The Safest and Earliest Time To Stop Saving For Retirement

When does it make sense to stop saving for retirement? For some of you watching, you might be able to stop saving for retirement earlier than you think. And in this video, I'm going to share with you how to figure out when it might make sense to stop saving for retirement, especially if you're one of those people that likes to save a lot of money. Now, there is nothing technically wrong with having too much money or saving too much money. My dad, in fact, was someone who saved more than he needed to. But when he passed away earlier this year, it dawned on me that he sacrificed way too much of his life for his nest egg, which ultimately he never got to enjoy. So to figure this out, let's first start with the variables you need to understand about retirement. There are, in my opinion, at minimum, six variables you need to figure out about your own retirement, and then we'll be able to figure out if we're in a place to actually stop saving. Now, I know what you're thinking, six variables, man, that sounds like a lot. Who wants to figure that out? But it sounds scary, I know, but trust me, you already have the majority of them already. So let me walk you through each one here. So the first variable is your retirement number. So how much money do you need to save to actually retire comfortably? Number two is your current savings or your net worth. Number three is what your expected returns on your portfolio will be. So what return rate can we actually reasonably expect? Number four will be our current savings rate. So how much we save every single year. Number five will be our retirement spending needs. I would argue this is very important. So your anticipated annual expenses in retirement. And number six are your other income sources. So social security, pensions, rental income, part-time work, et cetera. Now, traditionally, the most important variables, in my opinion, are how much you want to spend in retirement per year and what your withdrawal rate is. And that way we can back into what your retirement number needs to be. The withdrawal rate is simply the percentage of your portfolio that you plan on withdrawing every single year in retirement. And so for a traditional 30-year retirement, a common withdrawal rate is usually between 4% and 5%. And this is just a starting point. So if you knew you wanted to spend $7,000 a month in retirement, which would be around $84,000 a year, you would take the 84,000 divided by your withdrawal rate of 4%. And that means you would need $2.1 million saved in your portfolio in order to withdraw 4% of it every single year. The idea here is that if you have a nest egg that's big enough, you can withdraw from it. And because it's still earning you a return, the portfolio can sustain itself indefinitely or at least through your retirement. So now that we know what the six variables are, let's actually put them into practice with a case study of a couple. Sarah is 38 years old and her husband Mike is 45. And combined, they make an annual income of $180,000. Now, they know that they want to spend roughly $7,000 a month in retirement, which is quite convenient because that's about $84,000 a year. Or we know that their retirement nest egg needs to be about $2.1 million. So here's a list of their current assets. Both of them are quite big savers. Sarah has $380,000 in a 401k and $42,000 in a Roth IRA. Mike has $272,000 in a 401k, $60,000 in a Roth IRA and $60,000 in high yield savings. They both own a home in Texas together. It's worth about $395,000. $315,000 of which is their equity and they have about $80,000 remaining on their mortgage. Together, they also have a taxable brokerage account with about $81,000 in it. That means their net worth is just north of $1.2 million and their total portfolio size, if you combine it all, including the high yield savings, is $895,000. So let's actually fill out their six variables really quickly here. So number one, we know that they need $2.1 million in retirement as of today's purchasing power using the 4% withdrawal rate rule. And if we actually want to account for inflation, let's say in 20 years, that means we'll need $3.79 million at the time Mike hits the age of 65. That allows them to withdraw the equivalent of $7,000 in purchasing power today on a monthly basis. If you're wondering how I got that number, I just assumed a 3% inflation rates and I plugged it into an inflation calculator. Their second variable, which is their portfolio size, it's $895,000. Their third variable is an expected return. I'm going to assume a return of 6% in this case. This is conservative and also quite a blanket statement. I definitely understand it could be more than this or a little bit less than this, but for now let's just assume they get 6% on their portfolio. Their current savings rate is about $36,000 per year. So they're saving about 25% of their gross income. That's variable number four. Number five, we know that they want to spend $84,000 every year in today's dollars. And so we'll figure out what that is in the future as well. And number six, they are actually expecting some other sources of income when they retire, for example, social security. According to the social security administration, the average retirement benefit for somebody as of January, 2024 was $1,907 per person per month. So we're just going to assume that they both get $1,900 per month. Uh, that's just rounded down. Now that's a lot of variables to figure out if, and when they can stop saving for retirement. But the idea here is that if they have a nest egg, that's already compounding for them really well, are they going to be on track for retirement without ever having to contribute any more money into their retirement portfolio as of today? How do we figure that out? Well, if you went to a financial advisor, they would go through your cashflow summary, what you plan on saving every month and every year, and assume different portfolio return percentages, and then project out what your retirement looks like balanced with your social security and any other goals. They would probably do this manually, or they would do it via a model that they've built specifically for their clients. Now, another solution you might have at your fingertips is to turn to a partner like Claude.ai to help us figure out this complex problem with all the variables required. I will simply prompt Claude with the six variables of information, and let's see how Claude thinks deeper and asks us follow up questions. So here is my prompt. Hello, Claude. I have a couple, which is Mike 45 and Sarah 38, that are earning $108,000 per year. I want to figure out when is the earliest they can stop saving for retirement. They have $895,000 in their retirement portfolio, and they want to spend $7,000 a month in retirement. I then listed the six variables that we came to a little bit earlier, and then I simply asked Claude, how soon can Mike and Sarah stop saving for retirement? In other words, if they keep contributing $36,000 a year to their $895,000 portfolio, at what point can they stop completely and have their portfolio still reach $3.79 million in 20 years? Remember, that was the number that they needed to hit to have $7,000 worth of purchasing power in today's dollars at that time. And what other questions should we ask ourselves? So let's ask Claude. So as you can see, it's actually calculating this step-by-step and using some code to do so, JavaScript right here, et cetera. All right. So you can see that it says great news. Mike and Sarah can stop contributing after 12 years when Mike is 57 and Sarah is 50. Here's what happens. After contributing $36,000 a year for 12 years, the portfolio will grow to approximately $1.34 million. Then if we assume 6% annual growth on that, they will reach $3.84 million by the time that they hit about 12 years from now. So when Mike is 57. I also do like that Claude poses some questions that perhaps I had a blind spot to. So in section two, the important questions to consider, it asked me if I counted for healthcare costs, which I obviously didn't in our case study, but that's something now that I'm thinking about because Claude helped me do that. I would also encourage you after you get any results from an AI chat bot like this, just to double check your answers just for peace of mind. But for now, it's really cool to see that we could stop saving for retirement earlier than we think we need to, especially for Mike and Sarah, they can stop saving completely in 12 years instead of perhaps 20 years when Mike wanted to retire. So what I'm going to do is ask Claude for those intangibles that we may want to consider. So I'm going to prompt Claude with a simple, what are some of the softer intangible psychological psychological factors of stopping to save for retirement? We may need to consider, right? So if you just simply ask Claude this, let's see what it comes up with. As you can see, it's already giving us some key intangible factors that Mike and Sarah should consider when it comes to stopping to save for retirement. So perhaps there's some identity shifts, which we might talk about later. There's some suspending psychology, there's some trust and verification needs, et cetera. I mean, this is quite thorough. And I really do enjoy the fact of how thorough Claude can be. Whenever you ask it questions, like even just a simple question, it always prompts you to really think deeper and challenge your own assumptions. So I feel like Claude is really great in that it doesn't just stop at the first response. And I like that it continues to push until I'm satisfied. And so this is why Claude is one of my preferred AI LLMs. And even if they weren't sponsoring this video, I actually use Claude on an everyday basis all the time. I like that you're able to get different perspectives that will help you try to plan around these complex situations. Because as we know, retirement is not just one variable. It's usually a multitude of variables coming together. If you want to discover what's possible and try Claude for free, make sure to use the link in my description below. And thank you again to Claude and Anthropic for sponsoring this portion of the video. We'll talk about the psychological factors of stopping to save for retirement at the end of this video. But for now, let's explore another simple rule of thumb to figure out when you can retire as quickly as possible. And this is a different type of method. This is called coast fire. Coast fire is part of the financial independence retire early movement. And it's when you have enough in your retirement accounts that without any further contributions, it's going to be enough to cover a traditional retirement. The idea here is though, you're still going to work a little bit, but you might coast and you actually might dial back your employment just to cover your expenses. To get your coast fire number, we actually need this formula right here on the screen. First, we need to figure out your fire number and divide it by one plus your annual rate of return to the power of time and years. We already know our fire number based on Mike and Sarah. So let's use $2.1 million in this case. And if you assume a 6% annual rate of return, as well as you have 20 years left until Mike hits 25, their coast fire number actually comes out to $654,789. That means if they had about $655,000 saved today and never contributed another dollar, it should grow to their target of $2.1 million in 20 years. So technically they can coast fire at their current portfolio size already. But again, if we factor in an inflation rate of 3%, we actually need closer to $3.79 million to have the same purchasing power as 2.1 million in today's dollars. So I figured out that the coast fire number that we would need today is $1.18 million, which our couple isn't too far off from since they already have $895,000 right now in investable assets. Still though, it seems like even with coast fire, we're still not able to stop saving altogether as of right now. However, it could be more possible, let's say in three to five years. Again, with all of these examples, coast fire and the initial case study, you need to consider a wide range of variables, including if you want to work a little bit, even after you retire, your inflation assumptions could change, the market returns could change and your time horizon could change also as well, which could alter your target portfolio sizes. Okay. But let's say you do stop saving for retirement because you've reached a certain number already. What should you do with all of your savings instead? There are a few financial alternatives and also lifestyle alternatives. So first off with the financial side, you could still use your savings to pay off any debts you might have like a mortgage. You can still feel free to contribute some of your savings up to your 401k employer match. Since that's free money anyways, you don't really want to be passing that up. And perhaps you could save for other goals like maxing out The whole idea here is that while you will reduce your saving for retirement, it doesn't mean that you have to pass up good opportunities that you might see with your cash. For example, like the 401k employer match. In terms of lifestyle, you may actually want to redirect some of your savings towards more spending on experiences and memories with your loved ones. While money can always be made, you will never be younger than you are right now. And for example, if Mike and Sarah had $36,000 a year that they could be using towards vacation on their family or perhaps with their friends, or perhaps even spent on something more meaningful and fulfilling, then by all means, I think that they should do that as long as they aren't sacrificing their retirement goals. Now, before you stop saving for retirement altogether, you really want to make sure that you've actually checked the fundamental boxes of having a good financial foundation, and you want to make sure that these are covered. The first is an emergency fund. It should go without saying that we want to make sure we can an emergency today and aren't directing all of our funds just towards retirement. And then once we have our retirement goals hit, we just start yellowing all our cash. The second foundational thing is to pay off all high interest rate debt. You should have none of it by the time you retire. And if you're saving for retirement, but you're neglecting paying off your high interest rate debt at the same time, then I question your decision-making here because your dollars could be working for you much better by just paying off high interest rate debt. And third, if you have any major upcoming expenses, like saving for your kids' college tuition, you may want to not stop saving completely altogether. The whole idea of this video is that you might be able to stop saving for retirement goals because your portfolio size has gotten quite big. We still want to make sure that the rest of your financial life is still taken care of. If you, for some reason, took this video as a sign that you could all of a sudden start spending all of your excess money on sports gambling, or perhaps at the blackjack table, that's not the point of this video's title. We want to make sure we are reasonable here, so if you're stopping to save for retirement, hopefully you aren't just blowing that cash just for the sake of blowing cash. Now, there will be some psychological factors at hand if you decide to stop saving for retirement early, and we touched a little bit upon this earlier, but let's go deeper. The first, I believe, is this fear of regret. There's always going to be a nagging voice that asks you, well, if we stop now, what if we're wrong about our whole situation? The pain of potentially running out of money in retirement feels so much worse than the pain of over-saving right now. This is a valid concern. This is why so many people fall into the one more year trap. That's basically where you say, okay, one more year of savings just to be safe, but then that turns into five more years and then 10 more years, et cetera. To overcome this, you want to stress test your potential plan. Try different variables out, such as a 5% return instead of a 6% return, or perhaps a 4% inflation rate instead of a 3% inflation rate. You could also live a lot longer than you think, or you could live a lot less, but considering that the average retiree dies with anywhere from $283,000 to $315,000, it's likely that if you are an over-saver, you're probably going to end up in one of these scenarios where you have more money left over when you pass on. The second psychological factor is this shift of identity like we touched upon earlier. For many high savers, frugality and discipline becomes basically a core part of who they are and their lifestyle. Suddenly stopping this type of habit can feel like you're losing a piece of your identity, like you're becoming financially irresponsible. My dad was exactly like that. He couldn't change his mindset about spending money after being a saver for the majority of his life. Even when he had enough assets to cover his retirement and then some, I would still stop by his house and he would be eating a frozen meal. The mental transition here is actually going to be the hardest thing out of all of this, and I actually see this quite a lot with families that don't grow up with a lot of money, since those are the families that were conditioned to save all the time. The third psychological factor is the opportunity cost of time. You can always make more money, but sometimes if you're so ahead on saving for your retirement, you should know that every dollar that you continue to put in savings is a dollar that you cannot use right now to enjoy your life as it currently is. Just like I said earlier, you may want to start enjoying your money on things that matter the most to you, like experiences and travel with your family and friends. At the end of the day, that's probably what you will remember the most. I'm not saying everyone's just going to be super fulfilled by experiences. Maybe you just want that Rolex, but for most people, experiences really drive fulfillment. And remember, you don't take any of your money with you when you move on from this earth, so that is something to keep in mind as well. The truth is, retirement planning isn't just about maximizing your net worth, it's about maximizing your life. And if you can get to retirement safely without having to sacrifice too much today, then you should absolutely take that scenario. I hope you enjoyed this video. Let me know in the comments what you guys thought or if I missed anything. Once again, thanks to Claude and Anthropic for sponsoring a portion of this video. I couldn't have done it without them, and it is my preferred AI chatbot of choice. If you're interested in my video on how much you need to retire exactly how much you need, I will leave up my video on the 4% rule, which it will be right here. I'll see you guys in that video or a future one on the channel. Thank you for being here. Bye-bye now.