ever wondered the magic number for your dream retirement in 2024 well if you feel in the dark I've got you covered because all you really need to know is the answer to two questions and the answer to those two questions is all that stands between you and financial Independence I've got it all in today's video let's check out a couple real life client scenarios now I've changed the names and I've simplified some of the details so we can focus on what really matters but I want you to see if you can tell the difference between each of these two scenarios and why one works and the other doesn't let's start with Bill and Susan sample as you can see here really simplified their financial situation bill has half a million dollar in his retirement account Susan has half a million in her retirement account they own their home here now their goals are to retire at 62 both of them by the way currently are 62 and they want to live on $7,500 per month now in reality we took that 7,500 and understood how would some of those expenses inflate or change differently over time but to keep it real simple we're showing them all here at 7500 per month when you look at their income sources bill will collect Social Security at age 62 in the amount of 2,000 per month and Susan will collect Social Security also at age 62 also in the amount of $2,000 per month if you to look at their portfolio based upon the different Investments they had were assuming a growth rate of 65% per year on their portfolio value So based upon all these assumptions they're both 62 they're retiring now they want to live on $7,500 per month they each have social security of $2,000 per month coming in and their assets are growing at 62% per year what we want to tell is can this couple retire so here's what we do based upon all those assumptions I just listed we take a look yearby year at how much is coming in from Social Security you can see that number is increasing over time with a little bit of cost of living adjustment and then how much would need to come from their portfolio well here's the thing if you look at this number say the 67,8 59 per year and divide that by a portfolio value of $1 million you can start to see how that's a pretty high withdrawal rate they're taking almost 7% out of their portfolio that year and that number is only going to continue to rise because of this we can fast forward and we can start to see there's a projected shortfall that this couple will have in their retirement this red here is showing that Gap in fact if we look at everything here's what their portfolio is projected to look like in retirement they retire at 62 with a million bucks they gradually spin that down and by their early 80s they still have social security coming in they still have a house so there's potentially some Plan B options that we can look at here but they don't have any portfolio value left so that was Bill and sus and we took a look at their plan we saw their plan probably doesn't work they want to retire and $7,500 per month but based on their income sources and how much they need to pull from their portfolio it's not going to work under the current assumptions let's now compare that to another couple and really see if you can see what's different here between this couple versus Bill and Susan so this is Tim and Sally and as you can see Tim and Sally have simplified their plan details as well they have the same assets as a previous couple Tim has half a million dollars in his Ira salary is half a million in her Ira they also have a home that's valued at the same amount here's the difference with them Tim and Sally they're 67 as opposed to 62 is the previous couple the next thing we want to look at is the retirement age goals so the goal here is 67 for Tim and Sally whereas for Bill and Susan it was 62 but what we can see is they both want to live on the same amount of money Tim and Sally want to spend $7 00 per month so do Bill and Susan here's another difference is Tim and Sally they have social security both of which benefits are going to start right now Tim's benefit is 3,000 per month Sally's benefit is $33,000 per month so what we want to do with that information of current age plus assets plus growth rate which by the way we're also assuming a 65% per year what we want to do is we want to see how will their projections there being Tim and Sally how will their projections be different than bill and Susan well here's what we can see now what we can see is here's the income that's coming in from Social Security in this plan so for Tim and Sally what we can see is social security is a higher amount which means the amount that needs to come from their portfolio is a much lower amount to still meet the same income needs that both of these couples had going into retirement which is $7,500 per month so if we look at this and if you recall in the previous example that couple was spending close to 7% of their portfol folio in the initial years which led to their portfolio being spent down far too early in their retirement lives well in this case they're taking about $21,000 from their portfolio and that number actually drops after the first year or so so when you look at these withdrawal rates and compare it to a portfolio value of about a million dollars we can see that they're only taking out one and a half to 2% or so of their portfolio value and because of that here's what their portfolio is projected to look like assuming they get 62% for your growth over time their portfolio is projected to continue growing so when you compare Tim and Sally's projections versus Bill and Susan's even though they're both retiring today they both want to spend $7,500 per month in retirement they both have a million doll retirement portfolio what was the key difference if you said their age you're you're kind of right only in the sense that their age is impacting how much they can collect from Social Security so because this second couple has a higher Social security benefit it means less of their portfolio needs to be used to meet their retirement expense needs so as we go back to how much do you need to spend in 2024 to retire how much do you need in your portfolio in 2024 to retire these are the two things that you need to know number one you need to know your expenses so how much are you going to spend in retirement and then number two how much of those expenses need to come from your portfolio let's flush that out a little bit more so you can really walk away from this video understanding what your number is so you can see what you need to do to retire so let's start with number one the first thing you need to know is what are your retirement expenses this is probably one the hardest things for most people to understand they get so overwhelmed thinking about how do I even know what I'm going to spend that they just don't bother going through the analysis well let's simplify it there's really two ways that you can do this you can take a bottom up approach to determining what your retirement expenses will be or you can take a top down approach to understanding what your retirement expenses will be the bottom up approach looks like this you take a spreadsheet and by the way I have one in the show notes below so if you want to actually go through this exercise on your own I'm including a retirement casual planner that you can access for free so you can go through this exercise on your own and what the bottom up approach says it says start from zero and let's build in every single one of your expenses so we can get to an accurate projection of how much are you actually going to spend so how much are you going to spend on property taxes how much are you going to spend on groceries how much are you going to spend on gas how much are you going to spend on travel how much are you going to spend on your utilities and you itemize each of your expenses that you think you will have based upon the retirement you want and what that will do for you is it will help you come up with a number that you need to plan for that's the bottom up approach the top down approach is a bit more simple it says just look at what you're bringing home today not in terms of your gross income so before taxes and deductions and all that stuff but take a look at what's actually hitting your bank account today and then ask yourself does that number meet all of my needs the answer is yes well then great let's just continue to plan for that number into retirement let's say that number is $8,000 per month and that perfectly meets your needs well great let's plan for $8,000 per month as being your retirement income so you can simply maintain your lifestyle and feel as if you never stopped receiving a paycheck now on the other hand let's assume the $88,000 is what you're receiving today and it does perfectly meet your needs but maybe have a mortgage payment and the principle interest portion of that mortgage payment is $2,000 per month that's going to be paid off by the time that you're retired well really what that means is 8,000 per month is your number today but 6,000 in retirement would meet that same need because you'll no longer have that $22,000 per month mortgage payment so the top- down approach says how much do you have coming in today and then back out some of the expenses that won't be there in retirement add in some of those expenses that maybe you want to add in for retirement maybe that's more travel maybe that's more money for certain activities that you want to engage in whatever that might be but simply start with today as a Baseline and then remove or add any things that will be there or won't be there in retirement once you know what your expenses are then you can start to dial in how much of those expenses need to come from your portfolio the reason I started with two different couples in today's video with same expenses for retirement same portfolio value in retirement but completely different projections is the only difference in their situations was how much of their million dooll portfolio was needed to meet their income needs the first couple had combined $4,000 per month coming in from Social Security the second couple had a combined $6,000 per month coming in from Social Security that may not seem like a pretty big difference but it's huge when you account for the fact that the more you have coming in from outside income sources the less you need in your portfolio to supplement the difference because the way I want you to think about your portfolio in retirement often times we think of our portfolio as a separate thing well your portfolio needs to be very integrated and to your social security income sources your pension income sources your real estate income sources any other income that you have that's creating your floor that's creating the Baseline for how much income can you expect in retirement your portfolio is what fills in the Gap okay how far is that income going to get me the Social Security pension rental income whatever it might be for some of you that might cover all of your needs which is great for most of you it's not going to cover everything so you see how far can that get me and then any shortfall needs to come from my portfolio well why is that important because once you understand how much of your portfolio is needed to fill in those gaps you can solve for how big of a portfolio you need to be able to retire so if you're sitting here saying it's 2024 the year that I can actually retire this is how you would solve that let's say you need $40,000 per year from your portfolio to supplement your other income sources what you would want to do is use some withdrawal rate maybe it's the 4% rule maybe you use 5% maybe 3% come up with a withdrawal rate that you feel comfortable with that lasts and that sustainable for the duration of your retirement you then take that number that you need from your portfolio say 40,000 you divide it by that withdrawal rate and that gives you the portfolio value that you need so assume you need that 40,000 and you're going to use the 4% rule to generate that well 40,000 needs to represent 4% of the bigger portfolio value so if we take 40,000 divide it by 4% what that gives us is a nice round million doll here in our portfolio so if you have a million do you can take 4% of that and that will give you $40,000 per year to supplement Social Security or your other income sources for some of you you may be looking at this and saying wow I'm very fortunate I have a wonderful pension I have really strong Social Security benefits in fact let's say maybe I only want to spend $5,000 per month in retirement but I look at my pension I look at my Social Security I look at my spouse's social security already have 8,000 cominging in technically what that means is you really don't need much of a portfolio at all for you to be able to retire all of your income needs are met by your pension and social security such that you don't need a portfolio at least when it comes to your monthly income needs now you still probably want to think about having one to protect against things like potential Long-Term Care events to protect against major health events to have extra money as almost like a slush fund for more travel or more vacation or more anything that you want to do but when you start to get these these two numbers dialed in what are your retirement expenses and how much of those expenses need to be covered from your portfolio you can back into the number that you need to know that you can confidently retire and have that retirement sustained over a number of years now I can't stress how important it is to have this retirement number dialed in and it's not because retirement is everything but once you have this big rock in place once you know what your portfolio goal is then you can start to balance out other aspects of your life how long how long do I need to work how much do I need to save for retirement versus how much can I use to pay down my mortgage versus how much can I use to spend today if you want to see how we tie all those pieces together take a look at this video here where I go through a case study that actually examines how do all these different variables tie into one another so that you can see what a comprehensive plan actually looks like once again I'm James canel founder root financial and if you're interested in seeing how we help our clients at root Financial get the most our life with their money be sure to visit us at www. root Financial partners.com
