Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How Much Should I Be Saving To Retire Early?

• Ari Taublieb, CFP®, MBA • Episode 183

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Ready to redefine the concept of retirement? My latest broadcast delves into the exhilarating world of early retirement planning, promising a treasure trove of strategies for seizing control over your work life — before the traditional retirement age calls your name. You’ll be introduced to the Early Retirement Academy, a beacon of hope for those aiming to navigate the financial seas with confidence, all set to cast off its ropes on June 1st. Through the tale of a savvy investor, discover how a blend of shrewd investments and an eye on retirement spending can dramatically alter your golden years' landscape.

Then, join me as we traverse the personal journey of a 50-year-old with a million-dollar nest egg, facing the crossroads of financial security and life's joys. This narrative isn’t just about numbers; it’s a profound look at work-life recalibration, weighing the merits of a stress-reduced paycheck against the conventional rat race. Spoiler alert: Peace of mind might just be worth more than a bulging bank account. As we wrap up, I extend my heartfelt thanks to you, my dedicated audience, for your unwavering support. Your participation fuels this financial odyssey, and I eagerly anticipate our continued weekly rendezvous on the airwaves.

Create Your Custom Early Retirement Strategy Here

Get access to the same software I use for my clients and join the Early Retirement Academy here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

I'm going to give you an example today that might make you think differently about how much you need to save to retire early Now.

Speaker 1:

The truth is, most people that are working with us, they don't hate their job. They're just like, hey, I want to do it because I want to do it, not because I have to do it. And it's the fact that they realize, whoa, I don't have to do it because I'm in a good spot, that makes them go wow, yep, I'm going to take a job that's less stressful, with less responsibility, or no, I am going to switch jobs to a career that's way less stressful. That I've always wanted to do, and I'm going to do it because I want to do it and I'm in a good spot. First, there are, of course, some that are like, hey, I really hate what I'm doing. I want out yesterday. I don't know if I want another job. Thinking right now is, if you're listening to this episode, which is I made it specifically if you're in your 40s 50s going, hey, I want to make sure I'm doing the right things. I want to retire early. I just don't know exactly when Am I saving the right amount? That's what. Who I have in mind, and if you're listening on the younger side of that going hey, I just want to get ahead like kudos to you, but for most of I just not there yet, so I need some help. So I mentioned this last week and I'm going to go through this today. But last week I mentioned I've got my early retirement Academy coming out. That is coming out June 1st. That is going to have the software that allows you to run these projections on your own so that you can go okay, am I on track? What things should I be thinking about that I otherwise couldn't have either wise known. So hopefully that's going to be exactly what you're looking for. Once again, that comes out June 1st. You want the discount code? You just go to the survey in the description of today's episode and you will be able to fill that out. So I want to tell you an example right off the bat my quick story, because this is a real life story. It's how I like to do these, and then I'm going to give you my entertaining review of the week, a fun review, and we're going to have some fun. So as much as possible, I do try to keep these fun.

Speaker 1:

Some of you are like, hey, I listen while I'm working out or while I'm driving, I'm like cool, I recognize. You don't want it to be like I got to learn another lesson today Now. I like learning. I think you like learning, that's why you're here. But I also want to make sure you don't get. They will respond in the following way If you go, hey, how much should I save to retire early?

Speaker 1:

They're going to go. It depends. I'm like hey, that's great, it does depend. But I need more than that. I want some more guidance, and so what I'm going to go through today is maybe another way to think about this. So you go hey, that's helpful.

Speaker 1:

A lot of you know my dumb joke, doc. I think what you just said sounds great. I think you think that it sounded great. I don't know what you just said. So like, try again, please. Like I need to make sure this is coming through. I'm not trying to be mean, I just need to understand why you're saying what you're saying.

Speaker 1:

So I'm going to go through an example, real quick, and see if this resonates with you guys. You might start thinking a little differently. So someone said this was a while ago now. They said hey, and you know I'm the first person anyone reached out to the company I want to speak with you to see if you're a good fit, etc. So they said, hey, tell me what you do in 15 seconds, and if I don't like your answer, you're like fired before I even start. I'm like, okay, give me at least a minute to think about this answer, considering I'm gonna be fired in you know 60 seconds. If you don't like me, I go okay. They said okay. So I said, hey, my job is to quantify trade-offs, so you understand the magnitude of those decisions. And they're like, okay, we can continue. But like they still aren't that happy, I'm like okay. So anyway, the point of the story here. I'm going to give you my example.

Speaker 1:

So a client came to me when they were 50. They were really stressed out. Okay, 50 years old, really stressed out, a few different accounts, but a million dollars was the general total. It's like 988, but a million dollars for simplicity sake. Now, they're really stressed out.

Speaker 1:

What I really care about is how much do you want to spend in retirement? That's the big driver that most people overlook. But it's not sexy because it's not investing in tax planning, and but that's the big one, okay. So don't overlook that. But let's, for this sake of argument, say you're 50, you've got a million bucks. You can do the same analysis I'm doing right now If you're 40 with 500,000 or 40 with a million or 30 with a million same thing, it's gonna just apply it to your situation. So here's how I want you to think about it. There's a time value of money calculator and so it's very common people go yeah, I'm working right now, I'm really stressed, but I know I should be adding more money because it's going to help, and they're correct, it does help.

Speaker 1:

But then there becomes a point where saving more doesn't help nearly as much as investing the right way. Like, what do you mean? If you have a million dollars and you get a 10% rate of return, that's significant. That's $100,000 growth you just received. If you have $10,000 and you get a 10% rate of return, good for you, but that's a thousand bucks.

Speaker 1:

So I'll often tell children of clients and I'll joke, because a child of a client did come to me and they were like hey, I want you to help me. Like, put crypto in my 401k. I'm like not only are we not doing that, but what's going to happen is I need you to shut up. And they're like, oh, how dare you talk to me? And the parent was loving it. Like I asked permission, they want to. You know, we're very transparent with this family. And they're like oh my God, what do you mean? Shut up? You've never been spoken to that way.

Speaker 1:

I'm like, hey, I'm just kind of joking around here, but my premise is I don't want you to worry about your return. What you need to do at 20 years old is go max out your 401k. That's way more important than your return. It's the opposite. When you get a lot older, if you were to not add $20,000 because you're 50 and to see me freak out because I'm going to say I need you invested the right way, because adding $20,000 does not come close to getting the right return, so some of you are like, yep, that makes sense, just need to hear it. So hopefully that helps. Now on my example you're 50 years old, you've got a million bucks and let's assume you want to retire. Let's just say, in 10 years, at 60, keep it simple Okay, let's see me on our tire in 10 years. Okay, so here you are, you want to retire in 10 years.

Speaker 1:

This example I'm going to tell you right now is only going to resonate if you understand the rule of 72. Most of you have heard of it. Some of you are like, no, it's really cool, okay. So the premise here is there's a really complex formula. Don't worry about it. What it means is the rule of 72 tells you how long it takes to double your money, based on the return that you receive. So let's assume you take 72 and you divide that by 10%. Okay, so 10% is the return you get. That's going to tell you it's going to take you 7.2 years to double your money.

Speaker 1:

Okay, so someone will be like, hey, that's great, but I don't want to rely on like 10%. I go great. Let's, for simplicity's sake, rely on 7.2%. 72, divide that by the 7.2,. Here we are 10 years to double your money. So let's assume you're 50 and you have a million dollars and if you get 7.2% every year which you won't, just taking an average after 10 years your money's going to double to 60.

Speaker 1:

I know a lot of you are like, hey, where are you choosing 7.2% from? And what's the? I just made it up. Okay, so I'm just choosing it. You could do a lot better than that. You could do worse than that. Just let's use 7.2% for simplicity. So here you are, at 50 with a million bucks. Your money doubles and now you're 60 with 2 million bucks.

Speaker 1:

Okay, so the same person is a real person I'm taking the example from. They are 50. They're making $120,000 every year. Now they're really stressed and they don't love what they do. So they go Ari, I'm thinking about quitting and taking a job that pays way less, that I enjoy more, and I've already kind of picked it out. And I go okay, you're one step ahead, because most people haven't already picked it out. They just start thinking about this. I go how much are you saving every year? They go all right, I'm saving $10,000 a year. I go okay, great, where's that going? They go it goes to my 401k. I've already got a brokerage account because I started that early and you know which? The real superhero for an early retirement. Because if you want to retire before 59 and a half, you got to tap into accounts earlier where you're going to go for that, that kind of thing.

Speaker 1:

So 120,000 a year, that's what they're making in their stress. So picture this guy he's 50, he's got three kids and he's stressed at work. Okay, kind of got a visual. Now he's working right now he's saving 10,000 bucks a year, so that's great.

Speaker 1:

I said, hey, if you keep doing that, you're going to be in a good spot, like, if you just and they're like hey, I know that I'm coming to you to know, do I need to do that? I go, let's talk about your expenses and health and how much you want to leave to each kid. And so we had that whole conversation and he's like okay, so can you just give me like the financial answer I'm like of, know, show that. You know I got some cool tools. You know every advisor's like let me show off my tools. I'm like you're an advisor, okay, it's not that cool, unless you're doing your job really well, in which case it is cool. But most are like look at my software. I'm like software. Software is helpful for a conversation, but that's all it is. Most people rely only on the software. Don't do that Same story here.

Speaker 1:

I won't do a big tangent. But someone came to me like, hey, I have a 99% chance of success. I go then go retire. They're like, yeah, I don't know about that. I'm like, why not? It says 99%. You ran these little Monte Carlo simulations. It's pretty cool. No-transcript. Do my big tangent here, I promise.

Speaker 1:

Back to the story. Keep it really simple. 50 years old, make it 120,000 a year. Got a million bucks, simple enough. When that, if he adds $10,000 every single year, which once again that's what he's saving to his 401k right now, he will have $2.14 million because once again it won't just be 10, it won't be 1 million, becomes 2 million because he's adding new dollars. So because he's adding $10,000 year over year, it's gonna grow a little bit. Helps compound the portfolio beautiful stuff. Here he is $2.14 million. Okay, so you're going.

Speaker 1:

Why did you just tell me the story? Well, because I'm going to show you the alternative that I told him to think about, the one that he actually took, and I'm going to show you why. So now you've got the picture of a 50-year-old guy making $120,000 a year with three kids and he's stressed Okay, now, for the sake of argument, I'm not including his wife's details, how much they want to spend and yada, yada. Let's go to my alternative. Okay, and I know I'm still in story mode. I haven't even hit the comments of the week yet, so maybe I'll make this a four hour episode for you guys. I'm just kidding.

Speaker 1:

So let's now assume, instead of 120,000 a year, I tell him to go take this other job that pays way less, that he's going to enjoy way more. Okay, and you're going. I know you're thinking right now you're going, yeah, but like he's not going to make as much, so is it worth it? And I go, you're thinking about it wrong and you're like what do you mean? Here's how to think about it. Okay, I'm going to give you the alternative, but you got to understand it. If I came to him and said, hey, I don't want you to take this job that you're stressed out right now and it's year, yes, you're saving 10,000, but I actually would rather you take this job that pays 10,000 a year, a lot of you are going well, then I can't meet my bills, then I can't do X, y, z, o, and I'm the first person to go yep, I know, I understand how that works. But here's what I need you to think about.

Speaker 1:

If you're making 10,000, your first thought is, wow, 10,000 is not a big deal. But what I want you to think about is what if it was $60,000? And you're like I told you I make $120,000. So $60,000 is not that big of a deal. I go, you might not think so, but it's not $60,000 that I care about. I know if you made $60,000 a year, you probably wouldn't be able to save even that $10,000. I go, yeah, I know it would make you tight, but here's what you didn't think about. It's not 60,000 a year that I care about. It's 60,000 less.

Speaker 1:

That has to come from your portfolio and I would rather you do that than you simply continue doing the job. That's super stressful and it's because your portfolio is at a healthy position. I don't need you to save as much anymore. I need you to invest well. I need you to prioritize your health. I need you to spend knowing you're in a good spot to do so, and I don't want you to die with $10 million at age 85 or 95 or 100.

Speaker 1:

They're like, okay, you've got me intrigued, you're not convinced, but okay, go on. So here's the alternative. Most people go what big of a deal is it? I make 120, 200, 500, a million bucks a year right now. If I make a hundred thousand, is that even going to matter? I go. Not only does it matter, it only matters because you have a healthy portfolio, so you don't need to save as much. Saving doesn't have as much impact. So here's the alternative.

Speaker 1:

I told this client go, take this job. I pay $60,000 a year. That's a 50% haircut to what you're paying today. Your kids are already through college and you've saved well from you. Don't need to keep saving. Take this job. It pays 50% less, don't save anything.

Speaker 1:

And let's assume we use that same rule of 72 after 7.2, you know, once again, just assuming 7.2 is your rate of return. After 10 years your million dollars would have doubled. And so now here you are, 60 with $2 million. So what's the difference here? Well, in example one, he's going to keep working 10 more years at a stressful job that he doesn't enjoy and it's because he thinks it's going to save and make a big difference, and at the end he has $2.14 million versus making $60,000 a year, half way less stressed, enjoying what he wants to do, and he has $2 million at the end. So it's $140,000 difference.

Speaker 1:

Now, of course, growth, different changes. Yeah, let's assume there's more growth. Let's assume he's worth more than 10,000 a year. Yeah, maybe he'd have 2.3 or 2.4 instead of 2 million, but I would argue how much is enough? Now, this particular client also has a spouse, and so it's not like this is their only income. In addition to that, their kids are going through college. They're going to be fine.

Speaker 1:

And so his next question after this was how early can I retire? And so now he's going. Ooh, this was based on 10 years. I said, yeah, let's assume. What if? Let's take the same example. But let's assume you get 10% rate of return? They go oh, yeah, let's do that. I go. Why are you so excited? Now they go. Well, now I understand this rule of 72. If I get a 10% rate of return, my money's going to double in 7.2 years, hypothetically. And so now I'm not working until 60, I'm working until 57. I just cut three years off my retirement because I invested. Well, I go, that's right. And they're like oh, this is why planning's cool.

Speaker 1:

So the point here is, if you're in your 20s, 30s, 40s, thinking about how to think through this, prioritize your energy and your health. Make sure, yeah, you're spending a lot. The common mistake people will also make is they'll go. Hey, yeah, I know I could take a job that pays less, but like I've got bills today, I need to. Can I put my kids through college? Yeah, yeah, my long-term retirement looks good, but my short-term retirement doesn't look good, which is like the next five to 10 years. And if I'm gonna retire at like 57, all right, I don't have a 401k. So how am I gonna bridge that gap?

Speaker 1:

And that's when I say I am the meanest early retirement advisor. I don't want you to ever retire too early and run the risk of running out. I just wanna make sure you're not working unnecessarily. So hopefully that 15, 10 minute story just resonated with you. Where part-time income plays a big role, I won't even call it part-time income, I'll call it a job. That's way less stressful.

Speaker 1:

I don't love the word retirement. I prefer recreational employment. Are you working because you want to or because you have to? That's what I, and then from there you might go. Yeah, I'm going to, on purpose, keep working 10 more years because I want to spend and go first class for the rest of my life. When I take trips, I go cool. Let me show you how much you need to do that, I may say you can do it right now. That's what a planner should be doing for you. So, with that being said, let's go through the quick reviews of the week, and this comes from ChookChook2451. He says I'm not an American, but this advice is relatable. I'm currently doing all the fix up jobs on my house now Hope to retire in two years. Love your enthusiasm and genuine love of your work. Keep it up. So what he's referring to is very, very common.

Speaker 1:

There's something called sequence of return risk. Don't let it freak you out because you're like, oh my God, I've never heard of that before. Okay, here's what it means. What if you retire and you get unlucky? You retire at 57 and you go? Oh my God, markets go down and it's the same year I'm going to take those trips and I've got healthcare because Medicare is not in and, oh my gosh, I was going to hope to do a remodel. What you don't want to do is get unlucky, markets go down, you retire and now you have all these expenses and the risk is it could really take a big hit to what you're gonna spend the rest of your life, because if you have $2 million and you've gotta spend on healthcare and travel and you've gotta fix the home. Well, now markets are also not doing well. Well, what if you have to take two 300,000 out during the year market's down? Well, now, that's gonna change what you're gonna spend the rest of your life. So the way you protect against that is the years leading up to retirement. As much as you can, you bolster the brokerage account and you start tackling those big potential expenses, like a wedding for a child, like a home remodel, whatever it is. So that's what this person's referencing and glad that it has helped.

Speaker 1:

And then this is my it's not really a hate comment. This week, every week, I'll try to keep it interesting. This comes from Rayzerot R-A-Y-Z-E-R-O-T. It could be Rayzerot, rayzerot, whatever it is and he says spending that much on a wedding, a wedding they want to spend the down payment for a house, for a wedding Holy, not going to say the next word. So the point here is what this person fails to recognize, and I don't blame them. They're not a client of mine, I haven't educated them. They probably haven't heard, maybe, all the podcasts.

Speaker 1:

But the point here is, in this particular episode I talked about my client that spent $300,000 on a wedding, and I told them to do it, and you're like, how could you recommend that? All right, that's crazy. They could have done a down payment, or they could have done. I'm well aware Now they're an Indian couple that have specific values, and this is what they care most about, and I told him to do it without any head trash. What I don't want you to do is be sitting at your kid's wedding going. I just gave him 40,000 bucks.

Speaker 1:

What does that mean, though? For my long-term care, did I just put away my future retirement? Am I not going to be okay? I don't want you going. I know my child is going to be a higher earner. They're doing really well. I really love them. I want to give them a hundred thousand bucks for their dream wedding that they've told me about, but I'm not going to because you know, I just don't know if my retirement can support that. And then here you are now, at 85, with way too much money, wishing that you would have helped them out more. So, understanding, how much can you help them out? That's my job. I'm quantifying the trade-offs, so they're not sitting there wondering am I in a good spot or not? The best example I give in my opinion, but you guys all get to tell me is so I'm a soccer player. I love playing soccer to an unhealthy degree, and so my point here is I am not fun to be around when I get hurt.

Speaker 1:

I want an MRI. An MRI is like your financial plan Okay, am I kind of in a good spot? It's just telling, it's not going in. And you know, an MRI can be read very. You know many different ways, and if you go to one doctor, they're going to say, hey, it's not that bad. Another person's going to say it's really bad, it's not going to bit of inflammation, versus another doctor that's going to say, hey, this doesn't require a surgery, and so having the right physician look at the MRI is important here. And so that's when I'm the first person to say everyone doesn't need an advisor, it depends. I've got this academy that's coming out shortly.

Speaker 1:

Once again, june 1st, that's going to be for those that go hey, I want to run these projections, I like doing this. I want to run these projections, I like doing this. I want to see am I in a good spot? But I want some guidance and maybe there's some things you're going to tell me. I couldn't have otherwise known, because this is what you're doing all day. That's perfect for those people.

Speaker 1:

Others are like hey, I want an advisor. I don't want to do this, I want guidance. Great, that's why we exist. But we don't work with everyone, and the reason I tell you that my job is to half a joke scare people away because what we do isn't for everyone. Some people are like, hey, just tell me what stock to buy. I don't want like tax help and like healthcare stuff or withdrawal stuff. Just tell me. I'm like great, there are 10 firms down the street I said this last week that will help you out. It's just not us. Not because we're mean, but because you're going to be looking for something that we don't do. We're not stock pickers. We're out here saying, hey, you worked really hard to accumulate what you have. It's now time to optimize it.

Speaker 1:

This next stage of life is a different story. It's got different challenges. I don't want you to still be a great saver. If you stay as a good saver, which is why you probably are where you are today you will not have success. Yeah, your plan's going to look fine, but you're going to wish you to go through. I want you guys to get the guidance you're looking for. Hopefully this was helpful. If so, please, of course, rate the show. Review the show helps more people find it and share it with someone you want to retire early with. That's all I got for you guys today. Love you guys.

Speaker 2:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that episode you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week.