- [Narrator] $1 million, $3 million, $5 million,
12 times your yearly salary.
Those are some of the answers you get
when you ask the question,
"How much money do I need to retire?"
I don't like any of those answers
because they're all too general
and doesn't really take into account
your specific situation.
Plus, I think the real number
is going to be a whole heck
of a lot lower than you think.
So let me show you
how much you actually need
to save for retirement in a way
that's going to get you closer
to a more accurate number
based on your specific situation.
Oh, and it can easily be done
in five simple steps
and will only take you about 10
to 30 minutes to figure out.
Listen up Gen X, millennials,
and Gen Z people because you need
to know this sooner rather than later.
Look, we all have big dreams and ideas
of what we wanna do in retirement
but whenever I ask most people
how much money they need to do those things,
I usually get a blank stare.
Since the majority of people that I work with
are in their 20s, 30s and 40s,
I understand why this isn't
at the top of their mind.
Retirement feels like it's so far away
that it doesn't really make sense
to even bother thinking about that
sort of thing right now.
I'd argue that getting a rough idea
as early as possible is just
as important for us younger people.
At least when you're in your 20s, 30s, and 40s,
you still have time to make any adjustments
so you're not scrambling
to make up for lost time
when you're in your 50s.
Not calculating how much money
you need to retire would be like me
telling you to get in your car
and drive without giving you a destination.
I don't care where you drive to,
but when I tell you to arrive
in a certain location,
I expect you to be there.
Next thing you know, I tell you
to be in Miami, Florida in six hours.
But since you're in Charlotte, North Carolina
and it takes 10 hours to drive there,
you're either going to come up short
or you're going to have to drive
extremely recklessly to get there.
The first thing we need to figure out
is how much you're going to spend
every month in retirement.
Now, I'll admit right off the rip
that this number isn't going
to be 100% accurate and that's okay.
The point of this exercise is to get you
at least headed in the right direction
so you have a rough idea.
Instead of having you head north
or west in that car,
I can at least get you driving south
since your destination is going
to be in that area.
There's two different ways
you can calculate this.
Which method you choose is going to depend
on how detailed you wanna get.
For each of them, I want you
to calculate this in current dollars.
The first way, which is a little bit quicker,
is to take a general number based
on what you spend right now
with a few minor adjustments.
If you currently spend about $6,000
per month on all of your expenses,
then you might go with that number
or bump it up or down based
on the type of retirement that you want.
Keep in mind that spending in retirement
is way different from what we're used to
leading up to that point.
All of the data that I've found says
that for the vast majority of people,
spending will most likely decline
as we get older.
Trying to figure out this number trips up
a lot of us younger people
because we're thinking about retirement
through the lens of our expenses right now
that might not exist at that point in time.
If you're expecting for your home
to be paid off,
then that expense would naturally need
to be backed out of the plan.
You'll still have taxes
and insurance to pay for
but the mortgage part
won't be there any longer.
You most likely won't be investing
at that point in time
like you are right now
so that number would need
to be taken out as well.
Kind of think in those terms.
That way, you know what needs
to be removed from your plan.
Fidelity says the plan on spending
between 55 and 80%
of your working annual income.
A survey from the Employee Benefit Research Institute
shows that about 66% of people spent
between 1,000 and $4,000 per month
in today's dollars.
If you're wondering about inflation,
then hang tight because we'll cover that
in just a minute.
The second way to estimate your expenses
is going to get a lot more detailed
so it'll take a little longer to create
but it will be more accurate.
For this method, you'll go through
each individual's spending category
to put a specific number down for each one.
Don't forget to account
for how much you wanna set aside every month
for the vacations you plan to take every year,
holidays, hobbies, monthly savings
for future cars and things like that.
When you make these detailed spending plans,
you'll really going to want to imagine
what life is going to look like at that time
so that you can plan your spending accordingly.
If you need some help,
here's a little cheat sheet
of the average monthly expenses
from a survey that EBRI did in 2022.
I have a free spending audit
and planning spreadsheet
if you wanna use it
to plan out your expenses.
It's what I have people fill out
for their current spending
when they work with me
but it could still be helpful in this case.
I'll have a link in the description
to get a copy of it.
Once you have a number for expenses,
the second thing you need to do
is account for inflation
so we know how much this amount
is going to be in the future.
Inflation has been very high
over the past couple of years
but no one actually knows
if it'll continue this way and for how long.
Because of that, you should use a number
that you feel comfortable with.
I'll caution you ahead of time
that if you decide to expect
very high inflation to continue,
then it'll basically be impossible for you
and pretty much everyone else
to save enough money for retirement.
I have zero clue what's going to happen.
So on screen, I'm going to share
some historical inflation data
for you to use.
I put together one year inflation
as well as rolling periods in five,
10, 15, 20, and 30 year increments.
As you can see, it fluctuates
from time period to time period.
So for the sake of this video,
I'm going to just assume a 3%
average annual inflation rate.
If you decide that your expenses
are going to be $4,000 per month
or $48,000 per year,
then when you plan to retire in 30 years,
the inflation adjusted amount
is going to be a little over $116,000.
I came up with this inflation adjusted number
by plugging the current dollar amount
into a free inflation calculator online.
The one that I used
was from smartasset.com.
The third thing we need to figure out is,
what's your monthly income
will be in retirement.
By income, I'm referring to all
non-stock market related dollars coming in.
Think of income from sources
like Social Security, pensions,
real estate, from a business you own,
and things like that.
Everyone has different views
on where social security
is going to be at in the future.
And when you decide to take it,
we'll determine how much you get.
Based on that, you can either choose
to count the full amount,
count on a smaller amount
or don't count it at all.
Do whatever you feel comfortable with
when it comes to this income source.
I have a video where I discuss
my thoughts on the topic
so I'm not going to dive deep into it here.
The video will be linked above my head
and down in the description
for you to check out after this one.
If it helps you come up with a number,
the average monthly payout
across all retired workers right now
is $1,827 per person as of this year.
It's also going to be adjusted for inflation
so it'll increase as time goes on.
If we say that your Social Security payment
for an individual is going to be $2,000
per month in today's dollars,
then after 3% inflation in 30 years,
your yearly income from this source
will be a little over $58,000.
We'll also say that you're going
to be receiving about $1,000 per month
in future dollars from two rental properties
that you've accumulated
which will bring your yearly non-stock
market retirement income up to $70,000
when you go to retire in 30 years.
Before I show you the next step,
please help support my dog, Molly,
and the free content on this channel
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At this point, we need to figure out the gap
between your income and expenses to find out
how much we need to come up with
from stock market related investments.
We'll take the inflation
adjusted $116,000 in expenses
and subtract out the inflation
adjusted income of $70,000
which leaves us with a $46,000 per year gap
that we need to come up with.
As a quick reminder,
don't get too freaked out
by these large amounts
because these numbers are
after 30 years of future inflation.
You've got to remember that
as long as we're focused
on getting regular raises
at work every year, then over time,
these amounts make a lot more sense.
In this example, you;re actually going
to need to be able to withdraw more than
$46,000 per year from your investments
because we need to account for taxes.
Now, this is all going to depend
on what future tax rates will be
and the types of investment accounts
your money is in.
The problem is that A,
I don't know what tax rates will be
in 30 years nor does anyone else,
and B, I don't know which types
of investment accounts your money is in
so you're going to have to look
at your specific situation
to come up with these numbers.
There's a lot of different strategies
that you can use to reduce taxes in retirement,
like for example, takes X amount
of dollars from traditional accounts
and X amount of dollars from Roth accounts
to stay under certain tax thresholds
but we're not going to cover that
in detail in this video.
You're also taxed on social security as well.
But showing you how to calculate that
is a whole another topic for another video
so we are not going to touch on it
but it is something to be aware of.
Remember, the goal of this initial exercise
is to give us a general idea
of how much money we need to retire.
For the sake of simplicity in this example,
let's just say that you'll pay 20%
in taxes in 30 years.
Because of that,
instead of only withdrawing $46,000
per year from your investments,
you're going to need to withdraw $55,200
so that you can pay $9,200 in taxes
which will leave you with that $46,000
you need for expenses.
Knowing the yearly amount that you need
to withdraw from your investment accounts,
we can use that number to back
into the total portfolio amount
that you're going to need
in the fifth step.
To do that, we have to decide
on a safe withdrawal rate.
A safe withdrawal rate is the percentage
of your investment portfolio
that you can withdraw each year
without a high risk of running out of money
over your retirement horizon.
4% is a rule of thumb a lot of you
might have heard of before.
I put a little asterisks above that number
because some people say
it can be a little higher.
Some people say it can be a little lower
and it might need adjusted as time goes on.
I'm not going to go through all sides
of the argument in this video
because once again, this video
is to show you the mechanics
for how to get a rough idea
for how much money you need in retirement.
Feel free to use whatever withdrawal rate
you're comfortable with.
To figure out how much you need
to save for retirement,
you're going to take the yearly amount
you need to withdraw
from your investment accounts
and divide that number by the safe
withdrawal rate that you've chosen.
For our example, we take
the pre-tax amount of $55,200,
then divide it by our 4% withdrawal rate
to come up with $1,380,000.
This $1.38 million is the amount
that you would need to have
across all of your investment accounts
once you are ready to retire.
Before you look at
that high number and freak out,
keep in mind that this is for someone
receiving one monthly Social Security check
and after 30 years of inflation
so it's going to seem really, really big.
In today's dollars, that $1.38 million
is actually only $570,000.
While half a million dollars
is a lot of money,
it is way more attainable
when you think about it in those terms.
One thing I wanna make sure to call out
is that you should plan
on this final number changing over time.
Adjustments are naturally
going to need to be made.
I'd recommend reviewing and rerunning
these numbers every few years
because major and even minor events
will most likely change how much
you need to save for retirement.
Plus, as time goes on,
you might realize that you're going
to need a little more money
to cover certain expenses
you don't think about right now.
For example, I was just on a hike
this morning with my dog, Molly,
and realize that in retirement,
I'll probably need to be setting aside
some money for new trail shoes every year.
Since I plan to continue hiking
during that time, it'll cause me
to burn through shoes
at a higher rate than most people.
The goal should be to get
this initial plan in place
so at the very least,
you have something to aim for
and to make improved adjustments to
as time goes on.
Hit that thumbs up button and share the video
to help support my dog, Molly,
and this channel.
Remember that the free tools and spreadsheets
are down in the description below.
I'll see you in the next one, friends.
Done.