How Much Do I Need To Retire?
No matter your age, retirement is a great goal to save for. The earlier you start saving the more time your money has to grow and compound. It can be difficult working towards this goal because it isn’t always clear where or how much you should invest. Vince Truong, a certified financial planner, shares his insights on how much you should save.
How much money do I need to save for retirement?
There is an impending retirement crisis in developed countries around the world. Most people aren’t ready to retire, and this isn’t a scare tactic, but the problem is that most people aren’t taking it seriously enough, and they’re a little too complacent about it.
“I read an article a few years ago that included a survey. According to a survey of 55-year-olds in the United States, half of them have no money in a retirement account, such as a 401K. Nothing in an IRA excludes, as you may be aware, equity in a home, which is a significant asset for many people. People with defined benefit pensions with their employers were also excluded. They are, however, in the minority. But the point is that half of them had none by the age of 55.”
– Vince Truong
How much money will I need and how much will I need to save today is crucial since, again, most people do not consider their future selves who they will be in the future. They’ve conducted neurological research in order to map the brain. The region of the brain that gets activated when people think about themselves down the road is the same area that gets activated when they think about a complete stranger. Our future selves are strangers to us, and we don’t care about them, so we’ll have to automate our care for them by automating our savings as much as possible because it’s not about waiting until I feel like it because most of us will never feel like it.
Some parents may feel compelled to leave something behind for their children in the form of an inheritance, but this isn’t always the case. That’s usually a long distance away. Obviously, we’re talking about the end of the road but you have to get there first, and hopefully you want to arrive in some sort of comfort after working for decades.
If you’re living outside the United States, what can you do in terms of saving for some sort of retirement fund?
IRA contributions are very tiny, and assuming that most people can save more than the $6000 per year that you can put into an IRA when you’re under 57,000, most individuals will have to save outside of an IRA and certainly a 401K. If you’re over 50, you’re aware that it’s not like a 401K, where we can deposit much more.
Basically, you’re going to open a taxable investing account, which isn’t entirely a bad thing. You can still manage the tax hit in terms of when you reap capital gains if you use taxable accounts, but it’s basically the only option. Then there’s the question of who I can open an account with, Charles Schwab and Interactive Brokers are arguably your two best bets on a global scale. But that is highly country specific, and there are many constraints to what may be done in an account in Europe, especially if you live there. However, unlike many EUS firms like Vanguard or Fidelity, those two firms operate globally. They will not create new accounts for people who live in other countries. You’ll be able to keep your current accounts.
If you haven’t yet left the United States but want to live overseas, it might be a smart idea to open such accounts beforehand. Just so you don’t have to search for them when you need them, and you have a preference for a particular platform provider, such as fidelity. It’s a good idea to open it up before you travel abroad.
We currently refer quite a few people to Interactive Brokers, but we have no association with them. We know we send individuals there, and they usually have a good experience in terms of signing up. Obtaining an account if they have an address outside of the EUS. It’s evident that they don’t have a major issue, thus it’s a significant consideration. People have options, which is always a good thing.
How do we work out what’s an appropriate amount to save?
It depends on your age, and another factor is where you wish to retire. Where you intend to retire is important since you must consider the cost of living, as well as the cost of healthcare.
“I got a client in Spain who is retired. He actually spends less on insurance in Spain than he would for out-of-pocket expenses on Medicare, so it’s not always a bad thing to be retired overseas in terms of health care costs. You have to think about long term care as well, which is not covered by state medical insurance anyway, so you need to plan for that. You need to think about currency relations, you need to be thinking about where your family members are, the cost of travel and things of that nature.”
– Vince Truong
How much do I need to save today, so I can retire?
We’ll go over three different scenarios. Average asset and income levels at 30, 43, and 55 years old, and ability to relate to these; Joe, who earns $70,000 a year and is 30 years old, wants to retire at the age of 65, and we’ll assume he dies at the age of 90. These two numbers will remain consistent throughout the game. Because this person is a little younger, we’re going to assume they get the desired retirement age and the death age to keep things constant.
We’ll say they obtain a 10% annual return on their investments because they can be a little more aggressive. We must remember that when we save in a retirement account, say $6000 a year into an IRA, we are saving on an annual basis, and every time we add new money to the account, we are lowering this percentage because the new money hasn’t had time to be invested. Even if you’re as aggressive as a DS and P500, you might not obtain 10%.
When you add new funds, you reduce your return. To make up for the math of the lower percentage return, you’ll probably have to be more aggressive than you’re typically inclined. I’m going to maintain the inflation rate constant at 3.5%. It’s worth mentioning that inflation has been on the rise during the last two decades. Let’s say it’s been around 2%. This has typically been quite low.
I’d say that we’re seeing considerably higher inflation statistics right now as a result of the pandemic. Some of that is temporary, but I believe some of it is permanent, and I say it is safe to expect that inflation will be higher in the future than it has been in the previous 20 years, so let’s suppose 3.5%.
Let’s say this person wants $90,000 per year pre tax to fund the lifestyle they want in retirement. This could be too much for some people. It depends on where you live. This person, who is 30 years old and retiring at 65, has 35 years to go before they die at the age of 90, and then they have 25 years of retirement to fund.
These are financial assets, not equity in your home, because if you own a property, it will eventually be paid off, lowering your pre tax retirement needs. For example, I have their IRA 401K retirement accounts, which currently have a balance of $30,000. I’m not going to put the contributions because that’s what we’re trying to figure out, but they have a taxable brokerage account, and we have 20,000 here, so they have a total of 50,000. Assuming they don’t put anything more in, but it grows at 10% per year for the next 35 years, they’ll have $1.4 million in 35 years.
Let’s assume they do get some Social Security. But let’s just presume we’ll get anything. Assume we earn $1200 each month, or $14,400 per year. This is the amount of money that 1.4 million can bring in. If you expect a withdrawal rate of 3 1/2 percent. So, it’s roughly three and a half percent of 1.4.
Can I withdraw the 4% of it?
There are numerous nuances to this. Yes, you can withdraw 4% if your budget is flexible, which means you’re willing to spend less in years when markets are down. If you have that kind of flexibility, 4% is a viable option. If future results are even close to those obtained in the last 30-40 years when these studies were conducted. So, although 4% is generally achievable, it also depends on whether you retire in a bull or bear market. That is actually very important, because if you retire during a bear market and begin drawing down while the market is down, 30, 40, or 50%, you are effectively locking in your losses, which has a significant impact on how long your funds will survive.
To be safe, let’s say we can perform a 3.2% withdrawal rate. You’ll make approximately $64,000 each year if you earn 3 ½% plus Social Security. You will be able to spend $64,000 of your assets. However, if your cost of living increases at a rate of 3 ½% each year for the next 35 years, your net worth will be $300,000. That is a big job!
“Someone who invests a lot less early in life is in much better shape than someone who invests a lot but only has 10 years to live. For the young people out there, you must get started right now.”
– Vince Truong, Certified Financial Planner
What’s my magic number?
If my magic number is similar to the lump money I’ll require in retirement. We require $7.3 million. They’ll have 1.4, so they’ll need another 5.9.
In other words, how much money do they need to save right now? What about the other half of the magic number? What is their savings goal? It is $21,810, which is 31% of their salary, and most people do not save 31% of their income. Definitely not, although it all seems to make sense thus far. It certainly takes a lot of things into account, which is obviously important.
If you don’t get 10% if inflation is higher or lower, or if you spend more or less than this, you know it’s not very precise, therefore this is a pretty broad ballpark estimate. But, to give you a feel of what matters most, it’s not even your rate of return or how much you say; it’s your budget, if we cut this to $50,000. This is now 9500, which is less than half of what we were up before, so it definitely appears more attainable for a lot more people too, the most important factor being how much you’re going to need to spend.
“In 35 years’ time, it’s not really $50,000, a year plus 167,000. if you look the other way, you gotta do it in thirds. We don’t know what inflation is going to be, twenty years or 30 years from now. But I’m saying in the next decade it’s probably going to be higher than it was in the last 20 years when we run models.”
– Vince Truong
The purpose of planning is to prepare for unexpected events and to be present while we plan and model. We must be conservative, which means assuming lower returns, higher inflation, and a higher cost of living than we might expect, because one thing we don’t know is whether you will die of a heart attack at the age of 75 and have no medical expenses, or if you will live to be 100 and spend 10 years in a nursing home.
Those are all critical aspects, but I’d like to highlight one in particular, which is a heart attack and some positive news. This is due to the large number of unpredictably variable inputs. You can make the numbers work very well if you’re prepared to be flexible with how you live, but the problem is that we get used to a certain lifestyle and we become we. We want to live comfortably in our retirement years, which may or may not be possible for some of us.
Hitting 40 and worried about retirement. How much should I be saving now?
Let’s take a look at the second person in the three scenarios above; Mary, who is 43 years old and earns $110,000 each year. We’ve reduced the returns slightly because she could not be as aggressive as someone younger, so it’s now 9%. Inflation is the same 22 years into retirement, and the targeted keycaps retirement income is the same.
However, her account balances are higher, with $140,000 in retirement accounts, $250,000 in taxable brokerage accounts, and only miscellaneous assets. With $490,000, her portfolio will be worth $3.2 million in 22 years. The same Social Security benefit to her 3.5% of 3.2 million is 114, so she will generate approximately $129,000. She will require 191,836 and will have a shortfall of 63,000. Her magic number is 4.8 million because she’s retiring sooner, so inflation hasn’t had as much of an influence. However, she should aim for 25,000 in savings per year, or 23% of her income. This is a little more attainable for her than for the 30-year-old.
Assuming she already has $490,000 in her possession. If that amount was much lower, she’d need to save a lot more; subtract two and 50,000, and it’s 48,000, or over half her salary. That’s why we have to run these things for individual situations.
Finally, there’s Susan, a 55-year-old who earns $130,000 every year. A little bit more conservative on her investments, 08% return. But she only has 10 years left. She also has more assets, so we now have roughly a million dollars in assets. In 10 years, she’ll have 2.2 million.
Her earnings from this 2.2 are 77,800, therefore she will be able to produce approximately 92. She’s going to require 127. Her deficiency is approximately 35. Therefore, she needs to save $5950 every year, or 46% of her salary. Because she has less time, this is a considerably greater percentage. Especially for the audience members in their 50s.
When you have a lot of time, it’s your best friend. When you don’t, it’s your worst enemy.
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These bad habits will destroy your retirement
When we invest, we look at the investment curves, particularly over the first 20 years. But, while we know that compounding is where we obtain our return, the impact of compounding does not. The benefits do not become apparent until the third decade; you must wait until year 20 to observe the curves thicken. But, in order to get there, you need to hit 20 years.
“People my age and older didn’t necessarily have this type of information when we were younger. Younger generations today do have it, it’s readily available. If they get started when they’re young, like even in their 20s, even if it was only like $300 a month, well, if they do things correctly and live within their means, they could be done by age 50. It’s very possible.”
– Vince Truong
It’s important to build habits because when we build habits, we don’t have that mental battle of “Oh, I need to save this money,” We need to fight our own poor habits, most of us spend more than we should and may live beyond our means. These are some of the habits that we should build;
Start tracking your expenses and develop a budget. Know where your money is going. You can track your costs for at least three months using an app on your phone, every day, and on every single transaction until it becomes a habit. If you don’t want to build the habit, at least do it in three months because the numbers don’t lie when you see where you’re spending your money.
“Do I really want to do this? Even if I already made the purchase and input it a week from now, when you’re tempted to go spend on something, you’re probably going to remember. Oh, I just spent this on that thing. Maybe I should do this to keep things fresh. In your memory and at least for me, nothing changes behavior like the truth. And the truth is in the numbers. So, track the numbers but once you have that budget then you can answer.”
– Vince Truong
Open an investment account. If you have one, you should automate your savings. This is about habits, or our bad behavior, in the sense that if you have a US platform, you can set up a regular monthly contribution for each month, every month, and you’re just putting that money in. That money is going to go in before you spend it on anything else, and you’re going to become used to not having it in your budget, and it’s going to be something you don’t even think about anymore. You’re only getting used to it.
For those of us who aren’t great savers, I suppose it doesn’t matter too much if you pay your savings as soon as you get paid, right? We can still live and have some fun if you kind of overspend what’s left over because you’ve banked and put it aside. We could die from anything tomorrow. The pandemic tunnels, obviously. So, you do have to enjoy life today. You just have to find that balance.
As soon as you get paid, figure out what your monthly amount is, deposit it, and then relax and enjoy the rest; it’s possible after you figure out what your magic number is. Set it up as an automatic transaction so you don’t have to think about it.
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