Why $5 million is not just an easier $2 million

For years, my uncle talked about the same two things. He wanted to rent a villa in Tuscany and bring every one of the grandkids. And he wanted a small cabin in the Smoky Mountains, somewhere to go in the fall.

He did neither.

He lived on about $70,000 a year for the rest of his life. When he passed away, there was still $3.2 million sitting in his accounts.

Plenty of people would hear that and call it a success. I'd call it a planning failure. He clearly had room to spend more and still leave his family a meaningful inheritance. What he never had was someone who sat him down and told him, plainly, that he had already solved the "will I run out?" problem and could stop working on it. So he kept working on it, right up until the end.

That story is the reason I think about retirement in terms of problems rather than balances. People with $5 million are often still asking $2 million questions. People with $2 million are sometimes planning as if their money can't run out. Both are solving for the wrong thing.

To show what I mean, take one couple and change only one variable. They are 62. They want $110,000 a year to live on. The only thing that moves is how much they have saved.

Give them $5 million and they are withdrawing a little over 2% a year. At that rate they have enormous flexibility. Depending on returns, inflation, taxes, and how their spending changes over time, there's a real chance they finish retirement with a large amount still left over.

So the interesting questions stop being about what they spend. They become about what they leave behind. Who gets it? And in what form?

That second part matters more than people expect. An inherited Roth, an inherited traditional IRA, and an inherited brokerage account can show the same dollar figure on paper and turn out to be very different gifts once taxes are done with them. Deciding which assets go to which people, and when, is real planning work.

There is also a surprise built into the tax code that catches a lot of comfortable couples off guard. When the first spouse dies, the household usually goes from two Social Security checks to one, often keeping the larger benefit. But much of the other taxable income, the IRA withdrawals and the dividends, may keep coming. Eventually the survivor files as a single person, with narrower brackets and a smaller standard deduction.

Nothing went wrong. Nobody overspent. The investments did exactly what they were supposed to do. And the tax bill goes up anyway.

For this couple, my first piece of advice is a little anticlimactic: spend more. Take the trip. Book the villa. Then let's put real structure around what happens to everything else.

Now shrink the account to $2 million. Same couple, same $110,000 lifestyle. They are now pulling 5.5% a year, and the whole conversation changes.

At this level I am not interested in clever tax strategy yet. I'm interested in making sure the plan holds up.

Imagine the market falls 30% in their first year of retirement. That $2 million is now $1.4 million, and the same $110,000 they need to live on is close to 8% of what remains. They are selling investments near the bottom just to pay the bills, and that is a hole that is very hard to climb out of.

This is not the same as living through a crash at 45. Back then they were still earning a paycheck and adding to their accounts every month. A decline was, in a sense, a sale. In retirement the money is flowing the other direction, and every withdrawal made while prices are down locks in part of the loss.

The most dangerous stretch is the gap between the last paycheck and the first Social Security deposit. During those years this couple needs to be far more deliberate about how much market risk they carry. If a downturn catches them with too much in stocks, they may be forced into choices they would rather make on their own terms: cutting spending, drawing on other assets, or changing when they claim Social Security. Those are decisions you want to make on purpose, not ones the market makes for you.

The middle is where things get sneaky.

Put this couple at $3.5 million. They are drawing just over 3% a year. Once Social Security starts, call it roughly $50,000 a year, the portfolio only needs to cover about $60,000, which is under 2%. Running out of money is no longer the main risk. Taxes are.

And the tax mistake at this level doesn't look like a mistake for a long time.

Say $2.9 million of their savings sits in a traditional IRA and $600,000 sits in a regular brokerage account. The move that feels smart is to live off the brokerage account, leave the IRA alone, and enjoy a very small tax bill every year. It feels great. For about a decade.

Meanwhile the IRA is compounding untouched. By 75 it could be worth more than $5 million. That is when required minimum distributions begin, on a schedule the couple doesn't get to choose, and those withdrawals land right on top of their Social Security and their dividends. Higher reported income can also push up their Medicare premiums.

Look at what actually happened. They paid almost nothing in tax during their lowest-income years so they could pay much more during their highest-income ones.

The years after work ends and before Social Security and RMDs begin are often the best window a retiree will ever have to control taxable income on purpose. The goal is not the smallest tax bill this April. It's the smallest tax bill over the whole retirement, even if that means paying a bit more now. That might mean partial Roth conversions, or pulling some income from the IRA early, sized carefully each year.

I want to be careful here, because I've watched people hear this and immediately try to convert everything to a Roth. That's the same mistake pointed in the other direction. The right amount depends on brackets, Medicare thresholds, state taxes, and what the money is ultimately for.

It's also worth giving the brokerage account more credit than it usually gets. Pull $60,000 out of a fully pre-tax IRA and, generally, all $60,000 is ordinary income. Sell $60,000 of investments you bought for $45,000 and only the $15,000 gain is taxable, at capital gains rates, which for some households is 0%. The account people dismiss as tax inefficient is actually your steering wheel. It lets you decide how much income shows up on your return in a given year.

All of this comes back to one idea. The total on your statement doesn't mean what it appears to mean.

Part of every dollar in a traditional IRA belongs to the government. Every dollar in a Roth is yours. A dollar in a brokerage account is somewhere in between, depending on what you paid for it. Two people with identical totals can be in completely different positions.

That's why, when someone asks me whether their number is enough, I don't answer right away. I ask where the money is sitting. Until I know that, the total doesn't tell me much.

The tiers I described aren't fixed, either. Someone spending $280,000 a year from $5 million has the survival problem. Someone living on $55,000 from $2 million may already have the legacy problem. What sorts you is not the size of the account. It's the ratio of what you spend to what you've saved, and how that savings is held.

The pattern I run into most often is someone with $3.5 million running one more "will I run out?" projection, and then another, while a tax problem in the mid six figures quietly grows inside their IRA.

Don't be the man with the cabin he never bought. Figure out which problem is actually yours, and work on that one. Saving hard and growing the pile got you here. Spending it well is a different skill, and it deserves its own plan.