How Much Money Do I Need to Retire?

Transcript

Mike:

Today. We’re trying to answer the question. How much money do you need to retire? Very common question. That’s asked and here on the screen, this is an article from Yahoo finance. This was a study done where 401k participants were asked; How much do you think you need to save in order to retire? Let’s find out the answer. It says if 1 million was once the consensus target, well, that’s changing. A recent Schwab retirement plan services survey showed or found rather that 401k plan participants now believe they must save dun dah, dah, dah, $1.9 million. Yeah. Almost $2 million. They think, wow. In order for us to retire, we need $2 million. Or as Dr. Evil would say an Austin Powers, you know, $2 million. So hopefully I didn’t lose some of you in that movie reference. Here I am. You know, I’m a certified financial planning professional. I’ve been helping people get into and through retirement for the last 25 plus years.

Mike:

And here’s what I have to tell you. Studies like this are silly, right? They it’s, this is basically worthless information. I’m going to help you figure out how much you need to save for your retirement. The good news is it’s not necessarily that hard. So here’s the general math on this. So we’re going to start with your goal and the goal has to do with each annual income. So I want you to think about how much money do you need an annual income to retire comfortably, right? That is step number one. Now let’s imagine you do the math. You think, okay, if I’m retired, you know, maybe your home is paid for, maybe it’s not. You think about what you want to do in retirement. Remember if you want to travel, that costs money. You know, how often are you going to buy cars? What are your property taxes look like your insurance, and you kinda work through your budget and don’t forget about income tax. And let’s imagine for the sake of discussion that using today’s dollars, let’s imagine you need, I don’t know, a hundred thousand dollars a year, step two sources of income. Where will you get that income and may get it from a number of places. For example, you might have social security. In fact, probably you’ll have that. You may have a pension, you might even have rental income.

Mike:

It really doesn’t matter. You just have whatever your situation is. You have to add it up and you have to figure out when you look at your various sources of income and by the way, I would highly encourage you to think about these sources of income as stable income is what we’re looking for. Here’s what we’re not talking about. Okay? This is not not talking about, you know, maybe personal loans, right? Oh, I just know my buddy’s going to pay me back. I know my kids are going to pay me back. Yeah. I don’t think that’s great to include that required minimum distributions. They do not count. They don’t count that’s investment income, investment income does not count. In fact, I’m just going to write all investment income. None of it counts unless it’s coming from government bonds, because the reality is investment income changes.

Mike:

Every, every year, it’s not stable. We’re talking about stable income. Let’s just imagine for the sake of argument that you’ve got a total between social security, maybe you’re married or pensions or rental, let’s say it all adds up to 60k per year. Again, it may be more or less for you, right? Your number might be higher or lower. And so we say, what is our gap? Well, here you go. A hundred minus 60 means you are short 40,000 per year, right? That’s your shortfall. So the question is how much money do you need to have saved in your investment portfolio in order to generate that 40,000 a year? And don’t forget, we need to grow it over time with inflation. So the general rule of thumb is income goal times 25. How’s that? That’s a fun one, huh? Income goal times 25, the conservative rule of thumb is income goal times 33.

Mike:

How about that? Because what this really does is this one really equal to a 4% distribution rate. This is a 3% distribution rate. That’s what it really means. So let’s do some math. We said we needed 40k per year. That’s what we said we needed from the portfolio. If we say that times 25, that tells us you need to save not $1.9 million. Like the goofy article said, it says, you need to save $1 million and $1 million. Again, if you do the math times, 4% up here equals 40,000 a year. How’s that pretty simple, pretty straightforward. Let’s look at the conservative approach. 40K per year, times 33. That’s probably around 1.3 million. Give or take probably it’s a smidge more than that. But if you take this times 3%, guess what? You get the same 40,000 general rule of thumb 4%. That’s that one right here.

Mike:

If you have an advisor that is really, really knowledgeable about how to manage money in retirement, 4% will typically work well. On the other hand, if you’re thinking, you know what? I just want, I’d rather be safe than sorry. And I’m a big fan of that. I love it when you’re better, safe than sorry, then nothing wrong with number two there. Nothing where I say, you know what? I’d rather have extra money than, you know, not enough. You know what if inflation goes crazy? What if the markets don’t cooperate? What if, what if, what if? Being a little more conservative here is not a bad idea at all. We said, we want a hundred thousand. That was step one, figure out your number. You might be higher. You might be lower. Step two. What are your sources of stable, stable income, not up and down income, stable income.

Mike:

In our example, we said, ah, maybe that’s 60,000. In our little example, again for you might be more or less, you find the difference between the two. We said, oh, look, that was 40,000. Great. We now know our gap, right? That’s the gap. And now the simple question is how much money do we need to have saved to plug the gap? Well, we just did the math down here. We said two general approaches. We have the general rule of thumb and the conservative rule of thumb. General rule of thumb is whatever your income gap is, 40,000. In this example, multiplied times 25, more conservative, multiply it times 33. And there you go. I’m a fan of conservative. I’d rather have you be in a position where you have a little extra money. But with that being said, they both work well. That was this week’s message. I hope you found it helpful. See you again next week.

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