Saving enough for retirement

0:00- [Instructor] So let's talk a little bit about saving enough for retirement. So I'll start emphasizing how important it is to start early versus, let's call it not early. And I'll give you a scenario here. Let's say that in the early scenario, you are going to put in $100 per month.

0:24And you're going to do this for, let's call that 40 years. 40 years. And you're going to get 8% per year return on your investment. So if you think about $100 a month for 40 years, that's going to be $48,000 in total is what you directly contribute. But you also get this growth.

0:47Now, the not early scenario, let's say you double your contribution, so you're doing $200 a month. But you're doing it for half as much time. You're doing it for 20 years. And you're getting the same investment return. So you're not making different choices on how you invest your money.

1:04And once again, you are also putting in $48,000 in total. What's your gut sense of at the end of this, of either of these periods, who's going to have more money or less money, or whether it might be similar? Well, it turns out, and there are many calculators on the internet, or you could get a spreadsheet out to actually calculate this, the person in the the early saving category is going to save $349,100.78.

1:34Versus the person in the not early category is only $117,000, or $117,804.08. So even though they contributed the same amount of money, the early saver, because of that compounding for longer, especially those early contributions, is getting roughly three times as much saved up.

1:58Now, another misconception... Hopefully, now you are very clear. However old you are, start, start investing, start putting money away. Now, another big question is, how much money do you need to put away? And that will depend on the standard of living you have, your capability of saving, how much you're bringing in, how much you're spending, your budgets.

2:17And we have many, many videos on all of those things. But some people might imagine, well, maybe $1 million is more than I would ever need. I'm a millionaire after all. But you have to remember, retirement is when you are no longer working, or at least working in the traditional sense.

2:34So you're no longer bringing in income. So you have to essentially live off of this money. You might get some other things. Maybe you have a pension. Maybe, well, likely to have Social Security benefits, things like that. But for the most part, you're going to try to live off of this $1 million.

2:47And you don't know how long you're gonna live. Hopefully, you live a very long and healthy life. So if you retire at 65, it's possible that you might, you might need this money for 25, 30, 35 years. Lifespans are getting longer. Healthcare is getting better. Now, a rule of thumb that a lot of retirement planners would say, they would say the 4% rule.

3:06That however much money you have, you need to be able to live off of 4% of that money. So for example, if you were to have $1 million when you start retiring, that means that you should be able to live off of 4% of that, which would be $40,000. Now, in some places, some parts of the world, that is doable.

3:24And some parts, not so doable. And you have to keep in mind, where's this money being saved? If it was a 401(k), you didn't pay taxes when it went in. You didn't pay taxes while you were investing it. But as you start taking it out, you will pay taxes on it. So you're not even going to get necessarily the full $40,000.

3:41And so if you said, "I needed 80,000," well, you're gonna have to put $2 million in. And if you go back to these calculations before, if you're this early saver, if you wanna save $1 million, or even $1 million after 40 years, so you have to start early. You gotta start in your early 20s there.

3:55You would have to not put $100 a month and get an 8% per year. You'd have to put about $300 a month, so approximately 300 per month. And this person who didn't start quite as early, although 20 years isn't horrible, well, this person is going to need almost, is going to need almost, what is this, eight, nine times as much money put in.

4:19So if they only got a 117, and if they actually want to get to 1 million, so if I were to multiply this times eight, you're looking at more like $1,600 a month that they're going to need to put in. So keep all of this in mind. Keep in mind your cost of living.

4:35Keep in mind that the costs that are likely to decrease. Hopefully, your car and housing expenses go down when you retire. Maybe it even gets paid off. You're less likely to have childcare costs, college costs. Your tax rate might go down. But there's other things that might go up.

4:51Things like healthcare costs, inflation. Remember, this money, you're spending it in the future. And things get more expensive. Even a good inflation rate is two or 3% and the not... And in many years, sometimes you have inflation rates a lot higher than that.

5:07So you have to make sure that that's not just in today's money, $40,000. You have to say, "Okay, what would it be like in 40 years or 20 years? How far will $40,000 go?" And it might not go that far.