How Much Money Do You Really Need to Retire?

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That’s it! All the calculations are done to know how much money I need to retire. Do you know when you can afford to retire? If you’ve watched some of our other videos, you know retirement affordability actually isn’t the first question to answer. The first is figuring out what you’ll be retiring to. But part of retirement planning is knowing how much money you need. The first portion of retirement income is going to come from sources like Social Security, pensions, part-time work, consulting work, or any other sources. Then we look at how much we need to withdraw from our portfolio on an ongoing basis. Let’s start from the beginning with a few basics. In investing there’s a common rule known as the rule of 72. The rule of 72 helps to calculate either how much time we need to double our money, given a set performance rate, or vice versa. What performance we need to double our money. For example, let’s say the market performs at 10% percent per year, which is close. 72 divided by 10 equals 7.2. So 7.2 years to double your money. Flip that around if you wanted to double your money in 5 years. 72 divided by 5 equals 14.4. You would need to earn 14.4 percent return to double your money in 5 years. The next very useful tool is a compound interest calculator. I personally like using the one on nerdwallet.com.

You can go in there for free and start to play around with the numbers. I use the set annual compound interest rate of expected returns. So if the S&P generally does around 10 percent, I may plug in 10 percent or 9 percent, or depending on the scenario. If you are someone more conservative you might want to use a lower compound rate. From there you can begin to play around with the amount contributed per month and years spent allowing your money to grow before withdrawing. One critical item I point out at this stage is to play around especially with the duration of growth. Notice how much stronger of a factor time is on your portfolio than the contribution amount. This is the power of compound interest. In other words, it’s better to invest early than to wait for the perfect time. 30 years of investing $100 per month can compound to $206,000. Double your contributions but halve your time so $200 per month for 15 years only gets you to $79,000. Albert Einstein said compound interest is the eighth wonder of the world. He who knows it, earns it. He who doesn’t, hates it. As we calculate different scenarios, remember retirement isn’t the end of investing. In fact, it is equally important to be invested in retirement to maintain your purchasing power through decades of rising cost of inflation. The average retiree will see the cost of living rise about two and a half times during their retirement. For our clients, we adjust their investments to suit the needs and maintain dignity during retirement without running out of money through our buckets and guardrails approach. Remember, about one year in five since World War II, the markets have faced a 30% decline. The guardrails approach to retirement income is a studied flexible spending strategy to monitor and maintain buffer zones of income at given portfolio levels. The buckets are designed to maintain spending without selling investments at a loss during down markets. Now let’s begin to look at how much you need. The first quarter to fill is your minimum dignity floor. What are your living costs? From there, what are your goals? As I said, retirement planning starts with your goals and values. Only then can you calculate how much is needed. One way to help figure this out may be to take a practice retirement through a leave of absence or going part-time.

The spending smile is another well-studied retirement topic. This says retirees spend more in their honeymoon years of retirement, less than their slow-go years, and more again in their no-go years. You also have to incorporate taxes. Taxes are likely to be part of retirement income, whether from Social Security, pensions, work, or a retirement portfolio. Be sure to calculate and incorporate income tax strategies in your retirement income. So after all of that, let’s look at some calculations to figure out your retirement number. For simplicity of this video, let’s say your Social Security and pension cover your minimum dignity for. We just want to know how much we can spend from our portfolio. If you follow the state withdrawal strategy, that tells us we can only withdraw 4% from our portfolio forever. If you’re willing to follow the guardrails approach to retirement, we can start withdrawals at a higher 5.5% before inflation raises. Let’s try an exercise working backwards to the beginning of this video. Let’s say that you want to spend $70,000 gross per year from your portfolio. With a withdrawal rate of 5.5%, that’s a portfolio just under 1.28 million. If we factor the market does 10% per year, and we work and save for 30 years, we can calculate with our compound interest calculator, we need to save $621 per month to reach our goal of $1.28 million. Now you can see how easily you can back into a number that fits you. Take action. No one knows their exact line of living life today versus saving for later. We are all different.

Have a third-party assess your situation. Make a plan and follow the plan. Some people have a tough time flipping the switch from saving for retirement their whole lives to spending down their savings. Craft and follow a plan that you know is tailored to your life so that you can enjoy retirement. Be sure this includes a 10-year tax plate. Create a social security claiming strategy to get the most out of your benefit. Subscribe to our YouTube channel to stay up to date. I’m Hunter Brockway, founder of Boca Retirement Strategies. If you would like a personalized retirement income strategy to get the most out of retirement without running out of money, you can start by booking a simple 10-15 minute phone call on our website at bocaretirement.com or email us at contact at bocaretirement.com. We are based in South Florida, Western Massachusetts and work with clients scattered throughout the U.S.

Enjoy your successful retirement, and thank you for watching. Bye. One last thing. We are also slowly setting up a retirement mastermind group I am calling Retirementality. If you don’t know what a mastermind group is, it’s a group of like-minded individuals getting together to help each other solve common problems. We plan to run this group in a roundtable format so peers can help each other. We might talk about things like finance, things like healthcare, things like travel, things like local events. If you are interested in joining this group, you can send me an email at contact at BocaRetirement.com. This will be a complete anti-sales group designed purely in helping you help others retire successfully.

 

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