How much money will I need to retire?

hey what's up everyone and welcome to the school of personal finance so the number one question that I get that's always on top of people's minds is how much money will it take for me to be able to retire comfortably so in this video I'm going to walk you through the thought process how we start putting together a framework and trying to determine what your number will be because as we know it is all personal it depends on your lifestyle where you want to live how much money you spend every month if you have a pension all of those things are going to come into play when figuring out out how much money you will ultimately need to have saved up for retirement so that you could enjoy yourself so I hope that you find this one helpful let's get to it all right so let's Jump Right In and I'm going to throw some terms out there like the 4% rule or the rule of 72 and I'll explain what those mean when we get to them but the first step in determining how much money you will need to be able to retire comfortably is estimating what your monthly expenses are what is your Baseline going to be that you need each and every month to get by all right so we're not talking about going on you know nice trips vacations doing the fun stuff we're talking about just your Baseline number that you need every month to survive and it's going to be hard to estimate that if you're 20 plus years away from retirement but you have to sit and think about what it might look like are you going to sell your house in downsize will you have a mortgage at that time will your kids be grown and out of the house so if we take me as an example I'm 46 years old so let's say that I'm going to retire in maybe 20 years or let's say 21 years when I turn 67 Which is my full retirement age for Social Security that's another thing that we'll talk about let's say that right now it costs me $112,000 a month to live all right I live in the High Cost of Living area I have three kids my life is crazy so let's just say that it's $112,000 a month when I'm retired hopefully I'll sell this house I'll downsize I'll have no mortgage my taxes will be significantly less and I won't need that much money to live anymore so I'm going to estimate $6,000 a month in today's dollars all right we will inflate that for retirement but for right now we're talking about today's dollars so if I had $6,000 a month coming in with no debt no big obligations not saving for retirement anymore for kids college I think that's a realistic number so now beyond my Baseline number I also want to think about money that I might want to spend above and beyond that so maybe the first 10 years that I'm retired we call those the go- go years maybe I want to travel the world maybe I want to take a cruise each and every year I want to go to Europe I want to really enjoy life I have to look at that money is almost a separate pot of money compared to my Baseline amount the minimum amount that I need to live every month to cover my bills and my expenses so for that other pot of money I want to come up with a number of what I think might be realistic so if I'm looking at a 10-year period let's say in today's dollars I want to be able to spend at least $330,000 a year per year just going out and having fun and enjoying life so that would be $300,000 that I would need a pool of money for to be able to take care of those go- go years and then even the years after that there might be other things that I want to do so we call them the slowo years right the next 10 years after that where I'm not running all over the world like I might right out of retirement but I still want to enjoy life and have fun I'm still able to go out with friends go out to dinner and enjoy life so I want to have some money set aside for that as well so I'm starting to picture all of this and what it might look like and then after my slowo years then we call it the no-o years where we're older we're not really doing much we're not really going out we really don't need as much money for fun and for enjoyment Maybe want to help our kids or our grandkids out a little bit this is where medical expenses come into play maybe we'll see a significant increase in our medical bills so that is something that we have to prepare for as well so we have our Baseline amount that we're looking at for the rest of our lives but then on top of that we have these different buckets that we need to fill for different stages of our retirement and even though we don't know exact dollar amounts it's good to estimate so it's good to say in those first 10 years in the go- go years I want to have 300,000 put aside then in the next 10 years the slowo years this is usually where we see a dip in spending right so we want to come up with a number that we might need during that period of time and maybe it's only half of that maybe it's another $150,000 and that might even be too much and then we look at the end of life and our medical expenses it's such an unknown that you don't really know what that's going to look like but you have to expect that that's going to be high as well so maybe that'll be another $300,000 that you need for that period of life again we're talking in today's dollars I'm going to teach you how to inflate that so you can look at it in real dollars once you get to that point so you could have a good idea of how much money you're actually going to need but I like the idea of breaking that down and we call that the retirement spending smile right in the beginning you're up high those go- go years and then it gradually starts to go down as you start going through life as you get older and then towards the end it starts going back up again like a smile because your health care costs start to dramatically increase towards the end of life now obviously it doesn't always play out that way right you could drop dead of a heart attack at age 82 before uh you know before the later year is where you're in a nursing home or things like that so all of this planning right it's always changing it's always a living breathing document I call it where everything is always changing and you do the best to plan for it all right so let's talk about inflation real quick now inflation a lot of times it's underestimated when doing retirement planning because it's a real thing and it's brutal and maybe you don't want to use those numbers but it is a reality right if we look back 20 years ago things cost probably less than half of what they do now and that's probably going to be the reality in the future as well so this is where I like to use the rule of 72 with the rule of 72 if you take an interest rate and you divide it into 72 it'll tell you how long it will take for that amount to double so if we use it with our expenses a lot of times we use that when projecting out how much our portfolios will grow but we could use it for inflation as well and how much our expenses are going to grow over time so if we say if we use a 3% inflation rate which is historically about the average a lot of software we use 2 and 1 12% somewhere in that range but let's just use 3% if we divide 3 into 72 that is 24 years so what that is saying to me that if I'm saying $6,000 a month is what I'm going to need in retirement in today's dollars to live comfortably if I'm going to retire in 24 years then I could expect that amount to double I could expect $112,000 to buy me the same purchasing power as $66,000 does today at a 3% inflation rate so if I'm going to retire in 20 years or so a little bit more than 20 years I'm 46 right now so if I say 20 years 21 years somewhere around there then I could expect $6,000 a month to really be closer to $112,000 a month a little bit less than that and that's what I have to plan for that's reality if I say that I want $300,000 put to the side for my fund money for going and traveling and enjoying life for those first 10 years then the reality is I probably need closer to $600,000 in order to be able to do that when the time comes when adjusting for inflation that trip to Europe that might cost me30 Grand right now now it's going to cost me 60 Grand 22 years from now all right so now that we've given some thought to what life might look like when we retire and how much money we'll need each and every month and how much we want to spend on travel and all of that good stuff now it's time to figure out what guaranteed income will we have at that point are we going to have a pension what does social security look like do we have any other streams of income that are going to come in each and every month so now again with these streams of income inflation is such a big part of it so if you're going to a pension which fewer and fewer people do these days you want to make sure that there is a cost of living increase with it when trying to Value what that pension will be worth in retirement so I work with a lot of teachers and in New York state the pension even though it's a very great retirement system and the pension is great it does not have a strong cost of living increase an inflation kicker to it it's very minimal to the point that we almost don't even include it when projecting out into the future so when you retire at age 66 say and let's say your pension is $60,000 at that time then that's what it's worth at that time 60,000 bucks but if you go 20 years out 24 years out if inflation is 3% then that $60,000 it really only has a $30,000 purchasing power at that point because it's not increasing every year with inflation so inflation is eroding the purchasing power of that pension so this is why Social Security is the best pension that exists out there because it does have a cost of living increase every year that's tied to the CPI so so as prices go up the amount of your Social Security annuity the amount that you get every month is also going to go up to keep Pace with inflation so now it is a very good exercise to go to ssa.gov the Social Security website create your user ID and login and go in and look at your benefit booklet they will give you projections of how much Social Security you will receive in the future at all the different ages from 62 to age 70 and we're not going to go into Social Security and how it all works right now but the longer you wait on Social Security the more that you get guaranteed for the rest of your life and the numbers that they show in that little booklet next to each age those are in today's dollars so you want to estimate how much Social Security will you actually receive when you retire and you use that same formula that we were using before if we assume a 3% inflation rate and you're going to retire 22 23 24 years from now then you could expect that that number that you see there is going to be double by the time you actually start collecting Social Security there are a lot of other factors that come into play like your earnings and what that looks like from now until retirement so that number could change dramatically but just to give you an estimate of what that looks like that is a good exercise to go through and I do that with clients when we're trying to project what their social security income is going to be so let's just continue using me as an example so if I said that I need $6,000 a month to live right in Futures dollars it's about $122,000 a month and in my social security benefit book right now if I look at age 67 my full retirement age it is somewhere around $3,500 a month that I would receive re at that age so if we double it using inflation again again I'm just estimating right now we could say that my social security benefit is going to be close to $7,000 a month in retirement if I wait to my full retirement age of 67 and then let's say that my wife's social security benefit at her full retirement age which is 67 is $2,000 a month because she hasn't worked as many years she stayed home with the kids for a while so if we look into the future then if she's going to be retiring about 24 years from now then we could say that that social secur benefit will be about double so let's say $4,000 a month so between the two of us walking into retirement at age 67 we should have $11,000 a month of guaranteed income and our expenses are $122,000 a month now that doesn't Encompass everything that is just our Baseline expenses all right so we're $1,000 short right there which is a very good starting point just from Social Security now as we know Social Security is a variable we don't know if it's going to perform the way that we all expect it to by the time time we get there I do feel confident that for my age range that it is going to be the same but things might change we might have to put more money into Social Security in our working years they're going to change something to make sure that Social Security is sustainable because so many people have paid into it for so long and rely on it for their retirement income so now one other thing that I didn't mention that I might want to have a separate pool of money for or I might want to increase my monthly expenses for this is healthcare because it is such a variable we just don't know what it is going to look like when we get old if we're just on Medicare and we're paying co-pays and everything out of pocket what is that going to look like by the time I turn 65 nobody knows right all these systems seem like they need funding they need money and it's going to end up coming back on us so it's another variable where I want to error on the side of caution and have money saved put aside for that all right so there's another rule that gets thrown around a lot called the 4% Rule and what that is is it is what's called a safe withdrawal rate from your portfolio that you could take out each and every year with without ever running out of money so this rule has been back tested throughout history and 99.9% of the time if you withdraw 4% and increase it every year for inflation out of your Investment Portfolio it will last you for 30 plus years so in my case I need to take about $11,000 a month let's call it $115,000 a year that I want to be able to take from my portfolio to make up for that gap between my Social Security and my bare expenses so if I need $15,000 a year according to the 4% rule I would need to have $375,000 in an Investment Portfolio that I could then draw 4% on right 4% of 375 Grand would be $155,000 and then in year two depending on what the inflation rate is I would increase that $115,000 by 3% by whatever that inflation number is each and every year and that would be my safe withdrawal amount that that $375,000 would last me and now when trying to figure out how much money you'll need for each stage of retirement like the go go years we know that we want to have $600,000 that we could spend right $60,000 a year but you don't need all of that in day one because that 600 Grand would then earn interest or it would grow at whatever rate of return you're able to get that you would be able to draw from so we'd have to do some calculations we call it like a present value calculation right so if you're 67 and you know you want to take $60,000 a year for the next 10 years how much money would you need to have at that moment when you retire if let's say you could get a 5% rate of return right and maybe you would only need to have $400,000 saved I'm just making it up right but it's instead of the 600,000 walking into retirement you'd only need 400,000 because that money is going to grow throughout those 10 years and also with that later stage in life if we say for nursing homes and for end of life planning you want to have $500,000 put away but at age 67 you might only need to have $250,000 put away at that point so we'd have to do those calculations to figure out how much you actually need at retirement saved to be able to fill those different stages of your retirement spending life so so much to think about you know when starting to frame out how much money you'll actually need for retirement but this is where we start this is where we start putting those numbers together to try to come up with you know how much money we'll need and the bigger that Gap is between your guaranteed monthly income and your monthly expenses then obviously the more you have to save in that first bucket that we talked about where you're drawing money from where we go by that 4% rule which is not a hard and fast rule it's just really a rule of a rule of thumb to get started when putting these projections together but if you need $6,000 a month to make up for the gap between your monthly expenses and Social Security then that's 72 Grand a year that you need to be able to take off right so that's now we're getting close to 1.7 $1.8 million that you need to have in a retirement account in order to be able to pull that much every year we're talking a lot of money so that plays a big big part is how much money you're going to be spending every month in retirement and what your guaranteed income sources are when you have a pension you might end up where your monthly income between Social Security and pension is more than your monthly expenses and you really don't need to have a lot of money saved for retirement because your guaranteed income is more than your monthly expenses so any money you save in 401ks 403bs IRAs that's all party money and another thing you know for another day that we'll talk about is how is your money saved what type of investment accounts do you have is it all pre-tax money where you're taking money out and you got to pay taxes every time right cuz then you got to save a hell of a lot more compared to if you have Roth money where it's all coming out taxfree you don't have to pay any taxes on it that makes it much easier to pull that money out and enjoy it and spend it because you have no tax consequence when you're pulling it out so we could go on and on I'm going to leave this one here for now just to kind of give you an idea of the framework and I just did estimates off the top of my head so maybe all these numbers don't Jive and you might have some questions as you're going through this but I'm just starting to put the pieces together of how we deter determine how much money you might actually need walking into retirement so I hope that you found this one helpful please leave me a comment down below let me know if you have any questions you can always email me Rich school ofpersonal finance.com and I'll see you again in the next video thanks