How Much Do I Need to Retire

Hey, what's up everyone and welcome to the school of personal finance So if you google how much money do I need to retire? You're going to get answers like you need 25 times the amount of money you spend each year Or if you say how much could I withdraw from my accounts in retirement so that I never run out of money And you'll get the four percent rule the safe withdrawal rate So while these rules of thumb they pretty much apply to everybody and they're helpful at the same time They don't really apply to anybody because each situation is very different. Each person is unique So I say that retirement planning instead of it being a snapshot or you having your number It's more of a puzzle and this puzzle is unique to you You're the only one that has these pieces to this puzzle and in this video I'm going to teach you exactly how to go about putting this puzzle together and figuring it all out All right So i'm going to walk you through the exact steps to try to help you wrap your head around how much money You're going to need to live a comfortable retirement So now before I do I just wanted to say a couple quick things It's been about two months since I started uploading these videos on a consistent basis And I must say i'm having a lot of fun doing them So yesterday was the first time that I uploaded an ask rich episode Where i'm going to start taking questions and doing that once a week as well I've had a lot of support from a lot of people and I truly do appreciate it and the channel is growing I'm starting to gain more subscribers and getting more views on these videos and reaching more people If you want to help me out if you could hit the like button If you could start commenting below on the youtube videos themselves and also subscribing to my channel All three of those things are free and they only take a second of your time So that's the one thing that I ask to help me try to reach more people and grow this channel even more So a few captain obvious things to get out of the way first Number one is that it is so different for everybody depending on if you have a pension If you have health benefits that are going to last all the way through retirement Depending how much money you spend every month What kind of lifestyle you want to have all this stuff is so dependent on the individual that it's hard to use a rule of thumb So step number one and now this step is not easy and again, it depends how far you are from retirement But it's really just trying to picture what retirement looks like for you Is it a must-have that you have a ferrari when you retire or that you buy a house on the beach in florida somewhere? So those things are going to play a role because they will move the needle when it comes to how much you need to save for retirement so step one is to just start thinking about what it looks like for you when it's going to be and You know what must-haves what big things must you have that you want to plan for now The second step is to come up with a number that you need each and every month to live comfortably So with a traditional retirement, you know, we call this your replacement rate How much of your income do you need to replace to live a comfortable retirement and it depends how much income you make? But a happy number is somewhere between like 70 and 80 percent If you have a very high income then it's actually even lower than that But let's say for example, you make a hundred grand then typically in retirement and this has been shown through numerous studies In retirement, you're going to need about 80 percent of that maybe eighty thousand dollars a year That's because you no longer have the expense of your job and you don't have the expense of saving for retirement anymore You're no longer in the accumulation phase. You're now in the distribution phase So you don't have to save money to put into retirement. You're going to start taking money out of retirement So eighty percent is usually a good replacement rate where you're going to continue the lifestyle that you had while you are in Retirement and now step three is where we really get into the thick of things So this is where we start looking at all of your different income sources The first thing that we look at are your guaranteed incomes now The ideal situation for retirement is that you have a pension You have social security and those two things cover all of your monthly expenses and then you have this big fat Non-taxable brokerage account that has a lot of money in there and you have a big fat Roth IRA And those are the things that you pull up that you pull from for party time for trips for vacations taking your grandkids on cruises I don't have to I don't want to have to worry about that crap if I could afford to Take my grandkids on a trip to disney or if I could afford to go You know to europe for a month if I want to in retirement I want to have a big pool of money that I could just draw from whenever I need it So I want to have guaranteed income sources that cover my monthly expenses And then I want to have these big pools of money that when I want I just grab from it And I go do whatever the hell it is that I want to do. That's the ideal retirement Unfortunately, it's become very hard to live in that ideal scenario. So that's it for the guaranteed Now we move to the variable income sources So variable income sources are going to be investment portfolios So that's going to be your 401k IRA, Roth IRA, 403bs, 457 plans, all the different types of retirement accounts Other than that, we have rental properties and another big point with the sources of income Is the tax consequences of them? That's why i'm a big fan of the Roth IRA because when you take that money out in retirement, it is tax-free So when you have different sources of income you want to have all these different levers that you could pull depending on your situation So the more money you have in tax-free or tax-favored accounts Then the less you have to save compared to somebody who all of their money is in the 401k Or in the traditional IRA because their money is all going to be taxed when it comes out where if you have Roth money And real estate that money is going to be coming in tax-free to you So it really depends on your situation But it's another reason why it's good to have all these different income sources in retirement Feeding you so that you could play the game depending on what's going on at that time Let's say ten thousand dollars a month is how much I need to live Let's say I have no pension, no social security, no guaranteed sources of income So I need that ten thousand dollars to come from my investment portfolios So now my rental properties, let's just make the assumption that in retirement they're going to give me five thousand dollars a month So that leaves a gap of five thousand dollars a month that I need to generate from all other investment types So this is where the four percent rule comes in or the 25 times your expenses So if I need five thousand dollars a month to come from my retirement accounts, my investment portfolios, my brokerage accounts Five thousand dollars a month, that's sixty thousand dollars a year that I would need from there So sixty thousand dollars a year comes out to be one and a half million dollars. So 25 times Sixty thousand a year and we get one and a half million dollars, right? So four percent of one and a half million dollars, that's sixty thousand dollars a year And now that does not take into consideration Any fun money that you want, a big nice pool of money that you could pull from To go on cruises, to go on vacations, to take your grandkids to Disney World, to buy that Ferrari, to do whatever you want So there's even more that you want to have saved for retirement So it's not easy It's simple, but it's not easy, but there's a lot to this. So back to the four percent rule for a minute It really is a solid rule of thumb and it does apply So if you have a million dollars in your retirement accounts when you retire four percent of that is forty thousand dollars a year So when I first heard of this rule years ago, I thought to myself that sounds really low You're telling me if I save a million bucks then in order for it to last, you know 30 plus years in retirement that I could only take out forty thousand dollars a year And it is true. I mean that is the safe withdrawal rate If you stick to that four percent, then there is a very high probability that it will last for your entire life Now it does include a cost of living adjustment. So an inflation adjustment So you could increase the amount that you're taking out each year by inflation So for example, if you're taking forty thousand dollars out a year Then the first year you take forty thousand the next year if inflation is three percent, then you can take out another twelve hundred dollars So then it would be forty one thousand two hundred in year two and then in year three You know you ratchet it up by three percent to keep pace with inflation so it does go up each year with inflation But that is the safe withdrawal rate. I mean it's been tested time and time again and In a lot of instances you end up with a lot of money But if you happen to be unlucky and retire right before we have a big downturn in the market a big bear market Then it still has been tested that it will last for your entire life or at least for 30 plus years in retirement All right. So that's it for this one The biggest takeaway is that coming up with an amount that you need to be able to retire comfortably It's not a simple process There needs to be a lot of thought that goes into it and there needs to be a lot of planning And the earlier you start planning in your life the better off you will be so my advice start planning now Start investing in different types of accounts so that you have different places that you can pull from in retirement And you have different income sources so that you'll be able to have some flexibility And you'll be able to go with whatever's happening in the world at that time But it's important to start today to save for the future because we just don't know what it's going to be like If you like this video, make sure to hit that thumbs up button subscribe to the youtube channel Thanks so much for watching friend me on facebook linkedin Instagram all the fun places. I will see you again in the next video. Thanks a lot