How Much Should You Save for Retirement? | What the Experts Say

in today's video I'm going to show you exactly how much you should be saving to ensure you're on track of your retirement goals hey everyone I'm James canole founder of root financial and I'm here to teach you how to get the most out of life with your money preparing for retirement can be really hard one of the biggest challenges is understanding how much do I even need to be saving to be on track for this retirement goal not just that but if you look at the experts they're all saying different things Dave Ramsey is saying you should be saving 15 of your income to retirement Susie Orman looks at it a different way she says understand how much money you need from your portfolio each year then multiply that number by the number of years you expect to live so that's going to give you the amount you need to retire then Robert Kiyosaki he looks at it a completely different way he says don't look at your retirement portfolio as a portfolio but rather look at as a nest egg that's going to be able to generate cash flow for you that you'll never outlive now all these experts have different guidance and that's because they're telling you to save and invest in different things to get to the same ultimate goal so who do you believe who do you trust how do you know what you actually need to do to be on track for your goals well today I'm going to walk you through a five-step framework that you can apply to your specific situation to understand and exactly how much you need to be on track for your retirement goals now before we jump in as I mentioned whether it's Dave Ramsey or Susie Orman or Robert Kiyosaki or others they all say different things I would love to hear from you how much do you think you need to be saving to be on track for your retirement goals let's all learn from one another in this and be sure to post that in the comments below now all these experts as I mentioned they have different approaches to understanding how much you should save for retirement the reality is this there's no one-size-fits-all approach let's look at a simple example to understand why let's assume someone says you need to save 10 percent per year to be on track for retirement okay let's look at the numbers let's look at two individuals both of them want to retire at 65. both of them make 75 000 per year and both of them are saving 10 percent per year for retirement are they both going to be in the same position by age 65 what depends it depends on their age and when they actually started investing let's assume that person one started investing age 25 does that all the way to 65 and again invest 10 percent of 75 000 per year person number two doesn't start until age 55. also saving 10 percent and also still retiring at 65. well if we assume that they get an 8 per year average return percent number one has well over 1.9 million dollars in their portfolio by the time they turn 65 or person two barely has more than a hundred thousand dollars in their portfolio at age 65. so we can see right off the bat two people with the same retirement age the same income and the same savings rate it doesn't mean they're going to get to the same ultimate outcome so much of this depends on when you start saving what your growth rate is going to be what your expenses in retirement are going to be and so instead of using some rule of thumb of save 10 or 15 or anything else let's set that aside for a second and go through a framework that you can apply to your situation to get the precise number you need to save so here's the five steps that you need to understand in order to come up with this number number one and this is gonna be the most challenging of them but you need to estimate future expenses now if we can get through this step I know that seems daunting maybe you're 45 to day and think I don't know how much this is going to cost I'm 65. well don't think that far yet look at today how much does it cost for you to live today as a very simple starting point now you may already have a spreadsheet that outlines all of your expenses and you can say without even thinking about it exactly how much it costs to live today my guess is most of you have no idea how much it might cost in the future let alone today let's start with this start with how much money actually hits your bank account each month so much of us know our annual salary but we have no idea how much we're actually living on because with our annual salary that's before taxes before retirement contributions before deductions so if we can start with that well after taxes after 401K after all the things that come out of our bank account look at how much actually hits your bank account on a monthly basis is it 4 000 per month is it 10 000 per month whatever it is start with that once you have that number look at some of the expenses today that won't be there when you are retired maybe you're saving a thousand dollars per month today from your take-home paycheck for retirement on retirement you don't need to save for retirement so remove that thousand dollars per month maybe you have a mortgage payment that's 1500 per month of only the principal and interest well by time that you retire your mortgage is paid off that 1500 will go away keep in mind property taxes and insurance that will stay but the principal and interest portion will go away so as you do this you can start to filter out between what are your expenses today remove some of the items that will be done in the future so you can understand how much of your take-home income today do you actually need to retire well step number two is you need to adjust for inflation now inflation historically has been about three percent obviously today it's a lot more than three percent and this is something that really trips people up say how on Earth are you going to use a three-person inflation rate going forward when inflation today is eight nine ten percent well what we're more concerned about is inflation rate over the next several decades some Years it'll be really high like it is right now other years it will be much lower so I would not project out eight nine ten percent inflation forever now you certainly could but what you'll see is the cost of living quickly becomes unsustainable so if we use three percent as a starting point it looks something like this today we need sixty thousand dollars per year to live on three percent per year of increases over the next 15 years if we plug that into a calculator means by age 65 we would need a hundred and one thousand dollars per year of living expenses to maintain the same purchasing power that we have today on sixty thousand now if we just change inflation from three percent to four percent so not that significant of an increase seemingly well now instead of needing a hundred and one thousand per year at age 65 we would need a hundred and seventeen thousand per year at age 65. so you can see how some small tweaks and percentages when compounded have fairly dramatic impacts so as we're looking at this for this example I'm going to use that three percent number you can use whatever you feel most comfortable with as you do your own calculation but step number two is take the number we came up with in Step number one which is 60 000 per year in this example step number two is adjust that number for inflation so a hundred and one thousand is what sixty thousand turns into or fifteen years at three percent inflation I'm just gonna round that to a hundred thousand for simple math and then step number three is back out other income sources in retirement so the goal of retirement is to come up with income to meet our expenses at its Essence that's what retirement planning is so if we know that we need a hundred thousand dollars starting in 15 years because again we're 50 years old today and want to retire at 65. we need to understand what income sources that have nothing to do with our portfolio will be able to support us at that point this could be things like Social Security this could be things like a rental income this could be things like a pension really it's income sources that you have coming in that aren't requiring you to draw down your portfolio for our example this individual who's 50 years old let's assume that this individual and his or her spouse have a social security benefit that will represent 2500 per month by age 65. so after adjusting for inflation well if they both have benefits of 2500 per month that's a combined benefit of 5 000 per month which is 60 000 per year so step number three is to say how do we back that sixty thousand out from a hundred thousand dollars they need a hundred thousand dollars in future dollars sixty thousand that is already covered from Social Security before we even dip into the Investments what that tells us is the remaining forty thousand dollars per year that's what their Investments need to cover that's what their portfolio needs to be able to be structured in order to create that level of income from age 65 and Beyond this then ties into step number four step number four is apply a withdrawal rate to understand how much portfolio you need so if we use the most simple four percent rule well what that tells us is if we need forty thousand per year and we divide that by four percent that's going to give us the portfolio balance needed to generate that 40 000 per year so if we do the simple math 40 000 divided by four percent equals exactly one million dollars so if that's the situation this individual need a million dollars in their portfolio by age 65 so that after Social Security they could take four percent from their portfolio and be able to generate the inflation adjusted equivalent of sixty thousand dollars in today's dollars now that's if you're using a four percent withdrawal rule we've talked about guyton's guard rails we've talked about other withdrawal approaches that say if you structure things differently and take a more Dynamic approach you can maybe withdraw closer to five and a half percent of that first year retirement well if you apply a five and a half percent withdrawal rate to that portfolio or that income level of forty thousand per year what that means is you really only need 727 000 per year you need a smaller balance because you can take more each year and sustainably generate that income level you need over time now just a quick disclaimer here I'm not even factoring in taxes yet this is a very basic example so so whether that portfolio was in a Roth IRA or a 401k or brokerage account and depending on your unique and specific tax bracket well these numbers are going to look different so this is just a basic framework that you can apply but just full disclaimer this is before taxes are applied now with this number what we've done are with this step what we've done is we've determined what's our final portfolio value goal what we're trying to do is we're trying to say what do we need to get to in our portfolio by some age so 65 in this example so that then we can work backwards to today to start to understand how much do we need to start saving in order to hit that retirement portfolio goal now step number five is to use a retirement calculator to work backwards to solve for how much do you need to save on an annual or monthly basis to be on track to hit your number so let's assume that we need to hit a million dollars like we saw in that previous example if we apply a four percent withdrawal rate how do we get there well let's assume today you have 300 000 in your portfolio you'll say wow 300 000 today I need to hit a million I need a triple or more my portfolio value that seems like a really daunting thing to have to be able to do well let's look at the portfolio calculator if I pull this up here what you see I've put in here what's the number of periods so how many years until I need to hit this goal 15. so again 50 years old today retire at 65. what's the interest per year so when the financial calculator asks this it's asking what average growth rate do you want to assume you can assume whatever you want here again the long-term average of the S P 500 is close to 10 percent but that's not consistent it's not guaranteed and that's an all-stock portfolio you can plan for a much lower number if you feel like being conservative six percent is somewhere in the middle here so I'm going to use this for the example of what if this portfolio on average grows at six percent per year three hundred thousand this is my starting value you'll see when you plug this into a financial calculator you use a negative it's almost like you're putting 300 000 in the future value is what you're going to have which is that million dollars if you click calculate here you'll see what this shows is it results in a payment and that payment is essentially what do you need to put in of twelve thousand and seventy four dollars now that payment you might ask what is that per month does that per year this payment is based upon the period that you're using here so you see if I go back to this box the number of periods is 15 and the unit of measurement is years so the payment of twelve thousand seventy four that's per year so in other words what this is saying is you need to save one thousand dollars per month starting today with three hundred thousand dollars in your portfolio and if you grow that by six percent per year and if you do that for 15 years you will have a million dollars in your portfolio by the time you turn 65. so what have we just done here well what we've done is we said okay the experts say save 15 or save 10 or view your money differently that's all good generic advice but we need something that's specific to us we need something that's practical to us so in going through these steps of understanding what retirement expenses will be number one number two adjusting that for inflation number three backing out portfolio or non-portfolio income sources number four applying a withdrawal rate to understand your future portfolio goal and then number five working backwards to say how much do I need to save each year to hit that portfolio goal what you've just done is giving yourself a specific number a specific goal and you can now focus on that on a daily weekly monthly basis of how do I hit that goal as opposed to worrying and wondering how much do I really need to save for retirement so if you can apply this this is going to get you much further than any rule of thumb or any quote-unquote expert guidance that you might hear that's not specific or unique to you so as we've seen here planning for your retirement can seem really daunting and can be really overwhelming but if we can distill it down into the foundational pieces it becomes much less so if you want more videos and content like this that helps you to simplify the retirement planning process be sure to check out the playlist above once again I'm James Knoll founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com [Music]

Channel: James Conole, CFP®

Views: 46,420

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: qpmGIcRNXeo

Length: 13min 36sec (816 seconds)

Published: Sat Dec 24 2022