where did the idea that you need a one million dollar retirement nest egg come from and how
important is that numbered individual retirees in my opinion it's not really helpful and could
actually be really harmful to a lot of people stick with me as I explain why in many cases
retirees actually need less than you may imagine so where did the one million dollar number come
from the figure of one million is a recommended retirement Nest Egg it's a rule of thumb that
became popular in the early 1990s as a result of a study conducted by financial planning expert
William Bengen thinking study examined the maximum safe withdrawal rate that a retiree could sustain
from their savings over a 30-year retirement period without running out of money he found
that historically a four percent withdrawal rate is sustainable in most market conditions assuming
a balanced portfolio of stocks and bonds of course this maintained that no matter what happened even
in the Great Depression you never ever change that withdrawal rate using this withdrawal rate as a
guide banging calculated that a retiree would need a portfolio of approximately one million
dollars to generate a sustainable annual income of forty thousand dollars adjusted
for inflation going forward ah so it's a big round number used in a study because
it's easy to understand and more relevant than using one hundred thousand or ten million well
that makes sense but for many people I believe they should throw that number in the garbage
because rules of thumb are not important what is important is the specifics of your situation I
think a lot of people misjudge how much they will need in retirement because of that number and it
causes them unnecessary Stress and Anxiety around money and some may even believe that retirement is
unattainable so they just give up but I believe in many cases retirees actually need less than
they may imagine I can hear already people in my industry Whispering don't tell them that Colin
but the key is to actually plan it out with real numbers so let's look at a few things
the information in this video is for educational purposes this is not specific financial planning
health insurance or investment advice in addition everyone's tax situation is different you should
discuss your tax situation with a qualified Tax Advisor before implementing any planning strategy
for decades financial planners we worked on of an assumption that retirement expenses rise with
inflation over time like a straight slow moving line increasing a little every year it was easy
to calculate and prepare a financial plan and pretty easy to understand but that isn't actually
how most people spend money in retirement you see what I found in working with my practice and it's
actually been backed up with other information is that retirement spending looks more like a smile
spending is most often higher than expected in the first few years of retirement as you spend money
doing all the things you didn't have time to do while working you know the bucket list items that
makes sense then once you've done those typically expenses fall pretty significantly as you spend
more time around your home until you eventually have health issues and your costs rise back up in
the form of medical expenses planning using these smile method instead instead of a straight line
increase can make a big difference in the size of the nest egg that you need in my opinion the three
key questions to ask yourself are how much are you going to pay in taxes do you have a mortgage
in retirement and what will your out-of-pocket medical costs be these will most likely be
your three biggest expenses in retirement so understanding how they work can really help you
determine how much money you will need let's first look at taxes what type of accounts that your
funds are in can dramatically affect how large of a portfolio you need are you taking advantage of
health savings accounts Roth IRAs Roth 401ks and other tax advantage Vehicles whereas everything
in a traditional pre-tax retirement account your taxes in retirement depending on how you
get your income can be pretty significant or they can be greatly reduced with proper plan
but the delay and praise strategy can mean you need a bigger nest egg remember for every dollar
you distribute from a pre-tax retirement account the federal government gets its share so the
more you have accumulated in pre-tax retirement accounts the more potential tax you have to pay
what state will you be living in during retirement some states tax retirement distributions and
others don't additionally some states cost a heck of a lot more to live in than do others that can
impact the size of the retirement Nest Egg you need someone living in States like New York New
Jersey and California would need a much larger Nest Egg than someone who retired to a low tax
and a low cost of living state will you have a mortgage many people in their 50s and 60s have a
mortgage the really cheap mortgage rates of the past decade made it very enticing to lock in a
rate below four percent should you focus on paying off that three percent or four percent mortgage or
keep those funds growing in an investment or real estate portfolio it's a personal decision but I
think it dramatically affects how much you need to accumulate if you have a paid off mortgage you may
need significantly Less in a retirement portfolio than you think because you don't have that monthly
mortgage payment to worry about health care costs take a look at the national average cost of Health
Care per person in retirement and factor that expense into your plan the most recent study by
Fidelity Investments found that a 65 year old couple retiring in 2022 can expect to spend an
average of three hundred and fifteen thousand dollars in health care and medical expenses
throughout retirement if enrolled in traditional Medicare and this doesn't count long-term care
in a 20-year retirement that averages to just under sixteen thousand dollars per
year for a married couple of course that number is smaller in the first decade of retirement
than it often is in the second decade okay now that you have an idea about your three largest
expenses in retirement let's move forward and work on figuring out your retirement
income needs usually when people are thinking about retirement they're currently working and
they're using their current income level as a starting point as it's their current standard
of living so let's do that what are some of the things being deducted from your paycheck that
will not be deducted in retirement the first and most obvious are work related expenses but what
are they in your situation and what do they add up to things like union dues or association fees
uniforms or nice suits if you live up in New York City and need to wear those every day commuting
costs like gas maintenance tolls parking fees bus or train costs and also Continuing Education and
Training expenses there's a good bit of these the second is how much of your income you are saving
obviously when you're retired you're spending not saving so if for example you're currently
saving 10 percent of your pay into your 401k that's an expense that you no longer have third
Social Security taxes 6.2 percent of your wages on the first 160 200 in 2023 they go to Social
Security fourth Medicare taxes one point four five percent of your wages go toward Medicare
but unlike Social Security there is no income cap on these taxes okay what I want you to do is take
your current gross income and subtract those expenses let's say that you're spending five
percent of your gross pay on work related expenses that go away when you retire let's assume you're
diligently saving 10 percent of your gross pay for your retirement and you're paying 7.65 of
your gross income on Social Security and Medicare taxes that means that you can reduce that income
level to 77.35 percent this is where another rule of thumb comes into play that says assume you'll
need eighty percent of your final Year's gross income I've seen that in a lot of places and
it's pretty close at this point but we haven't yet taken into account any federal and state
taxes you're currently paying while working and if you will be paying a mortgage in retirement
according to the most recent update from the tax Foundation they found on average federal
tax rate of 14.6 percent for the top 50 percent of taxpayers let's also assume another 2.4 percent
for state and local taxes that's 16 percent total so we can subtract that in the number in
your case subtract the effective tax rate not your highest rate but the effective tax which
covers your entire income range in this example we are now down to 61 percent of your gross income
if you'll have a paid off mortgage you can reduce your income need by that annual amount
so if you're currently paying a mortgage and it's scheduled to be paid off by the time you retire
whatever that annual mortgage payment is you can reduce that from that gross income number lastly
will you be receiving Social Security most people will and in 2023 according to the Social Security
Administration the average annual payment for a 65 year old was roughly thirty thousand dollars a
year and if you're married and both spouses worked you may be able to double that number but every
situation is different so make sure you check out your number and let's assume that you keep
85 percent of that income after taxes subtract that number to figure out your income need to
maintain your current standard of living this is now the starting point using actual numbers
to figure out how much per year you need from your portfolio adventure to guess especially
if you have a paid off home that this number is substantially lower than your current gross income
it may be even surprising how much lower it is and if it's lower than forty thousand dollars then you
may not need anywhere near a million dollar Nest Egg I'd encourage you to take a look at
your own specific situation run the numbers using this strategy and you'll have a great
starting point to what you may need each year for retirement in current dollars that'll make
it a lot easier to figure out whether a million dollar nest egg is too much not enough or just
right and make sure you check out this video next in order to supercharge your Investment Portfolio