How Much Money Do You Really Need To Retire?

Will we ever be able to retire? That is a question that I'm getting much more often, especially for my clients that are in their 40s and 50s. People are getting nervous right now with the cost of living going up so much and just so much uncertainty about what the future looks like. People are starting hitting the panic button. You know, they're like, "Am I saving enough money for retirement? It's harder these days because we have so many priorities, so many things pulling out our paychecks where it's just harder and harder to put that money away. So, in this video, we're going to jump into Right Capital and look at the numbers. We have a married couple ages 47 and 45 with two children getting ready to go to college. One is age 17. The other one is 15. And we're going to see are they saving enough to be able to retire in their mid to early 60s when they would really like to. I hope that you find this one helpful. Let's get to it. All right. So, this is where we always start with a client's net worth statement to see what they have going on. Remember, a net worth statement, it's really like your scorecard for how you're doing financially. If you are not tracking your net worth on an annual basis at a minimum, then you really need to start doing that. It's even better if you do it every six months or even quarterly. All right, so let's jump in. So bank account. So they currently have 3,000 in their checking. That's money that goes in and out. Then they have $40,000 sitting in a high yield savings account for their emergency funds. That's a nice size emergency fund. All right, so they're doing pretty good right there. Then for investment accounts, so the husband, he has a 401k at work. It's all pre-tax. All right. A traditional 401k and he currently has $360,000 in there. Wife, same thing. She has $140,000 in her 401k. They each have a Roth IRA as well. The husband has 50 grand in his and the wife has $40,000 in hers. And then they have 529 plans for their kids, 85 grand and 45 grand. So total $720,000 that they have invested. So not bad. All right. Now, we're going to go through income, their jobs, all that good stuff as well. But first, we're just going to run through this net worth statement. Loans. They have a mortgage on their house. That is the only debt that they have in this world right now. And it's at a good rate. Everything is looking good with their mortgage. So, 30-year fixed four and a quarter. And they currently owe 365 grand on there. All right. The payment, just the principal and interest, is 1968 a month. All right. So their taxes and insurance they are escrowed but we break it out in the software. So principal and interest$968 per month. And then if we look at the property that they own, the house that they live in. So they live in New York, high cost of living area, their home value $750,000. You could see their property taxes $16,000 a year and their annual insurance $2,000 a year. So again, that's another $1,500 that is escrowed into their mortgage payments. Altogether, their mortgage payment is right around $3,500 a month between principal, interest, taxes, and insurance. So, pretty simple. That's their net worth statement right there. And we can see that their net worth is currently $1.148 million, right? So, we have all the assets and then we subtract their liabilities. In this case, only their first mortgage is their liability to get to that total net worth. All right, let's quickly run through goals here. So, they would like to retire. Husband 65, wife at age 60. They want to be able to spend $7,000 a month for retirement expenses. So now that does not include the mortgage that we just showed you. We're already accounting for that mortgage and the timeline of when that will be paid off. So this $7,000 a month, this is in addition to that. All right. We have health care costs, which is basically just the national average. We have long-term care costs, last two years of life, planning for a long-term care event, which would be super expensive. We're going to plan for that as well. Cash reserve. So they would always like to have $40,000 in an emergency fund. So we baked that into the plan. And then they want to be able to pay for their kids' college education the best that they can. So their older child who is 17 going to school next year, he wants to go to Villanova. All right. So we have the specific cost for Villanova, which is close to $90,000 a year, as insane as that sounds. and they are banking on him getting around $30,000 of scholarships, grants, money that they could put towards tuition and him taking out $5,500 in government student loans. So that leaves them with a little over $53,000 a year that they would like to be able to pay for that, which is a big number. And then for their second child, they are just guesstimating um a Sunni school. All right, so a public four-year instate college somewhere around $30,000 a year with room and board and everything. And then they also have the goal of going on vacation every year. We're doing $10,000 here index for inflation. So that'll go up a little bit each year. When they get into retirement, you know, we might adjust that because they might want to take some big trips when they retire, enjoy those first few years. We call them the go-go years. When they first retire, they want to go go and have some fun. All right? So, we might increase that vacation spending for that period of time and then decrease it as they start to get older, right? You ever heard of the go-go years, right? when you retire. Then you have the slowgo years where you slow down a little bit, but you still want to have some fun and go out. And then you have the no-go years as you get up into your 80s or so where you're not really doing too much, not really going on vacation, not traveling too much, not really spending all that much money on fun and travel and entertainment and everything. All right, income. Husband's making 160 grand. Good job. Wife's making 120 grand. Good job. They get basic increases every year. No bonuses or anything. Neither one of them is going to have a pension in retirement. So all of their retirement savings has to come from them plowing with money into retirement accounts and then eventually social security as well. For social security both of them planning on taking it at their full retirement age which is currently 67 years old. Now, as we all know, social security things could change, right? So, those full retirement ages, they could get later, benefits could be reduced, but overall, we're pretty confident that Social Security is going to be there for them, and it's going to be a very important part of their overall retirement plan. So, we're using age 67 here, and we'll show you what those numbers look like, you know, based on their earnings throughout their career. All right, Social Security is the best annuity that exists out there, and it's not going away. There might be some tweaks that go to it, but we are still planning on having social security be an important part of retirement. All right, so savings. So they are currently each doing 6% into their 401ks at work, and they each get matches. They each get half, so 3% matches from their employers. They're both doing backdoor Roth IRA contributions. So now they make too much money to be able to just do a regular Roth IRA contribution. In 2025, the maximum you could do is $7,000 a year. So, they are each doing that, but they have to do backdoor Roth contributions. And I'm not going to get into what that means in this video. Um, but they are able to make those contributions through backdoor Roth IAS, but they will continue doing that as long as they actually have the cash flow to contribute to those Roth IAS. And now they are also putting in $10,000 per child per year into those 529 plans, trying to catch up with those to be able to afford a school like Villanova, you know, and um and have that money coming out of 529 plans. For their living expenses, they're guesstimating that life cost them around $9,000 a month plus that mortgage payment that we already accounted for, right? The principal, interest, taxes, and insurance. So that was an additional $3,500 or so. So altogether life costs them around $12,500 per month. All right. So now we are going to jump right into the retirement section of this software and see is it possible for them to reach their retirement goals based on everything that they are currently doing right now. So now this first screen this is what we call a Monte Carlo simulation. It takes all the data runs a thousand simulations. You know, I know I talk about this every time I go into the software, but just as a refresher, I don't put a ton of weight into these numbers because you will adjust as life goes on, right? You always need to keep this plan going. But these are guardrails. This lets us know, are we actually on track? Are we doing the right things to be able to retire when we want to retire? What could we adjust? What could we play with? So, right off the bat that they're at 88%, that is not bad, right? We're looking pretty good. And this $5.1 million number that we see here, that is the median amount of money that they would pass away with. So we have end of plan age 90. So if everything goes according to plan, right? They would end up passing away at age 90 with a little bit over $5 million. That's a lot of money to pass away with, right? But we do have to plan for if things don't go according to plan. So what if the market stinks for the first 10 years when they retire? That will have a very big impact. So this $5.1 million, you know, that's not guaranteed. That doesn't mean that that's actually what's going to happen. We need to keep on planning and seeing year by year, you know, are we still on track? Is everything going our way? And the market, unfortunately, is going to play a big part in this because their only guaranteed income is social security. So the market ups and downs, right, their money that's invested in 401ks and Roth IAS and all of that, they're going to be heavily dependent on using that money. So, if the market does not cooperate, then it could blow everything up in this plan. All right. So, we're going to jump into the cash flows here. So, now let's focus on this top row, 2026. All right. Their income, right, $280,000. Now, their son is going to be in college in 2026. So, this plan distribution, this is taking money out of his 529 plan to pay for his first year at Villanova. All right. So, we have total inflows, right? We count this distribution as an inflow because we are counting it as an outflow over here under goals. So total inflow is at 333. Now expenses. Let's click on this and see what we have under the hood here. So we have the living expenses which is the $9,000 a month plus we have their housing payment which if I click in on this we see it's principal interest, taxes and insurance. So that's where we get that $41,000 and change and their total cost of living right around $150,000 for the year. All right. Now, goals. Now, this is where we have that college goal that they're currently doing, right? So, Bill's right there. And then we have the $10,000 travel and vacation goal for the year. And you can see for taxes, we're not going to dig into the taxes right here, but $70,000 between federal, state, and their FICA taxes. and then their planned savings. So here we have 401k contributions for each of them doing the 6%. Then we have the backdoor Roth IRA contributions and then we have the $20,000 that they are saving in the 529 plan. So they're saving 50,000 bucks throughout the year. All right. And you can see their cash flow. It's basically break even. All right. So they are able to accomplish all of this in 2026. All their savings goals, right? Everything looks pretty good right there. This negative cash flow, you know, that's not the end of the world, right? Because they have the three grand in the bank that we showed and they have that $40,000 emergency fund. So, when you have a negative cash flow, the system just assumes that you're going to go ahead and you're going to use that to make up the difference. All right? And as we go through these years right here, so these are the tough years where they have kids in college and they're going to be using that money, right? So, as we kind of go through, we could see that these distributions are getting smaller, right? So, they have one son who's going to be leaving college, the other one that's going to be going into college. But unfortunately, what happens here is they're going to run out of money for college. So, they're gonna have to make a decision. You know, do we prioritize saving o for college over putting money into our retirement accounts? And I always say, no, you should not make that decision. You should instead focus on you and saving for retirement and deal with college in a different way. if that means them taking on loans or you taking on loans or whatever the case may be in order to do it. You know, you don't want to put retirement on the back burner while you are saving for college, especially if you're worried that you might not have enough for retirement. So, if we go and look at we look at the plan savings for these few years, you could see that they are not able to save in these Roth IAS because they're putting all their money towards college. All the money they have in the bank in this example, they're using an emergency fund, right? things that I would not recommend that you go ahead and do the 529 plan. They're not able to do it anymore. So, the second son, they technically really run out of money saving for college for him. They would have to take loans in that instance. But then you can see as we get into like the year 2032, their incomes continue to go up. So, we're indexing for inflation. Their expenses continue to go up. We index that for inflation as well. And now this goal, this college savings goal has come off. All right. 2032, they no longer have any kids in college. So now you can see with their cash flow, right? Their taxes are going up, their savings, they're able to now go ahead. Let's click on this. So 2032 plan savings, they're able to do those Roth IRA, those backdoor Roth IAS, and they index this for inflation as well. We don't know what the limits are going to be in 2032. The system basically makes assumptions that, you know, those uh Roth IRA contribution amounts are going to be indexed for inflation and go up. All right, so 39,000 bucks they're able to save in 2032 and now they have positive cash flow. All right, so they have $20,000 almost a positive cash flow. So in the real world, they would be using that positive cash flow now most likely to pay back loans that they had to take out to put their kids through school if that's what they decided to do. They'd also be using it to build up their emergency fund again because they went through that during those college years. So they really don't have any money in the bank. So they're kind of living paycheck to paycheck and things are a little bit tight. But now that school is over, you know, we see these years where they have this positive cash flow and we're going to make the assumption that they are going to bank this money. All right. Now, in the real world, once we got to this point, we would most likely recommend that they max out their retirement accounts, they start juicing up their 401k contributions instead. Once they build up that emergency fund, once they pay off any debt that they might have accumulated during those college years, we wipe all that stuff, get the emergency fund where we want it, and then we would go ahead and we would increase retirement account contributions. All right, but in this scenario, we are making the assumption that they're just banking that money. They are building up the cash, which they're going to need, and I'm going to show you that in a second. All right, so as things continue, everything is looking good. And then we have right here in 2040 where the wife decides to retire. So now we just have the husband's income for a few more years. And then we could see in 2043 there is now no more income coming in and their living expenses, right? They have 215 $216,000 in living expenses and they're still traveling, right? So now we're spending almost $16,000 in travel that year and they are paying they have a big tax bill as well because the only way that they're going to be able to make this happen is by using the money that they've accumulated in the bank but also taking withdrawals from their retirement accounts, right? Which are going to be taxed. So why don't we go ahead and dig a little bit deeper in 2043 and see what that might actually look like. If we go to accounts over here and we scroll down 2043, you can see at this point they've saved a lot of money in their retirement accounts, right? They would have $2.3 million in their 401ks. They would have $800,000 in their Roth IAS. So, I mean, that's over $3.1 million. That has to make you feel pretty good about retiring at this point, right? It's 2043. We're 65 and 63 years old, and we have $3.1 million in the bank, and we really don't have any debt. So, you would think at this point, you know, retirement, it looks like they're definitely able to retire at this moment. All right, we haven't even factored in social security or anything yet because they're going to delay on taking that. So, now let's see. In this year, they have no income, right? They have to pay for their life, their living expenses, their travel, and everything. So, if we go and we look at withdrawals from accounts, we could see in 2043, they're basically taking it all from their 401ks, $276,000. And that's where we saw that tax, that $44,000 in tax or so. Now, again, in the real world, when they get to this point, we might not attack it this way. We have to see what would make the most sense, what the tax rates are. Maybe we would do a combination of taking money out of the traditional 401ks, IAS, and some out of the Roth to keep them maybe in a lower tax bracket. We'd have to see what that actually looks like, what their spending needs are, you know, where they are in the world at this point. when we're projecting out and we're going, you know, 15, 16, 17, 18 years into the future, there's so many unknowns, right? That's why we have to look at this each and every year and see what does the world look like right now, right? What's the cost of living? What are our goals? What is everything that uh you know that we have going on at this point? All right, so let's go back over to the summary here. So, we were looking at 2043 where they have no income. And now Social Security, they're each going to take it at their full retirement age, which is age 67. So you can see the husband, he turned 67 in 2045. He's going to start having social security now. Now again, they still have a very big negative amount for their cash flows, right? Because their only income is this $71,000. Their living expenses, 225,000 plus travel, right? Plus they got to pay the taxes on the distributions that they're going to be taking in order to live, in order to get by. So they're still negative $27,000 throughout the year. And that does continue, right? We have a few years before the wife, she turns on social security. So now here we are in 2048 and both social securities are turned on and they're bringing in around $160,000 a year and you can see that that is indexed for inflation. So now their expenses are still much higher than what their guaranteed income is. All right? So they are still in a pretty big deficit and they're traveling as well and they have their tax payment. So they're still negative $132,000 or so and that really does continue. So now all these negative numbers on the right hand side there, they scare people, right? It's like, oh my god, I'm negative $130,000 a year, you know, and that goes on and on year after year. But if we go ahead and we look, so let's pick 2048. Let's see what do their accounts actually look like. So in 2048, they still have $3.1 million in these retirement accounts. And that's because the accounts are still growing. So even though they're pulling money out, the accounts are still growing. But now this is where I come back to, you know, being at risk in the market, right? Because they are banking on the market doing okay. We're not using crazy numbers here. All right? And in the software, we use what's called a glide path. So as you retire and get into retirement, the smart move, what everybody's going to do is they're going to get less risky because they know that they're going to have to start drawing on some of this money. So they're going to have more money in bonds and money market accounts that's safe and secure which is in turn going to bring down their rate of return because they're not invested aggressively. So we have to account for that. So the glide path it's like you start out with you know maybe 90% stocks 10% bonds and as you start going through retirement the equity piece you see it start going down right and you see the bond allocation start to rise. And I could actually show you the glide path that we're using in here. So here's an example of a glide path. Okay. Now this purple, this is equity. So you can see while they're in their 40s and their 50s, you know, they're over 80% in equity. This green, these are fixed income. So bonds, treasury bonds, government bonds, corporate bonds, that's the fixed income piece. And then we have the cash piece as well. So once they're in their mid70s, we could see that their equity piece is now down to low 40s. Their fixed income is in the mid-40s as well. and then they have 12% or so in cash so that they have that money ready to withdraw and it's not at any risk of going down in value right when they need to take it out. So when we talk about a glide path or an allocation path, this is what we're talking about. How you're going to strategically get more conservative as life goes on and as you need to start taking distributions from this money. Now, if you're one of those unique situations where maybe you don't really need your retirement money, maybe you have a lot of Roth money for retirement, then your glide path might look very differently. If you're not going to be pulling on this money and distributing it, then you might want to have a much higher percentage in equities, for example, because maybe you're going to leave this kid this money to your kids to your grandkids. So, it has a very long time horizon even though you're old, right? You want to have that money continue to be aggressive because it's not going to get used for a long time. All right. All right. So now coming over to this one more thing I want to show you and then we'll wrap this up. So now at age 75, the IRS requires them to take money out of their traditional 401ks and IRA. So they're going to have required minimum distributions. And that's what you see here in these plan distributions. So in 2015, the husband turns 75, he's going to have an RMD, right? And then when the wife turns 75, she's going to have hers as well. So you see this jump up. So they're going to have to take this money out. in their case, they would need to take it out anyway because their expenses are more than their guaranteed income. So the R&Ds, it really does not have a big impact on them because they're taking the money out of their retirement accounts just to live. All right, but that's why you see this row, this column here of the distributions. So between their income flows, which is their social security income, plus the distributions from their IAS, you can see now the total inflows. And now they get to the point where between those two, it does cover all of their living expenses and the taxes. And it's interesting to see here, you know, their tax payment, it's really not that high, right? If they're only paying $16,000 in taxes during these years, you know, to me, that is a win, right? Between Social Security and the distributions that they're taking there, um, they're going to be in a in a lower tax bracket right there. So overall, when looking at this family, I would say yes, you are on track to be able to retire at ages 65 and 60. Now, there's a lot of things that we did not look at in this plan. We didn't look at any of their insurance, right? There's a lot of parts of a financial plan that we are not able to get to in this video. But my first thoughts after going through this is that yes, they will be able to retire when they want to, but they are at mercy of the market. So, their investments, their allocation, it's going to play a very big role in their probability of success. But they are doing well enough where if they just continue on this track, they will be able to pivot. There are other life events that could happen like one for example, are they going to stay in that house, right? That house might be too much for them once their kids are grown and out or maybe they will sell it and they will downsize and they'll have a couple hundred,000 or so that they'll be able to stick into the bank. Hopefully more than just a couple hundred,000 depending on where they want to move to. We didn't account for more travel those go-go years, right? So maybe that would reduce the probability of success a little bit. There definitely other pieces of this, but my first thought looking at it, 88% is fine. and they're saving a lot of money for retirement. Maybe they could do a little bit more Roth. Maybe they have a Roth 401k if that's something that they wanted to do. We'd have to look at tax brackets and everything. But overall, I would say, yeah, I think you guys would be able to retire when you want to. It might be a little bit stressful at points and maybe they could get themselves some more guaranteed income if that was something that was important to them. They'd be able to maybe buy a fixed annuity later on in life if that's something that they wanted to look at. Um, but overall, you know, moneywise, I think that they are doing okay. All right, let me know what questions you have below. Let me know if there's anything that I missed in here that jumps out at you. I appreciate you for watching. I will see you in the next video.