Figuring Out How Much Money You Need to Save for Retirement


Hopefully, you’ve heard the 4% rule, where you can withdraw about 4% of your retirement portfolio the first year of retirement and then increase that amount for inflation each year.  You can then figure out how much you’ll need to save up by 1) figuring out how much you’ll each year for living expenses, 2) guessing that you’ll get about $15,000 per year from Social Security so subtracting $15,000 per year from living expenses, then 3) multiply the difference by 25 to find the total amount needed (multiplying by 25 is the same things as dividing by 4%).  If you want to be really safe, multiply by 25 or 30 to reduce the chance you’ll burn through your portfolio early.  Oh, and also add $400,000 to the total for a couple ($200,000 for a single) for medical expenses.

So, if you’re a couple and want $50,000 per year for living expenses.  The calculation would look like this:

Income needed = $50,000 – $15,000 = $35,000

Retirement money needed = 25*$35,000 + $400,000 = $1,275,000

If you wanted to be safer, you would take a 3% withdrawal rate instead of 4%, so you would multiply by 30 instead of 25:

Retirement money needed = 30*$35,000 + $400,000 = $1,405,000

Hey – if you like The Small Investor, help keep it going.  Buy a copy of SmallIvy Book of Investing: Book1: Investing to Grow Wealthy, buy one of the products shown, or just click on one of the product links and then browse and buy something else you need from Amazon.

I would actually recommend trying to have extra money saved up so that you could invest the extra fully in stocks, which have a larger return than bonds, while you invest the money you really need about 50-50 in bonds and stocks.  (This mix of stocks and bonds is right at retirement – you would add more bonds as you got older to reduce the effects of a stock market decline, roughly keeping the bond percentage equal to your age minus 10%.) Because stocks average about 12% per year, you could withdraw about 8% per year from this extra money and have a good chance of getting 15-25 years of extra income that you could use for fun and giving.  The extra 4% you would earn would allow the funds to keep up with inflation.   For example, with an extra $1M, this would be:

Extra money = $1,000,000* 0.08 = $80,000 per year

Total Income = $35,000 (main account) + $80,000 (extra account) = $115,000

Because this is extra money, if you had a couple of years where stock market returns were low or even negative, it would just mean that your extra money would decline a little.  You could also choose to not take 10% (or not take anything at all) if there is a decline and wait a year or two for the market to recover, which it usually does, then continue to take withdrawals at 10%.  That is why you can take the risk of being fully in stocks.  If it runs out in 10 years, you’re still covered by your main account.

Having the extra money also helps protect you should you see a big market decline early in your retirement.  If the market drops 40% the first year you retire like it did in 2008, you could shift some of the money from your extra portfolio into your main portfolio to provide enough income for daily expenses.  While it is mainly for extra income, saving up more is also an insurance policy against market declines.  (Note that while the stock market fell by 40% in 2008, the bond market actually rose, so having a 50-50 mix of bonds and stocks would have meant your account would only be down by 15-20% and you might have been able to just wait a year for the stock market to recover without adding to your main portfolio.)

 

                  

These funds will typically be in a 401k or an IRA.  If you have a traditional IRA or 401k, where you will be taxed at ordinary income rates when you withdraw money, you’ll need to take taxes into consideration.  You can figure that you’ll pay about 15% taxes on the withdrawals (20% if you want to be safe), so you should increase the amount you need by 15-20%. To figure out how much you need to save for retirement, just take your retirement money needed amount and multiply by 1.15 or 1.20:

Assuming 15% taxes and a conservative, 3% withdrawal rate:

Retirement money needed with taxes = $1,405,000 * 1.15 = $1,615,750

Assuming 20% taxes and a conservative, 3% withdrawal rate:

Retirement money needed with taxes = $1,405,000 * 1.20 = $1,686,000

If you are using a Roth IRA or 401k, because the taxes are taken out before you put the money into the account, the withdrawals are tax-free.  This means you only need to save up the original $1.4M, not the higher amount.

I know it seems like a lot of money, and it is.  We’re talking about $2.7M in a traditional IRA or 401k if you want to have enough for expenses plus extra money coming in each year, which is probably more money than many people expect to see in their lifetimes.  The good news is, if you start early, it really isn’t all that difficult to amass such a sum.  That is the beauty of compounding.  Here’s how it works:

You can assume a return of about 8% after inflation if you invest fully in a diversified set of stock mutual funds.  If you start investing at age 20, right when you start your first job, you’ll only need to put about $260 per month away to reach $2.7 M by age 70.  If the stock market does even better, you might have $4M, or you might be able to retire at 62 or 65 instead of waiting until age 70.  The beauty of investing in a 401K or IRA, as opposed to the old-fashioned pension plan where the employer decides when you can retire, is that you can flex things based on how the market is doing.  If you have a good market from the time you’re 60 to 65, you can retire early.  If things go south, you can stay on a few more years and let things rebuild.

 

Want all the details on using Investing to grow financially Independent?  Try The SmallIvy Book of Investing.  

 The best plan is to sign up for the company 401k (if they offer one) or start an IRA as soon as you start working and start putting money away before you get used to the extra income.  If you start out making $50,000 per year, put away 10% into the 401k plan, which would be about $420 per month.  Hopefully, your company will match part of your contribution, so you might end up putting $600 or more away each month.  If you do so, you’ll have about $4.4M at age 70.  At age 65 you’ll have more than $3M, so you could retire a bit early.

If you wait until you’re 30 before you start putting money away, you’ll still have about $2M at age 70.  Wait until you’re 40, and you’ll only have $880,000 at age 70, so you’d need to work until you’re 75 or 80 before you could retire securely.  This is assuming that you don’t get laid off or have health problems that force you to retire.  Starting early is the best way.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why You Should Invest in Stocks


Personal finance begins with budgeting and controlling your money.  You need to make sure you are spending less than you make, putting money away for future expenses, keeping some cash around for emergencies, and staying out of debt beyond, perhaps, your home mortgage.  Do these things and you’ll be way ahead of 80% of the people out there.

But if you want to become financially independent, meaning that you have enough money tucked away to pay for all of your expenses for the rest of your life, saving isn’t enough unless you have a million dollar per year income and you live on $50,000.  Realize that in order to pile up money for a year through work and saving, you need to do enough extra work beyond what you need for daily expenses to replace a future year of work, which takes a lot of time.  Think of it this way:

If you were a farmer with a mule, growing food for your family.  If you worked really hard, you would probably be able to grow enough food for your family during the year, plus put some food on the shelf for winter.  If you really worked the fields from morning to night, growing on all of the ground you could,  in a given year you might be able to grow, can, and store enough food to last an extra month or two beyond the start of the next year.  Maybe three or four months.  This means that it would take you three to five years, working like a dog every day during the growing season (and a lot during the offseason too – farmers work hard) to save up enough extra food to last you a year.  If you wanted to save up enough to last you through a twenty-year retirement, that would take you sixty to 100 years.  That’s a lot of work, and a couple of crop failures in the middle, or an injury that put you in bed for a few weeks, and you might not make it.  Plus, while you might be able to work those hours when you are in your 20s and 30s, you’ll start slowing down and feeling the pain of all of that labor when you are in your fifties and sixties.

                           

Great beginner investment guides.  

Working an office job or factory job in the modern age is really the same.  If you want to have money to live on when you are not working, you need to put away extra when you are working.  Money is just stuff on the shelves – IOUs for someone to give you an hour of labor in exchange for the hour of labor your gave someone else in the past.  The trouble is that it is difficult to save up enough money before your sixties or seventies through work alone.  You never get that sense of peace that comes with knowing that you don’t need to work to pay the bill until you reach your golden years.  And if something happens along the way like a job loss or a major illness, it can set you back and you may never become financially independent.

The answer to becoming financially independent is to get other people to help you.  You want to provide others with the ability to make a living without figuring out everything themselves, and in exchange get a little of the income produced by their labor.  If you were a farmer, this would be like letting other people farm on your land for a small share of the crops, or letting others borrow your mule and plow for some of what they produce.

One way to do this is to start a business and provide employees with a way that they can make money – feeding people in a restaurant, making something that other people want, or providing places for people to sleep for the night with a hotel – and in exchange you keep a small portion of the money produced through their labor.  For them, it means that they can make a living without going through all of the hassle of setting up their own business and figuring out something they can do that will make money.  For you, it means that you can make a bigger income using the help of others than you could by doing all of the labor yourself.  (Note, another thing you could do is to use machinery or computers to multiply your efforts, but we digress.)

 

Want all the details?  Try The SmallIvy Book of Investing.

Maybe you don’t want to start a business and deal with the hassles and take the risk, however.   Maybe you also don’t know how to start and run a business and don’t have the money to invest in a building, equipment, and inventory.  Maybe you also would like to just work for someone else and not need to be worried about market conditions, meeting a payroll, or preventing theft.

By investing in stocks, you can effectively own a business – in fact you can own great businesses like Apple, Google, or Amazon – but do so with just a small starting investment.  You get the advantages of ownership without all of the hassles of needing to run the business.  If you buy a mutual fund or an exchange-traded fund (ETF), you can own little parts of dozens or hundreds of businesses, meaning that you can reduce your risk should a particular business see declining sales or other issues.

So once you get past the initial personal finance issues like maintaining a budget, you really need to look at investing.  It can be complicated if you decide to make it that way, but it can also be really simple, in fact downright boring, if you invest through index mutual funds and ETFs.  So look into investing, perhaps starting with one of the investing books shown above (I, of course, recommend The SmallIvy Book of Investing).  In twenty years when you’re financially independent, you’ll be glad you did.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why You Really Need to Invest


You’ll find a lot of blogs on people getting out of debt.  Perhaps they start out with a student loan balance of $150,000 and pay it off over a period of three years.  If they are persistent, and particularly if they see their income rise, perhaps because they get a lot of revenue from their blog and affiliate advertising, they will make their way out of debt.  But what then?

What happens after you pay off that last student loan?  After you close that last credit card account?  You make your last car payment?  You make your last mortgage payment?  And what if you never got into debt in the first place?  Often that’s where the blog stops.

If you want to move from just being debt-free to being financially independent – being able to pay for things without needing to depend on a paycheck – you need a way to make money efficiently.  There is only so much time in the day.  Even if you get a second job, unless you have a phenomenal salary, it is really difficult to simply work and save enough money to reach financial independence.  Plus, your income level is usually limited and it will top out at some point in your career.  If you make an average of $60,000 during your working career and save 10% per year, you’ll have $240,000 over your entire career.  If you save 20%, you’ll still only have about half a million dollars at age 60.  To sustain yourself, you’ll probably need something north of $2 M unless you live a very meager existence.
                           

Great beginner investment guides.  

One way to attain financial independence is to start a business.  If you start a business and run it well, your potential income is theoretically limitless.  If you open a store and do well, you can open a whole chain.  The same thing goes for a lawn care business, or a manufacturing business, or a restaurant.  Because you can hire people to work for you, and take a small percentage of the amount of money they generate, you can expand your income.  But many businesses fail, and you often need to take a big risk to start a business, possibly borrowing a lot of money.  Starting a business when you already have a family that depends on your income is also risky.  Is there another way?

The answer is investing.

When you invest, it is like you are buying an ownership stake in a business, which means that, just like starting a business, your theoretical income is limitless.  There are people who bought a $5,000 stake in Home Depot or Wal-Mart who are now millionaires.  The beauty of investing is that you get to enjoy the possibility of growth that you get from starting a business, but don’t have all of the headaches that come from actually running a business. You don’t need to check inventory, order supplies, or manage employees.

Not only that, but you get to benefit from other people’s good ideas.  You probably didn’t get the idea to build a search engine that everyone would use, let alone go through the hassle of coding it, getting servers set up, and getting the word out.  But you can buy shares of Alphabet and benefit from the efforts of people who did.  You can buy shares of Walgreen’s and have drug stores on all of the best corners in every city in America.  You can buy into a successful restaurant, a successful credit card issuer, or a successful tobacco company.  If it trades publicly, you can get a stake in the company and take advantage of other people’s good ideas, execution, and hard work.

 

Want all the details?  Try The SmallIvy Book of Investing.

There are some people who will become rich by working really hard and saving  every dime.  There are others who will become doctors or lawyers, get hired by the right firm or practice or start their own practice, and live on little enough to build up their savings and become wealthy.  There are still others who will start a business and work hard to grow it into a huge company and become wealthy.  For the rest of us, investing is the way to wealth.  If you’re interested in learning how, pick up a copy of The SmallIvy Book of Investing and keep reading The Small Investor Blog.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.