entertainment was going to call audience members up there, not once but twice. A lot of our clients were not excited about going up and dancing. Krista came. But what you just saw was not me goofing around. That was literally the best I have.

I've been fired by two different dance instructors. We got married almost 25 years ago. My wife is romantic, loves dancing, said let's take dance lessons. We did. Three or four weeks in, the instructor said, "Listen, Will, you literally have not picked up a single thing we've covered. I can't help you. There's nothing I can do." I was let go.

About two years later, at Wells Fargo, one of my sales guys I hired was a salsa instructor, as good as it gets. My wife was super excited. He came to our house and started giving lessons. Four weeks in: "Will, this just isn't for you, buddy. I'm hopeless. I'm giving up hope that you can get this." I was let go again. So twice I said, that's the end of my dancing career. Then of course I got called out in front of all of our clients to dance.

Jonathan: A man of the people.

Will: And my wife says thank you. Listen, that's it for today. If you have questions you'd like us to answer, drop them. We'd love to hear from you.

Jonathan: Drop your comments. We look forward to hearing from you. Thanks for watching.