How to Retire on a 100k Annual Income

https://youtu.be/A8W0vMl4f64

Transcript

00:00:00:01 – 00:00:41:22

Mike

How much money do you need to retire? Very common question that’s asked in here on the screen. This is an article from Yahoo! Finance and it’s titled 401k Plan. Participants say they need to save this much to retire. So let’s find out. The answer says if 1 million was once the consensus target. Well, that’s changing. A recent Schwab retirement Plan Services survey showed that 401k plan participants now believe they must save $1.9 million.

 

00:00:41:23 – 00:01:08:09

Mike

The question is, are they right? And how do you know how much you need to save? Well, 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. And here’s what I have to tell you. Studies like this are silly, right? They it’s this is basically worthless information.

 

00:01:08:10 – 00:01:43:23

Mike

So what I want to do is I’m going to switch to my iPad and 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 we’re going to start with your goal. And the goal has to do with annual income. So I want you to think about how much money do you need in annual income to retire comfortably?

 

00:01:43:27 – 00:02:03:01

Mike

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 do your property taxes look like?

 

00:02:03:01 – 00:02:30:20

Mike

Your insurance and you kind of 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, $100,000 a year. Your number might be higher. It might be lower. It’s okay, but you got to start there. Okay. That’s step one. Step two, sources of income.

 

00:02:31:01 – 00:02:50:15

Mike

Where will you get that income? And you 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.

 

00:02:52:17 – 00:03:17:08

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, urge you to think about these sources of income as stable. Income is what we’re looking for. We’re not. Here’s what we’re not talking about.

 

00:03:17:09 – 00:03:46:27

Mike

Okay. This is not not talking about, you know, maybe personal loans, right? Oh, I just know my buddies going to pay me back. I know my kids are going to pay me back, but I don’t think that’s great. To include that required minimum distributions. They do not count all investment income. None of it counts unless it’s coming from government bonds.

 

00:03:47:01 – 00:04:22:28

Mike

Because the reality is investment income changes every every year. It’s not stable. We’re talking about stable income of the stable income. If we add up these items here that are stable, let’s just imagine for the sake of argument, let’s say it all adds up to 60 K per year. Again, it may be more or less for you. You are short 40,000 per year, right?

 

00:04:23:05 – 00:05:00:19

Mike

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. General rule of thumb, I’ll call it the r0t and then we’ll go the conservative of the conservative rule of thumb.

 

00:05:01:06 – 00:05:40:15

Mike

So the general rule of thumb is income goal times 25. How’s that? That’s a fun one. Higher income goal times 25. The conservative rule of thumb is income goal times 33. Because what this really does is this one is really equal to a 4% distribution rate. This is a 3% distribution rate. That’s what it really means. We said we needed 40 K per year.

 

00:05:40:24 – 00:06:11:20

Mike

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. Pretty simple. Pretty straightforward. Let’s look at the conservative approach.

 

00:06:12:17 – 00:06:50:22

Mike

40 K per year, times 33. That’s probably around 1.3 million give or take. Probably. It’s a smidge more than that. Maybe it’s 1.3 to whatever. Right. But if you take this times 3%, guess what? You get the same 40,000. 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.

 

00:06:50:23 – 00:07:23:07

Mike

We said we want 100,000. That was step one. What are your sources of stable, stable income? Not up and down income. Stable income. In our example, we said maybe that 60,000. In our little example, 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. Now, the simple question is, how much money do we need to have saved to plug the gap?

 

00:07:23:08 – 00:07:47:21

Mike

General rule of thumb is whatever your income gap is, 40,000. In this example, multiply it 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.

 

00:07:47:21 – 00:08:04:13

Mike

I hope you found it helpful. See you again next week.


 

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