How Much Do You Need to Retire?

this video is sponsored by skillshare the first 1 000 people to click the link in the description below will get a free trial of skillshare's premium membership it's estimated that a whopping 81 of americans have no idea how much they'll need to retire given that retirement is one of the most expensive financial goals that most of us strive to achieve that's a high figure but not really a shocking one when you consider how complicated it is to properly estimate your retirement needs from taxes to investment returns to how you think your actual career is going to pan out there's a lot of stuff to consider and the earlier that you try to estimate this sort of stuff the less accurate it's likely to be but starting early is one of the most effective strategies for achieving financial objectives and so if you're able to come to even a rough estimate of how much you'll need to retire which is known as your nest egg by many you can gauge your general progress over time towards this sort of goal which is why i wanted to make today's video today i'll be highlighting a method for estimating what you'll need for your retirement and while it's going to be a very rough method that's far from perfect it's a good starting point for someone who has no idea where to start and is looking to get on track so let's work towards estimating our retirement needs on today's plane bagel before we jump into the video i want to reiterate that the approach i'll be covering today for estimating your retirement needs is a very rough and oversimplified one how much you will personally need to retire will depend on your unique goals and circumstances as well as where you live and work and given that i know nothing about you i really can't offer advice about what you as an individual will need to save for and even outside of that there just isn't a simple perfect equation that estimates your retirement needs the professional approach that gets closest to this often involves using software that forecasts different scenarios with considerations for different tax laws the types of accounts you can invest in the timing of your withdrawals the financial products you can use and many other personal variables that all being said it's my belief that a rough estimate is better than nothing and with this method at the very least you can play around with the numbers and see how different assumptions will play out just don't put any undue weight on this figure it's not financial advice and certainly not a substitute for retirement plan be sure to speak to a professional if you need assistance there but with that said let's go over the inputs involved with estimating a nest egg the amount that you will need to retire there are three important variables that form the basis of our retirement calculations one extra variable that i think is worth considering as well the first factor as you can probably guess is when you want to retire obviously most people look to retire as early as possible but the earlier you retire the more you'll need to save and the less time you'll have to get that amount so it's not always a feasible thing on top of that many government programs actually pay out more the longer you wait to retire and less if you call it quits earlier so it is worth considering that as well in the us social security has a full retirement age of 67 and canada cpp and oas programs have a normal retirement age of 65. so there's a lot of plans that will use those as a default age but consider your own circumstances for determining your age the second factor once you have that is our calculation of how long we expect to live now contemplating our mortality is never fun but it is necessary for setting up a realistic retirement plan for a certain point in estimating when your retirement will end you can look at what's called a life table which gives an average life expectancy based on your age then you can adjust this figure to reflect any personal factors such as a family history of longevity or any medical issues it's also good practice to be optimistic with your expectations thankfully since living longer than expected is a very real risk that if not planned for can greatly reduce your standard of living in retirement if you outlive your savings so a lot of people actually use 90 as a default age despite this being well over the average lifespan of americans and canadians again adjust to your circumstance the third and final variable at least for the core estimate here is the annual income that you'll need for retirement this is by far the hardest number to estimate will obviously vary drastically from person to person because it really does depend on what you want from your retirement where you want to live what you want to do whether you'd like to keep working casually or not so on and so on adding to the complexity is the fact that retirement usually entails periods of different spending habits retirees typically spend the most money in the first part of their retirement on things like traveling and as time progresses and people age they do tend to spend less though that can eventually be offset by higher medical expenses obviously forecasting all this can be pretty difficult a more detailed approach would be to essentially budget out your retirement and consider all your expenses that you might face and estimate them for inflation but as a very rough estimate of your average spending there's a rule of thumb that a retirement income of 70 to 80 percent of your pre-tax pre-retirement income will maintain your standard of living so if you're making sixty thousand dollars a year on your salary when you retire you should target a regular income stream before tax of forty five thousand dollars now importantly if you're a few decades away from your retirement you should adjust this amount to reflect any career progression you expect as well as for inflation which we'll exemplify later on now if you want to avoid using a financial calculator there are plenty of shortcuts here for estimating your nest egg one approach advocates for taking your pre-retirement income and simply multiplying by 12 to get how much you'll need to save another approach is the four percent rule which says that you just take your desired retirement income and divide by .04 to get a nest egg that should last your whole retirement with a pre-retirement salary of sixty thousand dollars these amounts equate to seven hundred and twenty thousand dollars in one million one hundred and twenty five thousand dollars respectively though excluding inflation but with a few more assumptions we can come to a more detailed figure first of all we have to make an assumption around our post retirement return because yes even when we do retire it's a good idea to continue investing to get the most bang for your buck that being said the older you get and the more that you rely on your savings and the more you withdraw from them the less risk you can typically afford to take on which conventionally speaking means you should look into investing less into the stock market and more into fixed income assets now unfortunately in the current environment these sorts of investments aren't as attractive as they used to be but you really don't want to risk putting all your money into the stock market just before it experiences some sort of correction and you have to withdraw your money so you should assume that you will be taking on a lower return of some sort i'll use 4.5 for my example but consider adjusting this figure to reflect the investments available to you that given your risk tolerance you're able to take on later on in life another assumption here that we should make is around inflation fun old inflation which will unfortunately further reduce our retirement return as you probably know every year things get a bit more expensive so we need to factor this into our model inflation is generally assumed to be two 2 but you can adjust this if you're a bit more pessimistic to incorporate inflation into our return figure we use the following formula which gives us a real retirement return in our example of 2.45 finally while i won't go too into detail here it might be worth considering our fourth extra variable for our model which is how much you want to leave behind for anyone after you pass away now i get it most of us are worried enough about making it to the end of our retirement with enough cash on hand let alone leaving some for others but between estate fees taxes and any desires to leave money for others there are a number of reasons you may want to aim for an end to value that's other than zero now estate management could have a whole series of videos dedicated just to it but i simply highlight this as something you may want to consider for your own calculation especially if you have certain assets that will accrue liability when you pass away okay we now have all the numbers we need the final step is to compute our nest egg retirement which using a financial calculator will be our present value i've left a link in the description for an online financial calculator that you can use for this part all you've got to do is go to the pv tab set end to your retirement length in months so years times 12 iy to your real post retirement return assumption pmt to your monthly withdrawal need so your annual income divided by 12 and fb to the amount that you'd like to have left over for your state you also need to go into your settings and set p over y to 12 and pmt today to reflect that will likely be withdrawing from our savings at the start of each month and once everything's plugged in you just hit compute so with those instructions out of the way let's run through our example let's say i'm currently 30 and i'm wanting to retire at 65 because i've got a good family history of longevity i expect to live to 90. so my retirement will be 25 years long or 300 months i currently make 60 000 a year and because i expect this amount to grow at 2 to match inflation each year at 65 my pre-retirement income will be roughly double that amount now going in the middle of our 70 to 80 range that we mentioned earlier 75 percent of 120 thousand dollars is 90 000 that i will need in my retirement every year as income so that's 7 500 a month i'll assume a real rate of return of 2.45 given our assumptions from earlier and let's say that i'll need 150 000 to meet my state needs so with these assumptions i hit compute and boom nest egg that i will need for my retirement is a whopping 1.77 million dollars now that's a lot before this example gives you a panic attack keep in mind that we are being conservative here with some of our assumptions and this number includes inflation in truth the 70 to 80 rule assumes your expenses from pre-retirement will continue into retirement which for many isn't the case since a lot of people finish their mortgage payments and no longer have dependents and thankfully this example assumes that we're paying for our entire retirement by ourselves when in reality there are usually some ways to subsidize our retirement income first and foremost there's a pension if you happen to have one pensions are usually designed to help cover a sizable chunk of your retirement income so if your employer offers one and you are able to estimate what your retirement pension income will be given the time you've spent with that employer you can reduce the annual income needed in your assumption and thereby reduce your nest egg requirement secondly there's the option of working casually in retirement in truth a lot of people actually look to pursue passion projects to earn a little bit of money in their downtime with their retirement so while you should only expect a small fraction of your pre-retirement income from this casual work and you really shouldn't assume that it's reliable that is another option for supporting your lifestyle in retirement and finally there are government subsidies as highlighted in canada and the us there are programs that assuming you meet the requirements will help you further subsidize your retirement income now how much you actually get will depend on your income and certain other factors but the social security program in the us is estimated to cover 40 percent of pre-retirement income for fully eligible middle-income americans while cpp in canada can cover up to 25 of your average earnings up to a maximum dollar amount and if your income falls below a certain threshold you'll also see a benefit from the old age security program i'll leave links in the description below if you'd like to go and learn more maybe even try to estimate how much you'd be eligible for but in our example if our canadian receives the maximum cpp benefit adjusted for inflation his nest egg requirement would be reduced by roughly 540 thousand to 1.23 million dollars so thankfully you may not need to reach the massive nest egg on your own but again i really do want to drive home the point here that this is an incredibly rough gauge that may not be appropriate for your own circumstance when working with clients at my company this isn't the method we use we typically work with a software program that considers a lot of different variables from canadian tax laws to subsidies as well as a detailed forecast of cash flows but regardless i highlight this exercise to show that when it comes to retirement when you have certain assumptions it's usually a pretty expensive goal so it's worth working towards as early as possible time is one of the most important factors here and the sooner you start the easier it is to reach your retirement goals so take the time to learn about different types of investment accounts and explore any dollar matching retirement programs that your employer may offer and as always if you need further assistance reach out to a professional who can give you a more detailed forecast so while i don't want this exercise and the specific numbers that we've used to give you anxiety hopefully it is a sort of call to action about starting as early as possible your future self well thank you this video was sponsored by skillshare whether you're in retirement and looking for something new to try or you're perhaps working but want to start something on the side skillshare is a great service for picking up a new skill they're a learning platform that hosts thousands of classes teaching everything from script writing to cooking to business analytics i personally use them a lot for home rental stuff since i like to try things myself and it's really helped me improve my video editing skills advanced video editing with adobe premiere pro 2020 by jordy vandeput was one workshop that really helped me advance my animation by explaining things like keyframe settings now youtube videos probably aren't everyone's hobby of choice but you're bound to find something on the platform that's suited for you because they're always adding new classes and just recently they've even added different language subtitles so that a bunch of different audiences can learn from the same class so if you're interested in checking them out the first 1 000 people to click the link in the description will get a one month free trial which will give you unlimited access to their offering so check them out and learn something new today [Music] you

Channel: The Plain Bagel

Views: 214,500

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Id: rE3hWkExAhY

Length: 13min 51sec (831 seconds)

Published: Fri Dec 03 2021