Save Many Ordered with airSlate SignNow

Save many ordered

i receive questions all the time relating to retirement and investing and saving and just money in general one of the biggest questions that i consistently receive is troy how much money do i need to have in the future in order to retire at a certain age with a certain level of annual income and there are many concepts that go behind this calculation so the purpose of today's video is to help you understand those concepts learn how to do this calculation yourself and we're going to go through several examples of how much money you need to save annually given your age to retire with a hundred thousand dollars a year of annual income at the age of 60. [Music] hi i'm troy sharp ceo of oak harvest financial group certified financial planner professional and host to the retirement income show so as we look at this concept i've created a little chart here and this is going to be a cheat sheet i'm going to explain how i created this cheat sheet but doing this calculation involves many factors how much money to save what is your investment rate of return what age are you now how much do you have in savings how long before you actually retire what will be your future social security benefits so this decision or coming to the answer to this question it's a complex question that involves a complex process but i'm going to break it down and make it pretty easy for you to understand and hopefully be able to do this calculation yourself so what we have here is a basic chart retire win and now 10 years 20 years 30 years 40 years social security i don't know what your social security will be in the future but you can go to ssa.gov create a profile and look at your benefits and it can help project into the future they even have calculators you can play around with to help you determine what your social security benefit will be in the future right now if you retire at full retirement age the max social security benefit for one person is around thirty one hundred dollars per month so if you have two working spouses that's about sixty two hundred dollars per month or almost seventy five thousand dollars per year in that range in the future these numbers will be higher because social security is indexed to inflation so ssa.gov you can put that in if you're married look for you and your spouse and come up with this number to help you have a more accurate calculation savings this is what we're going to figure out today two components to that savings number how much do you have now and how much will you need in the future to support an annual income of a hundred thousand dollars now you see this is increasing and the reason it's increasing is because of inflation the concept of inflation is pretty simple a dollar today is worth more than a dollar in the future so if i were to tell you i'll give you one dollar today or in 20 years i'll give you a dollar which one would you take of course you're going to take the dollar today because you could invest that money and in 20 years hopefully it's worth two three four or five dollars so a dollar today is worth more than a dollar in the future so when we want to spend a hundred thousand dollars today that's the true value of that number but if we want to spend a hundred thousand in the future we have to discount in order to calculate that and all that means is in ten years if we want to be able to buy a hundred thousand dollars of goods and services we're going to need about 128 000 this is using a two and a half percent inflation rate in 20 years 164 grand to equal a hundred thousand dollars in goods and services today so the first concept here is if we want to spend a hundred thousand dollars in the future we need to understand that it's not a hundred thousand that we need to pull out of our nest egg if we want it to be a hundred thousand dollars in today's dollars because today's dollars are more valuable than future dollars we need to plan on pulling more money out of our nest egg and the longer in the future our retirement is the greater impact inflation will have on our dollars so we need more money if you're 20 years old and you want to retire in 40 years and spend a hundred thousand dollars in today's dollars you need to plan on pulling out 268 000 per year and then as you go through retirement inflation of course will still exist that withdrawal needs to increase to keep up with inflation in the future okay so here's the basic chart that i've created if your goal in retirement is to spend 50 000 a year not a hundred this still applies i'm going to show you how to do the calculation though to look at inflation based on your particular time frame okay so if we want to retire in 30 years coming back here this is the the cheat sheet 30 years to spend 100 000 we're actually going to need 210 because of inflation so we're gonna take two hundred and ten thousand the magic number here subtract out the social security benefits this is the amount of money that you will need to withdraw annually from your savings here 210 i just assumed social security would be 85 000. subtract that out we get 125 000 with that number we take 125 divided by .04 the reason i have point zero four here is because that's what's known as the four percent rule the four percent rule simply says if we withdraw four percent of our nest egg we should be able to live through our age nineties without the fear of really running out of money now it's not an exact science it's not it's not something that can guarantee you success but as a rule of thumb it's a decent number to do this calculation based on so we divide the number we got in step one by point zero four and this tells us that in order to have a hundred and twenty five thousand dollars withdrawn from our savings be able to increase that for inflation throughout retirement we need to have about 3.125 million dollars saved now once we get this number we need to do a time value of money calculation so this is pretty straightforward so far i'm going to teach you how to do this time value of money calculation so all i've done i've come to the google search engine i put in tvm calculator i just go to the first one up here i've used several of these before they all pretty much do the same thing you can even get an app on your phone to do the same thing but if you click here i'm going to walk you through how to do this calculation okay so future value pretty self-explanatory we just calculated that we're going to need 3.125 million dollars to withdraw again the 125 000 per year which will combine with our social security to get us to 210 which is the equivalent of a hundred thousand dollars in 30 years so just reinforcing these concepts so the annual rate of return if you're if you have 30 years until retirement i personally believe that you should be 100 stocks inside your investment portfolio now i don't know your situation i don't know your needs i don't know your willingness or capacity to take risk but we need to grit to earn the highest potential rate of return as possible to achieve our goals over the long term right now bonds are paying next to nothing so if in my particular portfolio i'm 100 stocks somebody younger than me or even older than me as long as you're comfortable with the risk it merits strong consideration in today's low interest rate environment to go 100 stocks so i want to be still conservative here even though we're looking at 100 stock portfolio if you have 30 years until retirement and assume we earn 7 on our money the periods that's how many years before you actually need this money in this example it's 30 years compounding we need to change this to annually because our investments they compound annually present value this is the amount of money that you have saved today now it's important that you input this as a negative number so let's say if you have 30 years until you're 60 that means you're 30 years old today if you're watching this video hopefully you've been diligent about saving and you're watching because you want to learn how to be a better saver better investor i'm going to assume here you have a hundred thousand dollars saved up by the time you're age thirty and then all we need to do is solve for payments we click the payment button so that's twenty five thousand dollars per year we need to save to get to 3.125 million if we're 30 years old want to retire in 30 years and spend after inflation a hundred thousand dollars a year in annual income now some of you may be saying this is a huge number i can't save twenty 25 000 a year if you're 30 years old that's completely fine keep in mind that as you get older you're going to enter more of your prime earning years in your 40s and your 50s and you may not be able to save 25 000 now but in the future you'll probably have years where you're saving 40 50 60 70 80 90 000 i really want to point out though how important it is to save we need to save the longer time we have the more return we can earn the better this will be let's assume we make nine percent we only need to save about thirteen thousand dollars per year so going from seven to nine almost cuts the amount of money you need to save in half now let's say you have you're a conservative investor and you're 30 years old and you're scared of the stock market and you decide you want to invest in a target date fund that is a little bit less risky well you may only earn three percent a year let's bump it up to four in that instance now you need to save 50 000 per year for retirement so the annual interest earned is extremely important when you are looking at how much money you need to to save for the future okay coming back here this is a little cheat sheet so if you want to write this down pause the video the time value of money calculation the present value is your current savings do not forget to put the negative sign in front of it the negative sign negative 100 000. future value this is the future value needed which we just calculated right here r is the expected rate of return if you're young i encourage you to talk with an investment professional understand your risk tolerance but in today's low interest rate environment considering going very heavily allocated towards equities for most people is probably a really good idea there will be lots of volatility there over time but the alternative inside your 401 k of bonds is paying you next to nothing and will never get there without saving massive amounts of money much more than we otherwise would if we took advantage of the stock market's long-term expected growth n is the number of years before retirement and remember to switch it to compounding annually okay so i'm going to do one more example here just to run through it let's assume we want to retire in 20 years well we take our magic number from the chart above 20 years 164 thousand subtract out our estimated social security benefits for this example i put eighty thousand dollars per year which leaves us with eighty four thousand we take the eighty four thousand divide by four percent or point zero four we get two point one million dollars so now we're going to go back and do the calculation just to reinforce that so future value 2.1 million dollars you can change the rate of return again to 7 percent the end to 20 years annually is compounded i'm going to assume if you have 20 years until retirement you've done a bit better at saving and you have 150 000 let's say remember the negative number and then we compute payment so now we need to save thirty seven thousand dollars per year over the next twenty years in order to achieve this two point one million dollar number if i change this to nine percent it drops to twenty four thousand 000 if you're a conservative investor and you're scared of the stock market if you are i encourage you to watch my video stock market for beginners and several of the other videos i have about the stock market there's no reason to be scared of it if you have a long term to invest change this to four percent now it jumps up to sixty thousand dollars so again we need to earn good interest and one of the best ways to do that is is the stock market okay now i want to show you how to calculate your own magic number meaning what if you don't want to spend a hundred thousand dollars a year in retirement what if you want to spend 80 000 or 120 000 i want to show you how to do that calculation so back to the time value of money calculator let's say you want to spend eighty thousand dollars per year in retirement so we put the eighty thousand because that's the today's value payment is going to be zero future value not going to put anything in there i use a two and a half percent inflation rate right now inflation is less than two percent in the general economy medical expenses is much higher than two and a half percent but historically in this country two and a half three three and a half percent is what we've seen but we are in a very very unique economic time two and a half percent is not a bad number but you might want to play around with this to see what impact inflation can have on your magic number period so let's say we have 20 years before we need this number compounding annually again and we just compute future value so if we want to spend eighty thousand dollars in the future of today's goods and services the value that eighty thousand would buy today we're going to need a hundred and thirty thousand pulled out of our retirement nest egg at a two and a half percent inflation rate in 20 years this 131 000 now this would be your magic number so then we would take that 131 000 we would subtract out your estimated future social security benefits to get a number divide that by .04 and then we would go back and do the time value of money calculation in order to determine how much you need to save each year based on how much you have the interest rate earned the number of years before you need it etc just like we went through this whole video now i did not do a tax calculation because i have no idea what taxes are going to be in the future although i do believe taxes will be a lot higher than they are today so everything that i just went through does not take into account the impact of taxes because when you have money inside that tax infested 401 k that you're probably contributing to at work every time you take money out of there you have to write uncle sam a check so this is what we call tax risk how much will you pay in taxes in the future if we're continuing to contribute to that traditional part of the 401k you're not only carrying investment risk and inflation risk so many risks you're also carrying tax risk so i strongly strongly encourage you to consider contributing to the roth part of your 401k most of you should have this option at your employer the difference is the dollars you put in you will not get a tax deduction today for you will pay taxes on that savings contribution but in the future after you've put all that money in and it's grown and you start to take money out you will never pay taxes on the growth or any distribution from the roth portion of your 401k if you're getting an employer match you will still get that match if you contribute to the roth section but that match will go into the traditional side of your 401k and that when you withdraw in the future you will have to pay taxes so watch the video that i did about roth 401ks if you're not contributing and most people are not we need to consider making contributions to this roth 401k again i encourage you to reach out to a financial professional a cfp preferably in order to help you determine what is best for your situation but i'm in the boat the taxes are going to be a lot higher in the future the more money we can get inside this roth 401k the better you're going to be because from a retirement planning standpoint when i'm building retirement income plans for clients that come to see us they typically have three buckets of money and if they don't have three buckets we're trying to create this third this is what we call retirement account ira money that the traditional 401k will roll into we want to have a tax-free bucket and we want to have what's called non-qualified which is savings essentially so when i build an income plan we can take a certain amount out of here a certain amount out of here and a certain amount out of here if taxes are higher in the future i can take less from here for my clients and take more from here or more from here so part of what we're doing here is positioning for the future to have the flexibility to have a better retirement if you like this video make sure to hit the subscribe button hit that thumbs up button and share this video with a friend or family member so we can help them be more connected to their money so we can all have a much brighter future when it comes to our finances