Saving enough for retirement (Part 2)

0:00- [Instructor] So let's talk a little bit about saving enough for retirement. So many financial planners will talk about the 4% rule. And this is, that's this idea that however much you save for retirement, that you can prudently spend about 4% of that per year.

0:18So for example, if upon the day that you retire, you have $1 million saved up, which feels like a lot, but the 4% rule would say, well, you should only spend about 4% of this per year. So that would be about $40,000 per year, which all of a sudden feels, not 40,000 K, $40,000, which all of a sudden feels a lot less than a million.

0:44And the reason why they focus on 4% is, at retirement, you're not going to have this money invested in high risk, high return things because you don't want it to jump up and down by 10 or 20%. So you're gonna have it mainly in fairly safe things that are going to be giving you fairly low yield or low interest on it.

1:03Maybe if it's in very safe things, you might be getting 1, 2, 3% on it. It obviously depends on interest rates at the time of your retirement, which could be hard to predict. But this allows the money to grow a little bit. And you are still probably, if the money's growing less than 4%, you're still digging into it, but you're having many years to dig into it.

1:22If this money wasn't growing and you're spending 4% a year, you would've 25 years. If this money's growing by even 1 or 2%, then that's going to extend even further. And obviously, if this money is growing by 4 or 5%, then you could keep doing this for a very long time.

1:37But this is a pretty prudent thing to do and you might want to go the other way around. You might say, all right, upon retirement, I need 60,000 a year to live off of. And be careful when you make these assumptions 'cause you might say, well, I could imagine doing that in my town now.

1:54But if you're not retiring for 10, 20, 30 years, you have to think about inflation and how much things might cost then. And to just get a sense, think about what inflation's done in the last 10, 20, 30 years. But if you have this sense, okay, I'm going to need $60,000 a year.

2:08Even when you factor in inflation, what you wanna do is then just take your $60,000, 60,000 and divide by 4%. Or another way to think about it, divide by 0.04. You could do this on a calculator, but you would get this to $1.5 million if you want to have 60,000 a year.

2:27Or if you do this with 80,000, you would get that you have to save $2 million. And once again, be sure to factor in inflation. Now the next thing you might wonder is, okay, let's say I do decide that I need to have $1.5 million saved up at the time of my retirement.

2:43How do I know how much to put aside, let's say, every month right now in order to get there? There is some fancy math to figure that out, but luckily there are these retirement calculators all over the internet. You could find one of them right over here at investor.gov, which is run by the Securities and Exchange Commission.

3:04So it's a credible organization. And so you can just fill out this form. So initial investment, so let's say you have nothing already, but monthly, you want to contribute $200. And let's say that this is, let's say you're earlier in your career, you're gonna be doing this for 30 years.

3:23Estimated interest rate. So this is how the percent that it's gonna grow at, and it's hard to completely predict. But let's say over the stock market, you get a little bit higher return. Let's say we go with 8%. Some people would say that's conservative. But if you're investing in more conservative things, some people would say that's aggressive.

3:39And then here they say interest rate variance. So they wanna see, well, how does the amount you save change depending if you've got 9% or 7%? We don't have to worry about that right now. Let's assume that the money, this is, this is annual interest rate, but let's say it compounds monthly at that annual rate.

3:58And now we can calculate, and it says right over here that, year 30, our total contributions are going to be about $72,000. But because of that growth, the future value at 8% is 298,000. But as we can see, we did not save anywhere near enough that I just talked about in order to actually get to those numbers that we wanted.

4:25So let's juice this up a little bit. Let's say we are saving $500 a month. And let's say that we are doing a little bit better, and I would say I'm getting a little bit aggressive now at 10%. Let me give, let's look at a range here. Let's go plus or minus 5% to see what happens.

4:44And now let's calculate this. And so now I'm getting closer, but I'm still not where I need to be for those calculations to have 60, if I use the 4% rule to have $60,000 a year. But now that I can see, in 30 years, I'll have 1.13 million and they can see my future value is right over here.

5:04Now, if I were to get 5% return above that, so this is at a 10%, then I'm doing really well. So as you can see, the return really matters. If I get 15% a year, that's all of a sudden almost 3.5 million. But if I got 5% a year, that's only, not only, it's a lot of money, but that's 400,000 or a little over 400,000.

5:23So that return you get really matters. But once again, you don't wanna take on too much risk either. So start playing around with these types of tools and you'll get a sense of, depending on how long you have to save and how much you can contribute, what type of a lifestyle you can have when you retire.

5:38And of course, you might be able to go a little bit above the 4% rule if you think that you could dig into it or you can invest it better. But that's always a little bit risky to be overly optimistic with your finances.