What Do You Need To Do To Retire Like A Millionaire?

Troy Sharpe: You’re in your 50s, you have a certain amount of money saved, but the question is, will you ever get to that million dollar number? How do you become a millionaire? Well, in this video, we’re going to talk about ways to help you get there, but also we want to help you identify where you are, and how far off you actually might be.

Troy: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner Professional, host of The Retirement Income Show, and also a certified tax specialist. You probably have the big questions, those are, do I have enough? Can I retire? How long will my money last? If something happens to me, will my family be okay? You probably also want to pay a lot less in tax.

To figure out the answers to these questions, we first have to know where exactly are we, what do we want, what is our vision for retirement? When we get into the planning process, heading into retirement, the first thing we need to do, of course, is identify where are you, where are we trying to go? Then, we build out a map to help get you to where you want to be. I want to go through this with you.

This is on our website. If you go to the website, you come to the Knowledge Center, Retirement Nest Egg Calculator, or you can just Google Oak Harvest Retirement Nest Egg Calculator, either way. I want to look at a couple of examples because you’re watching this video, I don’t know how much money you’ve saved, I don’t know how much you can save monthly, how old you are, when you want to retire, so I want to teach you how to use this tool, and then give you some material, some understanding knowledge to help you make better decisions, to help improve what the original output that you have into here.

You can come back in six months or a year or two years, and keep track and see where you are, and what you need to do. If you need any help, you can reach out to us. Okay, current age, I’ve input 50, I want to retire at 62. Currently, you have $100,000, and you’re saving probably inside your 401(k) $1,500 per month. Now, that’s 18,000 per year. If you’re under 50, you still can save a lot more than that.

If you really want to get to that million dollar number, you need to do the best you can, saving as much as possible. The last variable that we input is the Annual Interest Rate. This is very, very important. Many times, if you go and look and do any research, you’ll find that the stock market at is average 10% or 11% or 12%. You have some very famous people out there telling you that you can make 10% a year into the stock market.

That is not how you plan, you plan with a much more conservative number. Also, it’s unfortunate to say, but at this time, where I’m mid-2022 right now, well, there’s two things. If you’re watching this video soon, the market does have a lot of great opportunities out there we believe. The downside is, most of the experts out there, the consensus for market growth over the next 10 years is nowhere near 10%.

Let’s not be overly aggressive with our interest rate assumptions, 7% if we’re going to go into a heavy stock type portfolio is probably the most you want to assume in this illustration, if you’re incorporating bonds into your investment allocation, you probably don’t want to assume 7%, at least I wouldn’t. The question is, with these numbers input, how much, we come down here, and we hit Calculate, how much would we have at retirement?

We would have $627,000. Not quite at that $1 million number. What do we need to do? Well, the first thing I would do is, I’d come in here and I’d say what happens if we save $2,000 per month? Gets us up to 754. Okay, let’s look at $2,500 per month saved, that’s about $30,000 per year, that gets us up to about 881. Now, let’s say you’ve saved more money than this, let’s say you’re 50-years-old and you’ve saved a quarter of a million dollars.

You feel like a million is so far away, how am I ever going to get there? Well, you still have the power of time on your side, you’re a lot closer than you think. If you’re 50-years-old, the maximum amount today that you can put inside your 401(k) is $27,000 per year. You have a catch-up contribution at age 50 that increases it, you might be getting a company match as well, hopefully, you are.

We’re going to say, let’s start here saving $1,500 per month is 7%, gets us to 999. Look at that, we’re right at a million. If you’re 50, now this is age 62, you save $1,500 a month, you can be at that million dollar number, 7% interest by saving that $1,500 per month. Now, let’s say, “Troy, I don’t want to retire at 62. I want to retire at 60.” Okay. You just come in here, you hit 60, hit Calculate. Well, we need to save more than $1,500 a month because that’s only going to get us to 835.

Let’s bump it up to $2,000, gets us to 934. We’re almost there. Knowing these numbers, it’s important because this lets you know where you are, and helps to lay out a path to get you to where you want to be. Now, you also have to have the discipline to execute on that strategy, but if you don’t know where you are, you’re never going to find out how to get to where you want to go.

Why is this important? You need to know where you are, in order to identify a path to execute upon to get to where you want to go. I encourage you come here, hit the Knowledge Center, go down to the Retirement Nest Egg Calculator, and start to input your particular information. We don’t have access to any of the numbers that you input there, so don’t worry about us getting your information, if that’s a concern of yours. It’s there for free for the public to use, to help you understand a lot more closely where you are.

Now, I want to get into some ways to look at this, because maybe you don’t quite need to get it to a million dollars, but if that is a number that you want to hit, now I want to talk also a little bit about things that you can do, possibly, to help get you there more quickly.

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The first one, if you’re like most people, and you have most of your money inside that 401(k), you have a limited number of funds to select from. That’s not necessarily a bad thing, because studies show us that the more choices we have, the more likely we are to make mistakes, or to not do anything at all. We tend to get overwhelmed as human beings, but one thing that I see far too often is that, people invest in these target date funds.

Now, I’m not going to go into a deep dive here of why they can’t be good, or why they may not be good, I just want you to understand the facts. Here’s a very common target date fund. This is the Vanguard Target Retirement 2030 Fund. If you’re in a situation where you have 100,000 or 200,000 or 300,000 saved, and you’re really maxing out those retirement accounts, and you’re trying to achieve some certain number, so you can have a certain standard of living when you no longer are working, and those paychecks stop, you need to be aware, not just of the fund that you’re investing in, but what is that fund comprised of?

Here we see, it’s 60% stock, 30% bonds, and 10% cash. These target date funds, as you get closer and closer to that target date, they automatically rebalance to get you out of more aggressive stocks, which give you the potential for much higher returns into less risky bonds, which most experts think bonds are going to return very, very, very small returns. That means if you’re in this target date, 2030 funds, or any fund similar to it, you’re going to have probably 30% to 40% of your money earning next to nothing over the next 10 years.

When I say, “Next to nothing,” I mean at best, I would say 1%, 2%, or 3%. You have to understand your risk tolerance. Your tolerance is essentially your willingness to stay invested in periods of high volatility in the market. If you have 10 years, don’t worry about if the market is down now. As a matter of fact, you should be strongly considering putting as much money as possible from your paycheck into the market in periods when the market is down, that’s when you’ll get your largest returns on that invested capital.

Number two, I want you to consider taxes in this conversation. If you have all of your money inside that tax-infested retirement account, versus having it into a tax-free Roth, if you have that available in your 401(k), which most of you do at this point, I believe, then you don’t necessarily have to save that full $1 million, if it’s inside the Roth, because when all that money comes out, you won’t have to pay taxes on it.

Now, that does mean you’ll be paying taxes today, so an individual tax analysis of your situation is warranted, and a financial plan really to identify what makes the most sense for me. Should I be putting money into the traditional part, getting that pre-tax deduction, or should I really be putting money into the Roth, so when I take all that money out later, principle plus interest, it’s all tax-free?

The point is, if you have a million dollars in a tax-infested 401(k), it’s probably about the same as accumulating 850 or so, depending on your age and your timeframe, and a few other factors, but that’s a decent ballpark generalization. A 850 in a tax-free Roth is probably very similar from an income-producing standpoint, as a million dollars inside a retirement account. Maybe you don’t need to get to a million, maybe you just need to get to 850, but you need to have a more intelligent tax approach.

Number three, do you want to actually have a million dollars, or do you just want to live like you have a million dollars? Because one thing I want you to start doing, is thinking about retirement in terms of income, not assets. We’re big, big fans of multiple streams of income around here. The more income we have, the more security we have in retirement. That’s pretty common sense.

If you have a million dollars saved, there’s a general 4% rule out there that says, if you withdraw 4% of your nest egg at retirement, increase that amount every year by about 3% inflation, you have a decent chance of not running out of money, not guaranteed, of course, but you have a pretty good chance. Now, I am going to say that there are lots to that rule that I don’t necessarily agree with, somewhat antiquated in regard to when it was created, and what the economic circumstances were as compared to now, I’m actually a big fan of what we call a dynamic spending plan.

Some of you could pull out much more than 4% and be okay, as long as you’re staying connected to your money and your plan, and you do have a plan in place. Some of you, maybe not, maybe that it’s not right for you. I’m speaking in generalities here, but what I do want you to do, is start to think about retirement in terms of income, and not necessarily assets.
With inflation, if we pull 4% out, I just wanted to visually show you what that looks like. This is someone retiring at 65, passing away at age 92, to keep up with inflation, or to pull that amount of money out, we would pull 40,000, and then by the time we’re expected to pass away, it would be up to almost $90,000 of income to have the same purchasing power today as $40,000 would.

Now, man, if you aren’t going to need the same level of income at that age as you do today, although medical expenses, possibly home healthcare, long term care are considerations that should be taken, but I just want to visually show you this. How can we generate? One way to look at this is, can we generate multiple streams of income that help get us to 40,000 per year, 50,000 per year, 60,000 per year?

One of the biggest things that people underestimate in retirement is the social security. If you defer social security until 67, the maximum today is around $36,000, $37,000 per year. That is almost the same as having $1 million saved. If you start to think about it that way, it’s a very, very powerful benefit. Now, not going to get into how much social security could be, if the government had managed it better, but the point is, if you think about that social security check, or think about income in terms of assets, 40,000 per year is the same.

If it’s guaranteed for life, as about a million dollars. A deferred income annuity may make sense for you. If you’re 55 right now and you deposit a half million dollars, so you don’t even have to get to a million, by the time you’re 65, you can be guaranteed over $50,000 per year for the rest of your life. Around 53,000 per year, right now, based on the most competitive guaranteed income strategy in the marketplace.

That’s more than a million dollars of income, fully guaranteed, no market risk from age 65 to age 85. When we start to look at how that compares to this, it’s not is one better than the other, it’s just these are options that are available. If we start thinking about retirement in terms of income, as opposed to assets, maybe it’s rental real estate. Maybe you start to try to build out a portfolio of rental homes.

Maybe there’s a pension option at your work that you can get involved with, and you start to think about it in terms of income. What we want to see is multiple streams of income, no matter what the source is, the more certain and guaranteed they are, the more certain and secure your retirement will be, but if you think about it in terms of income, as opposed to just accumulating this money, there are ways to get to that level of income that a million dollars would produce otherwise, without having to actually accumulate a million dollars.

In summary, we don’t necessarily need to accumulate a million dollars to live like a millionaire. Number one, I want you to look at where you currently are, your retirement nest egg, where are you at? We have the calculator here, go to oakharvestfinancialgroup.com, Google Oak Retirement Nest Egg Calculator, start to play around with your input, so you can see where you are, and start to formulate a strategy of what you need to do to get to where you want to be.

Number two, look at your four 401(k), look at the investments. If you’re in one of those target date funds, target date 2030, target date 2025, anything with a shorter than 10-year or shorter timeframe, possibly even 15, you’re probably 30% to 40% in financial tools like bonds and cash that are not expected to average much more than 2% to 3% per year for most experts. That is on what we call a nominal basis.

On a real basis, when you take into consideration the impact of inflation, you could quite well be negative with 30% to 40% of your 401(k), so definitely take a look at that. Number three, take into consideration where you’re saving your money. Are you saving it inside that tax infested 401(k), where you get a tax deduction today, but you have to pay income taxes later, or are you saving it into the tax-free Roth part of your 401(k)?

That means you’re paying taxes today, but all of the interest, all of the growth, everything you’ve put in will always be 100% tax-free forever. If you have to get up to a million dollars in your traditional 401(k), that is subject to income taxes, to have the same effect of a million dollars in retirement, you don’t need to get as high with the tax-free part, because when you start to take money out, this one you’re going to have to pay taxes on, this won’t be tax-free.

Then, finally, I want you to start to think about retirement in terms of income, not assets. Assets are nothing more than tools to generate income once your paychecks stop. There are ways, whether it’s rental income, whether it’s a deferred income annuity, whether it’s reinvesting dividends and accumulating more shares to generate more income, there are ways where you can generate the same level of income that a million dollars are projected to provide, without actually having a million dollars to invest. If you think about retirement in terms of income, not assets, that should hopefully help you out.

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