hey guys what's up i'm erin and welcome back to the channel how much money do you need for retirement well there's a whole lot of ways to answer that question not only because it depends so much on your personal situation and your circumstances but also there's so many different rules and guidelines that attempt to answer it and while it may seem like a benign question it carries a heavy weight because essentially it's one of the most important financial decisions you will ever have to make get this question wrong and the consequences could be massive if
you guesstimate too low you could run out of money in your golden years you might have to scrimp and cut back in areas you really don't want to just to get by or you might have to rejoin the workforce a task that is not necessarily so easy once you reach a certain age and can you save too much money for retirement well i guess the answer depends straight up my answer would be no because have you ever heard someone complain oh gosh darn it i saved too much money having a surplus of money is an
extra cushion against emergencies it opens up greater opportunities and in the end can be passed on to loved ones and causes that you care about but there is another thought to consider what if you don't like your job all that much and you continue working and saving and investing long after that point of having enough for retirement well at that point maybe working longer and saving more wouldn't have been the best choice or what if you lived in a way where you were so frugal that you hardly spent anything at all and you ultimately feel
like you missed out on the joys of today to save enough for tomorrow but when tomorrow comes maybe you have more than you ever needed because ultimately when we work we trade our life hours for dollars and i think it's really important to like the job you do but sadly not everyone likes their job so if you continue working at a job that you don't like to save dollars you don't need well perhaps it is possible to save too much then because ultimately that cost you your happiness but nonetheless inevitably we all ask ourselves how
much do i need to retire and i want to go over some of the most popular rules that attempt to help you answer that question the rule of 300 is pretty simple and straightforward and states that you should take your monthly expenses and multiply them by 300 and that is how much you need for retirement so if your monthly expenses are five thousand dollars that would mean you would need 1.5 million saved up for retirement the cool thing about the rule of 300 is its simplicity because practically anyone can figure out on any given month
what their expenses look like and if you're a financial nerd you probably already know this number and a little side note if you've ever heard the retirement rule of 25 times annual expenses it's the same thing as this rule as 25 times 12 months in a year is 300. now basing your retirement number off your expenses rather than your income is a pretty good idea as your income itself is kind of irrelevant in figuring out what your expenses will be if you're someone who spends your full income well then likely come retirement you're going to
need to find revenue streams that are equivalent to roughly your full income but if you are someone who lives on about 50 of your income well then you need far less and it's important to factor in those once in a while expenses maybe they don't hit every month but they come up occasionally like maybe you want to factor in household repairs maybe household repairs don't happen every single month but you want to put a set amount in your budget aside for when they do come up or maybe you take one or two vacations every year
figure out a way to break it down to a monthly amount because at the end of the day you don't want to come up short in retirement and while the rule of 300 is great for its simplicity it does have some shortfalls one it doesn't indicate how your money should be invested should it be invested in aggressive funds conservative funds or target date retirements just fine it isn't made quite clear two it doesn't factor in inflation so while this approach does assume that you spend roughly the same amount every single month continuing on into retirement
it doesn't propose a way to deal with inflation for instance let's say you retired 10 years ago in 2012 and at the time were spending 5 000 a month well today in 2022 you would need roughly six thousand five hundred dollars to be living at the same standard so leaving out inflation is a pretty big variable but still this approach does get bonus points for simplicity the rule of four percent states that you need a nest egg large enough so that you can comfortably live on withdrawing four percent of its total value for instance if
you want to live on sixty thousand dollars per year you would need investments of 1.5 million which you might remember is the exact same figure as the rule of three hundred both of these paths end up getting you to the exact same number the big difference here is that the rule of four percent addresses annual income needs rather than approaching things from a monthly standpoint further the rule of four percent actually addresses inflation and suggests how you should be investing your money as far as how it addresses inflation it says in the first year you
can withdraw four percent of your total investable assets in each subsequent year you can adjust up that amount that you withdraw by the amount of inflation so if in your first year you withdrew sixty thousand dollars and then inflation sits at eight percent you would then withdraw sixty four thousand eight hundred the next year and repeat that process each year factoring in inflation so your purchasing power stays constant the rule of four percent also tells you how you should be investing they say that you should have at least 50 percent of your portfolio in stocks
because you're banking on your investments slowly growing over time now while the rule of four percent is more fully developed than say the rule of three hundred it does have its share of downsides and it has its critics as well for some retirees maybe investing 50 percent of their portfolio in stocks is simply too aggressive for their liking others don't like a four percent withdrawal they see that as too aggressive they think it should be adjusted down to maybe a three percent withdrawal rate to ensure that you don't run out of money especially when we
have retirement time horizons that are going longer and people who want to retire early others say that a four percent withdrawal rate is simply too conservative and it should be adjusted up to say five percent actually one of the proponents of this adjusting up to five percent is one of the founders of the four percent role himself further it only considers a 30-year time horizon it doesn't factor in taxes or fees so you might want to build in a little buffer and it's pretty strict it assumes you spend the same amount every single year another
approach to saving for retirement involves hitting certain savings milestones along the way now different sources will say that you need to have different amounts saved up by various ages but for this video we are going to use fidelity's metrics they say you want to have one times your annual income saved up by the age of 30 three times at the age of 40 working your way up to 10 times your annual income at the age of 67 as this plan is made for a traditional retirement age now keep in mind that this approach is looking
at income not expenses and i do want to stick with somewhat the same numbers for the purposes of this video i will assume that our fictional household here has expenses of sixty thousand dollars but an income of seventy five thousand dollars meaning that they're able to save twenty percent of their income ignoring taxes so that means this household should aim to have 750 000 invested by the time they hit retirement now you might be thinking that is literally half of what the other rule suggested that's a pretty big difference and you're right it's a pretty
big difference worth noting that the ultimate amount that you should have saved is based off your final income because your income at 67 is likely to look different than it did at 30. as to why this number is drastically lower well perhaps you have to consider other income sources like social security or perhaps even a pension if you have one the other rules don't inherently consider another income source either for most retirees in america social security is a huge part of retirement income here are the max social security monthly benefits at various ages and failing
to factor in social security could mean you are saving way more than is necessary that's not to say that i think you should be saving less but you might find that you don't need quite as much as you previously thought a big benefit of this approach is having little milestones along the way at different ages leading up to that ultimate retirement goal i think it helps to keep you on track if you have these little goals to hit as you lead up to that ultimate one big final goal the next rule is that you should
have enough invested to replace a certain percentage of your income and what percentage that may be varies some say you need eighty percent of your pre-retirement income because perhaps you are saving 20 of your income towards retirement and once you're in retirement you probably don't need to be saving for your retirement others argue that it can even be less than that because after retirement your source of income switches to investment income and retirement benefits and you typically are not required to pay medicare or fica tax on most or all of your retirement income so maybe
you only need to replace 70 or 75 percent of your income well interestingly a study from fidelity said that the typical retiree tends to live on about 66 of their pre-retirement income so if we use our previous example of a household making 75 000 a year if they need 66 of their pre-retirement income in retirement that would be forty nine thousand five hundred or about four thousand one hundred and twenty five dollars a month the goal of this approach is to help you keep that same standard of living once you reach retirement as you were
at prior to retirement but of course if you use this method you have to use one of the other methods to figure out how much of a nest egg you would need to provide that type of income it could also be important to make sure to factor in social security or any pension if you have one because it will lower the nest egg that you truly need and finally the last approach is a simple one have a million dollars this is the least thought out approach and it's been a popular answer and the cited number
for decades but just because people say you need a million dollars to retire doesn't make it so it's special because it has a name we don't have a special name for this number or quite frankly it doesn't look as pretty as a million whether or not you need a million dollars to retire that depends on so many different factors maybe you do maybe you don't and it's important to remember that most people do not retire with a millionaire status it's important to note that all of these approaches are intended to be used as general guidelines
none of them are perfect and have the right answer at best they can be seen as a general guide to check if you're on track but remember that everyone's retirement looks different will your expenses increase or will they decrease with time if you move to a lower cost of living area perhaps your expenses will decrease or maybe you travel more or maybe health care becomes more expensive so maybe your expenses actually increase in retirement everyone's situation is unique you also want to make sure that you factor in other income sources because that will affect how
much you need to save and have invested once you reach retirement all of these factors matter and it's what makes retirement planning complex and kind of fun i like to use the general guideline of when in doubt save more because i don't want to run out of money in retirement what metric do you use let me know in the comments down below i'm actually really curious because i love the subject of retirement and retirement planning let me know your thoughts i post new videos every single week if you got anything at all out of this
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