How Much Do I Need to Retire? 3 Numbers You Need to Know Before Retiring

the biggest fear people have about retiring is running out of money because when you run out of money you become a burden to children a burden to friends or a burden to whoever's supporting you now the good news is there's a way to tell exactly when you are in a position to retire and it is as simple as understanding three unique numbers for you once you know these numbers you'll be in a position to retire comfortably not have to worry about being a burden to children and most importantly have peace of mind as you transition into retirement now when most people look at retiring and ask how much money do you need to be able to retire they're looking at some arbitrary number maybe it's 12 times your salary maybe it's a million bucks maybe it's some other arbitrary number which is a good starting point but it's not unique to you if you want to know when you're in a position to retire you need to know your three numbers and i'm going to walk you through exactly how to find those the first number the first thing that you need to know before retiring is what are your expenses so when you start with retirement people ask if they're in a position to retire the first thing i want to know is what do you want retirement to look like if you want to retire you want that to be enjoyable you want that to be fulfilling so think about what is that going to look like at that time are you traveling are you joining the country club are you spending time with family are you volunteering really understand what does that ideal retirement look like for you because once you understand what ideal retirement looks like then you can start to go back and see how much is that going to cost now there's two ways that you can approach living expenses so that you can find your number one is what i like to call the bottom-up approach the bottom-up approach is very precise it's very detailed and it's going to be very accurate the bottom up approach says if you want to know what your expenses are get out a pad of paper get an excel sheet get whatever it is that works for you and literally start lining out your expenses that you're going to have in retirement what is mortgage or rent going to be write out that number what is groceries going to be write out that number what's the cell phone bill going to be what's the netflix cost going to be what's it going to cost to do the different things that you want to do and you literally line by line go down every single expense to come up with a very accurate picture of the expenses you need to be able to fulfill your retirement goals so that's the most accurate way of doing this that's the way that's going to give you the most precise picture of what it's going to cost to fund your retirement but it's also the most time consuming if you like that approach wonderful but if you're saying james i just want to know a very quick basic way to find out what my expenses are here's an easier approach i like to call this a top-down approach the top-down approach says look what's your salary today your salary today is probably some gross number but once that number has taxes taken out maybe 401k taken out maybe other deductions taken out there's a much smaller number that actually hits your bank account each month so the question is what is that number because if you just want to maintain lifestyle retirement let's assume that as you think about your ideal retirement maybe it's not too different than today maybe it's the exact same thing you're already doing but you have income coming from somewhere else that's not a paycheck well great we just need to be able to replace what your paycheck is delivering your bank account after taxes today so let's say that number is ten thousand dollars per month well great let's start with ten thousand and say we need to replace that ten thousand but maybe you have a mortgage today and maybe by the time that you actually retire you're going to have that mortgage paid off well if that mortgage is two thousand dollars per month well then we really don't need to replace the full 10 000 per month that's coming in really we need to replace 8 000 because 2000 has gone to a mortgage that will no longer be there meaning less income is coming in but you're still able to do everything that you want to do let's also say assume that you're saving a thousand dollars per month for retirement wonderful that's another thousand dollars per month if it's coming from your net paycheck that we can take out so if ten thousands coming in and two thousands go to the mortgage we can reduce that another thousand is going to savings we can reduce that really that's seven thousand dollars per month that you need to live on that is actually your number now what you do from there is say maybe your retirement doesn't look exactly like what living expenses look like today maybe you want to spend more on travel you want another thousand bucks a month to travel on average okay we'll take that seven and add another thousand bucks per month maybe you want to join a country club maybe you have more giving or donations you want to be able to do really what you want to do is take a look at take-home income today take out the expenses that are no longer going to be their retirement and add back in some other expenses so that's a very basic way that you could do in 10 minutes to see what are your expenses going to look like at that point so that's how you get your expenses and keep in mind you're not adding taxes at this point this is just the expenses that you want to be able to live on after taxes that's your first number your after tax expenses the second number is your income not talking about salary i'm talking about income in retirement and i'm also not talking about any income from your investments so really this is income from things like social security it's income from things like pension maybe rental income really any income sources that you're going to have in retirement that don't cause you to have to pull money from your investment account so you need to know your income for this reason we just looked at your expenses and in this example we're gonna assume that your living expenses are seven thousand dollars per month and let's assume that you and your spouse are retiring and you'll just have social security maybe that's your only income source and maybe you're both collecting two thousand dollars per month in social security well what we know is if seven thousand is your expenses four thousand dollars is your income the difference between seven thousand and four thousand that's the shortfall that's the gap that we're going to get to the third number but really the goal of income is understanding what income sources will you have when you no longer have a paycheck and before you take any money from your portfolio we want to know that and more importantly we want to know what that number is after taxes because if you're receiving a pension or you're receiving some other income source that's going to be reduced by taxes so what's the after tax income that you'll receive that is your second number and the reason we start with this your expenses of seven in this example your income of four now what we know is your gap the gap here is three that allows us to solve for the third number which is your portfolio or your savings amount any shortfall there so three thousand dollars in this example that needs to come right from your portfolio or right from your savings so when we understand this when we understand exactly what that shortfall is we can work backwards to understand how much do you need to have in your portfolio to be able to support that so how do we do that there's a general rule of thumb where there's a rule called the rule of four percent what the rule of four percent says is it says that if you have a portfolio when you retire and if you want that portfolio to last for 30 plus years generally speaking and assuming you're invested the right way you can take out about four percent per year of your portfolio and have that be sustainable meaning not have an extreme risk of running out of money in retirement so what we want to do is we say okay 3 000 per month is what we still need multiply that by 12 so 12 months in the year that's 36 000 we need 36 000 per year so what is 36 thousand four percent of so if we just divide this by four percent or multiply by 25 the math works out to be the same thing in that case what we get is nine hundred thousand dollars so nine hundred thousand dollars is the amount we need in our portfolio to be able to generate three thousand dollars per month supplementing our social security bin and four thousand so that we can live on the seven thousand per month that we talked about so as we look at that keep in mind that nine thousand dollars that nine hundred thousand dollars depending on what type of an account that is in we don't know if that withdrawal or that the taxes on that are going to be tax-free or taxable say for example that 900 000 is all in a roth ira we can pull out 3 000 per month and it's completely tax-free so that's that math checks out if that 900 000 is in a traditional ira or a 401k and let's say that for example maybe you're in the 25 tax bracket between federal and state taxes well you might take 3000 per month out but after you pay taxes you're not left with 3 000 i mean there's still a shortfall between your income and your expenses so what we first need to do is we need to understand what's the after tax amount on that same thing that we did with the income sources so let's assume now that you're in a 25 tax bracket and that nine hundred thousand dollars is in an ira well that's no longer enough to be your number to allow you to retire really what we want to do is we want to say okay if i need 3 000 per month really that's 4 000 before taxes so if i pay 25 in taxes or 1 000 per month now i have three thousand per month after taxes so if four thousand per month or forty eight thousand per year is my actual number and i divide that by four percent what i actually get is a portfolio value of one million two hundred and fifty thousand so once i have a portfolio value of 1 million 250 000 now i can retire now i can generate 4 000 per month pre-tax which is 3 000 per month after tax supplement social security and meet all my living expense needs now there are other ways of doing this this four percent rule is kind of a rule of thumb that's been used for a long time there's actually methods that you can actually take more out of your portfolio and still have that be sustainable if you're doing the right things with your portfolio using a more dynamic approach but for simple exercise or just simple numbers for today that's a good baseline amount that you can plan to take out so at the end of the day what we want to make sure that we're doing is we want to make we want to make sure that we know these numbers because when you know these three numbers what you can do is you can answer a question definitively of are you in a position to retire and what it starts with is it starts with understanding what are your expenses that would allow you to live your dream retirement what are your income sources in retirement and what does your portfolio value need to be to supplement that income so i hope that was helpful if you like this video give it a thumbs up subscribe to this video for more great content like this and we'll see you next time [Music] you

Channel: James Conole, CFP®

Views: 150,874

Keywords: retirement investing, how to retire, how to invest money, passive income, retirement planning tips, investing in the stock market, retirement portfolio, retirement planning, retirement planning at 50, retirement planning at 60, how to retire early, how much do i need to retire, savings, retirement taxes, retirement income taxes, taxes in retiremen, 4 percent rule for retirement, 4 percent rule

Id: 6H07CeKviZQ

Length: 10min 37sec (637 seconds)

Published: Sun Aug 01 2021