Can YOU Afford Retirement? | 4% Rule Explained | Safe Withdrawal Rate

welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth today we're talking about how much you need in retirement we're talking about the 4% rule and also the safe withdrawal rate okay so if you're like me you're probably thinking to yourself I know I need to save for retirement but how much how much do I actually need what am i shooting for so the typical rule of thumb is 20 to 25 times your annual salary okay and when I say annual salary that's what you want to earn in retirement okay so if you want to live off of 50 grand a year that'll be 25 times 50k that's 1.25 million dollars is what you need for your nest egg to be able to pay yourself 50 grand a year for 25 years makes sense so at this point I've already lost half of you because heavier like how the hell think it is safe up 1.25 million and the other half were you were thinking hey I may need more or less than $50,000 a year to live on so again you guys this is personal finance it's all personal to us I'm able to live off of 50 grand based on where I live if you live in LA or New York you may need 150 this is all proportional so again what we're going to be talking about is how to actually use the 4% rule so that we never have to go below our principal sitting in that retirement account so what is the 4% rule so let's say that you have a 401k okay and you're about to retire in this 401k you have $450,000 and you also open up a Roth IRA a few years ago because you've been watching and listening to white board finance and in that Roth IRA you have $50,000 so in both of these accounts we have $500,000 okay the 4% rule is actually what dictates us to be able to take out 4% of whatever this retirement account is without actually touching the principal we're living off of 4% every year and that's getting replenished every year so how is this getting replenished the stock market has typically done six to ten percent historically in returns so think about it logically you guys if you have a retirement account and you're taking out 4% every year to live off of you're actually going to make it up by the returns in the market ok the 6 to 10% is greater than the 4% you're taking out so not only are you living on that you're actually making some money as well by the end of the year so let's look at a real life example here so again we'll use this $500,000 that we've set aside we've saved up for many years and we're ready to enjoy retirement so if you take this $500,000 okay multiply it by point zero four that's four percent that comes out to be $20,000 okay so again this is all personal you guys you may be able to live off of 20 grand you may need more so you need to save more for retirement however this 4% again gives us a cushion to be able to take this money out but still be able to live and not touch our principal payment so when you account for this this 500 grand you're subtracting 20 becomes four hundred and eighty thousand dollars okay so let's say we took this 20 grand out on January 1st 2020 okay we're taking out at the beginning the year and one lump sum normally you wouldn't do that you would take out the average of whatever you want and pay yourself monthly and live off that but we're going for an extreme scenario here I'm taking this out all on January 1st so this four hundred and eighty thousand dollars has all of 2020 to grow and realize that six to ten percent growth that we've talked about okay so if we take four hundred eighty thousand dollars times one point zero six that six is coming from here the six percent growth in the market this now becomes five hundred and eight thousand and eight hundred dollars by December 31st twenty funny does that make sense so not only have we lived on this 20 grand a year our 480 is actually grown to be this amount by the end of the year okay so I don't have this math you know I'm not doing this in my head I actually have it written down but I just want to make sure we're covering all our bases here so now let's think about this logically we all know that inflation exists okay so we know that inflation is typically two to three percent per year so now with the 4% method you can actually afford to pay yourself a 2% raise every year so how is this possible so let's do the math so let's take the number that we have this is the end of the year 2020 that we just figured out okay and now we take the 20 grand that was the 4% from last year that was our $20,000 we take the 20k and multiply it by one point zero two that two is our two percent increase or two percent raise so now this 20k becomes twenty thousand four hundred dollars we've now adjusted for inflation so are no longer earning twenty thousand or earning twenty thousand four hundred so now let's do the math on this if you take this five hundred and eight thousand dollars - the 20 thousand four hundred so let's do 508 - 20 thousand four hundred basic math tells us that we have four hundred and eighty eight thousand four hundred dollars so now this 20 thousand four hundred dollars we've taken this out on January 1st 2021 and now this four hundred and eighty-eight thousand dollars has all this entire year to grow by that six to ten percent that we talked about earlier okay so now even if you figure you're taking out two percent more to give yourself a raise to hedge against inflation you take this 488 four and if you multiply that again by one point zero six actually gives you your starting number for the next year which is actually greater it's gonna be five hundred and seventeen thousand 704 on December 1st 2021 so you started with five hundred grand you've lived for two years you're given yourself a 2% raise and now your nest egg is actually grown by seventeen thousand dollars do you now see how powerful that this four percent rule is obviously this is accounting for six percent growth in the market every year are you going to achieve that every year absolutely not are you going to go negative some years absolutely however there have been studies done and this has been studied numerous times that over the course of 33 years okay there has never been a big enough fluctuation in the market on the downside to eat up someone's entire principle to eat up this entire principle that they start with so there's never been a streak of that long and typically when people go into retirement let's call it their late 50s early 60s most of them don't out last 33 years so you're living off of your nest egg without ever touching your principle does that make sense and now if you extrapolated this number out thirty years okay so how we started on 2020 let's say it's the year 2050 this number is actually like seven hundred something thousand if you keep you know earning 6% year over year so not only have you lived for those thirty years you've actually never touched your principal you've actually grown your money by two hundred thousand dollars plus okay so now me personally now that I know this math I'm probably to be conservative I'll probably be taking out you know four to five percent a year with my safe withdrawal rate using that 4% rule and I'm gonna be buying Benzes beamers mansions and tough just kidding that's something you can't do you cannot take huge chunks and you have to be super disciplined so you really do have to live off that 4% so that's the only caveat to this and obviously market conditions aside so hopefully you got some value out of this video you guys if you did please give this video a like and share with one person who values their retirement thank you so much and have a prosperous day [Music]

Channel: Marko - WhiteBoard Finance

Views: 124,732

Rating: 4.9259615 out of 5

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Id: 1O1Lk21o3Hw

Length: 9min 14sec (554 seconds)

Published: Wed Mar 20 2019