Planning for Retirement
But first talking about this bleak outlook on retirement and you know, I'm sorry to be a downer, starting out on this very important topic, but I do want to address some of the fears that we have when it comes to retirement planning Now, has really traditionally been the old rule of thumb. But surveys and studies that have come out about the millennial generation thinks that we won't be able to retire until we're 72-75 years old. That's a long time. Sure we may be living longer than previous generations. We'll see. But that's really old. I don't know about you but I don't want to wait until that point in my life to do some of the things I love and want to do. You could do them now. That's true, but you also have to have money in order to be able to do them now and we're going to dig into that and part of it with this idea of financial independence formula, Everybody's going to have a different number here and it also depends on at what age you plan to retire to. That's really going to ...
be a big part of this conversation. But for the sake of argument, I'm saying you need $60,000 for a year to live comfortably at the lifestyle that you want. Now, the other thing to know is this idea of a safe withdrawal rate now, this is something you can also look up and read more about after this class today, but a safe withdrawal rate is essentially the number, the percentage of your investment portfolio that you can pull out every year without outliving your money now. Typically the number that has gotten used for about the past 15 to 20 years is this idea of 4%. If you only four pull 4% out of your investment, your retirement portfolio, you're not going to outlive your money. The concept basically being your investments will keep growing and compounding all terms we're going to talk about here today and you're not gonna outlive it And that equals your F. I. No. So in reality, let's say $60,000 divided by 4%. That means you need about $1.5 million dollars to consider yourself financially independent and to be able to no longer have to earn money, you can just live off of the money that you have both saved and invested. Now, some people would want to be more conservative with that safe withdrawal number and maybe play around with 2.5 or 3%, depends on the age in which they plan to retire and their risk tolerance in general and how much money they want to have saved. But I just want you to familiarize yourself with this formula because you're going to hear, especially if you start to read more about retirement, learn more about retirement, this idea of an F. I number of financial independence number, that's what the formula is now. If you want to get really freaked out. I am not bringing this up to stress you out or to shame you or to make you feel bad, I'm bringing it up because we humans are intrinsically love to compare ourselves to other people. And if you want to compare yourself against a benchmark, this is one that financial professionals used. This is a way for them to say, hey, you're on the right path now. If you're not there, That is also okay. You have time, you can just start working towards getting these kind of goals now. But by 35 you are supposed to have two times your salary saved. So if you haven't gotten started, I do want you to think about ways you can actually start taking steps to get here. But again, I'm kind of playing on this idea of bleak outlook for millennials a little bit up top, we're gonna come back around and cheer up in a minute and I don't want to shame or make anyone upset. But these are the goals. These are the benchmarks. If you're not there, that's okay. But I want you to start working towards getting here and again, it's your annual salary. So If at 30, you're making $40,000, that's how much they would like to see in your retirement savings account, not just savings across the board, specifically your retirement savings. So again, like I was saying, if you're earning $55, in your 30 minutes, 55,000 saved. And by 35 they want 110. But here's the reality. So these stats actually come from Q2 of this year, 2018. Fidelity analysis found the average retirement savings to be in a four oh one K. $104,000 and an I. R. A. $106,900 and in a 403 B, which if you're not familiar with that term, it's basically a four oh one K. For nonprofit companies, $83,400. And this is based off of more than 30 million retirement accounts in the United States. So sure there are probably some young millennials, older gens ears who are very early in their careers might only have $4,000 save for retirement and maybe that's pulling down the number a little bit. But you got to think this is across 30 million retirement accounts across a wide variety of ages. So truly a lot of americans are not at all on track to prepare for their own retirement. But first I want to get into the very important idea of compound interest and why this matters so much. One of my favorite money quotes ever is compound interest is the 8th wonder of the world. He who understands it earns it, he who doesn't pays it, it is often attributed to Albert Einstein, who knows if he actually said it, but it's a great quote and the reason it's so powerful is because those of us who have ever dealt with credit card debt, student loan debt have been on the wrong side of compound interest. You understand what it feels like that every single time you make a payment towards your debt and it just seems to never go down, it's because interest is working against you, but on the flip side, especially when it comes to investing, it can be working for you and it's this simple concept of earning interest on your interest. So to over simplistically break it down, this is a very, very simple explanation. But if you're near one, you invested $100 and you earned a 5% return, you have $105 at the end of the year. Now in year two you're going to continue to earn interest on that whole $105, not just on the initial $100, you invested your earning interest on the interest you already earned. So at the end of that you've got an 8% return. So now you have $113.40 and then you're going to keep earning more interest and it's going to snowball now, does that sound like a lot of money? No, but if you start to deal with tens of thousands to hundreds of thousands of dollars, think of how that can be snowballing for you. So you're constantly earning interest on your interest and I'm going to break it down with a real life example. First we have lily she decided to start saving into our four oh one K. When she was 25 she first had access to a four oh one K. Account. She decided to put $ per month. So $200 out of each paycheck into her 401K. Now her husband Marshall put off saving into his 401K. Until he was 35. You know what, he's feeling a little competitive, he wants to catch up with his wife. So he started to double down and put away $800 a month into his 401K. They both have decided they want to try to retire at 65 and they have received an average percent or an average return of 7%. What that means is over the course of all of the decades they've been invested into the stock market. On average they've received a 7% return on their investment. So some years were high, some years were low but across the board it's about seven. So here's how this actually shakes out Lily with her 7% return on $400 a month for 40 years has just shy of $960,000 in her 40. And K. Now remember her husband Marshall doubled down and put $800 a month away but waited 10 years. So he only had 30 years to get his returns And he did not even catch up. He had over just a bit over $900,000. And part of the point here is that if you wait to start, even if you double down, you're not necessarily going to catch up. And that's why I'm harping right now on this importance of starting early and being consistent. And also consider that these are two people who in this very simplistic example. This very simplistic formula never started putting more away. Well, you would think that I'm sure they got raises over the course of their careers, they started to eventually put more away. They would have gotten even more. They would have probably had well north of $1 million dollars individually. So this is just a very easy simplistic explanation and they still both got very close to having $1 million dollars saved by being consistent