How Much Do You Need To Save In Order To Retire at 60 With a $100,000 Income | Calculate Your Retirement $

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 $100,000 a year of annual income at the age of 60.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner professional and host of 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 in, 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 $3,100 per month. So, if you have two working spouses, that’s about $6,200 per month, or almost $75,000 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 $100,000?
Now, you see this is increasing, and the reason it’s increasing is because of inflation. The concept of inflation is pretty simple. $1 today is worth more than $1 in the future. So, if I were to tell you, I’ll give you $1 today, or in 20 years I’ll give you $1. 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 $2, $3, $4 or $5.

So, $1 today is worth more than $1 in the future. So, when we want to spend $100,000 today, that’s the true value of that number. But if we want to spend 100,000 in the future, we have to discount in order to calculate that. And all that means is, in 10 years, if we want to be able to buy $100,000 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 $100,000 in goods and services today.

So, the first concept here is: If we want to spend $100,000 in the future, we need to understand that it’s not $100,000 that we need to pull out of our nest egg. If we want it to be $100,000 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 $100,000 in today’s dollars, [then] you need to plan on pulling out $268,000 per year. And then as you go through retirement, inflation — of course — will still exist [and] 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 $100,000, this still applies. I’m going to show you how to do the calculation though to look at inflation based on your particular timeframe.

Okay. So, if we want to retire in 30 years — coming back here, this is the cheat sheet — 30 years to spend $100,000, we’re actually going to need $210,000, because of inflation. So, we’re going to take $210,000, 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 $210,000, I just assumed Social Security would be $85,000. Subtract that out, we get $125,000.
With that number, we take $125,000 divided by point-04. The reason I have point-04 here is because that’s what’s known as the 4% rule. The 4% rule simply says: If we withdraw 4% of our nest egg, we should be able to live through our age 90s without the fear of really running out of money. Now, it’s not an exact science, 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-04, and this tells us that in order to have $125,000 withdrawn from our savings, be able to increase that for inflation throughout retirement, we need to have about $3.125 million 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 we’ll combine with our social security to get us to $210,000, which is the equivalent of $100,000 in 30 years. So, just reinforcing these concepts.

So, the annual rate of return, 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 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 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 $100,000 saved up by the time you’re age 30.

And then all we need to do is solve for payments: We click the payment button. So, that’s $25,000 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, $100,000 a year in annual income.

Now, some of you may be saying: This is a huge number, I can’t save $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, in 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 9%. We only need to save about $13,000 per year. So, going from 7% to 9% 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 3% a year, let’s bump it up to 4%. 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 save for the future.

Okay, coming back here: This is the 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 we’ll 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, $164,000. Subtract out our estimated Social Security benefits, for this example, I put $80,000 per year, which leaves us with $84,000. We take the $84,000, divide by 4%, or point 04. We get $2.1 million.
So, now we’re going to go back and do the calculations just to reinforce that.
So, future value: $2.1 million. Change the (annual) rate of return again to 7%, the N to 20 years. Annually it s 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 $37,000 per year over the next 20 years, in order to achieve this $2.1 million number.
If I change this (annual rate) to 9%, it drops to $24,000. 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 (annual rate) to 4%. Now it jumps up to $60,000. So, again, we need to earn good interest. And one of the best ways to do that 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 $100,000 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 $80,000 per year in retirement. So we put the $80,000 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 2.5% inflation rate — right now inflation is less than 2% in the general economy, medical expenses is much higher than 2.5%. But, historically, in this country, 2.5%, 3%, 3.5% is what we’ve seen — but, we are in a very, very unique economic time. (So,) 2.5% 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. Then we just compute future value.

So, if we want to spend $80,000 in the future, of today’s goods and services — the value that $80,000 would buy today — we’re going to need $130,000 pulled out of our retirement nest egg, at a 2.5% 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 point-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) — which 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 401(k), 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 401(k). 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 401(k).
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 401(k). And (on) that, when you withdraw in the future, you will have to pay taxes.
So, watch the video that I did about Roth 401(k)s. If you’re not contributing — and most people are not — we need to consider making contributions to this Roth 401(k). 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 [that] the taxes are going to be a lot higher in the future, (and that) the more money we can get inside this Roth 401(k), the better [off] 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, [then] we’re trying to create this third [bucket], this is what we call retirement account/IRA money, that the traditional 401(k) will roll into. We want to have a tax-free [Roth] 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 (IRA), a certain amount out of here [Roth] and a certain amount out of here [nonqualified]. 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.

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