How Much Should I Be Saving To Retire Early?

Understanding how much money you need to retire early involves examining various factors, including savings distribution, lifestyle choices, and investment strategies. By utilizing tools like the time value of money calculator, you can explore different scenarios to assess how to optimize your financial plan for retirement. 

• The importance of the time value of money in retirement planning 
• Case study: $527,000 savings and its implications for retirement 
• Impacts of spending goals on retirement strategy 
• The significance of account types and access in financial plans 
• Exploring various retirement scenarios using calculators 
• The trade-offs between saving more versus investing wisely 
• Unpacking the 4% withdrawal rule and its critiques 
• The value of shifting focus from accumulating wealth to living well 
• Encouraging proactive engagement in retirement planning

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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.

Chapters

• 0:00 Early Retirement Savings Strategy Discussion
• 3:55 Retirement Savings Strategy and Calculations

Transcript

Speaker 1: 0:00

How much money do you need so you can retire early, aka not work forever? That's what today's video is going to be all about. If you're listening on the podcast app, I'm always going to post these videos slash podcasts there as well, so you can, of course, watch on YouTube or you can listen on the apps. I listen to a lot of podcasts and I know sometimes it's just easier because I'm driving and I don't want to have the video pulled up. So no worries either way. But some of you send messages going hey, are you still going to post on the podcast app because you're doing more videos? Yes, I'll always do both Now. With that being said, I'm going to make it really easy for you guys.

Speaker 1: 0:35

So there's something called a time value of money calculator. Now, six or seven years ago, when I was going through my certified financial planning course and designations and education, this was brought up and it was really, really cool because it really, for the first time, made me go hey, this is the value of compound interest. All of you have heard of compound interest, most of you understand the value of it, but once you connect it to your own money, it just hits different, and that's what I'm going to show you today. I'm also going to explain it for all of you listeners out there. We're going to use a real case study. Now here's how we're going to do it. So if you're watching right now, you can, of course, see on my screen a nice friendly graph here of someone who's 53 years old with $527,000. And you can see they're on track to have about nine hundred thousand dollars by age 90. Now a lot of what we're going to talk about today have some assumptions. How much do they want to leave to children? Do they have children? How much do they want to spend in retirement? Are there big travel goals? Would they rather work longer to spend ten thousand a month, or retire earlier to spend six thousand a month? There becomes a point where adding new money doesn't add quality to your life. So what I want to show you is those trade-offs so you can decide for yourself what's most important to you.

Speaker 1: 1:55

So let's go ahead and look at this case study and then let's connect the dots with the cool calculator. So this is someone who has $527,000. Now, when you hear that and you're listening to the podcast app, I hope you're thinking where is that money? Is that all in a 401k? Is that in a Roth IRA? Is it in that superhero thing you talk about? So you can see it's broken up into a few different accounts $264,000 is in a superhero account, $153,000 is in a 401k and $110,000 is in a Roth IRA. So a few different accounts. And the reason this is important is if they had all of their money in a 401k, well, their plan might not look as appealing, because if they want to retire early, they need some way to tap into these funds. So if we were to take this same person right here and put them into this other really simple calculator here, this is that time value of money calculation and so what I'm going to do is I'm going to take these same figures here. I'm going to take their, starting with $527,000.

Speaker 1: 3:01

Now a lot of the questions in your head right now is when is this person going to stop working? How much do they want to spend? How old are they today? So I'm just going to make some assumptions. This is a real person I work with today. They are 54 and they want to spend $2,000 a month in retirement I'm going to address that in a second and they want to retire at 58. Now I will be the first person to tell someone please don't retire and spend 2000 a month. I don't think you're going to be able to do what you want to do.

Speaker 1: 3:30

Now this person does not have a mortgage, so that's 2000 a month, and they are not big travelers and they have a health condition. So for some of you you're like 2000 a month. I don't know what the heck anyone could do with that. I need 10,000 a month? Great. Then you need to change the numbers and that's a good thing. I'd rather you retire and do what you actually want to do instead of retiring, going yep, I did it. This is awesome, but I can't go travel or I can't actually do what I want to do.

Speaker 1: 3:55

So, putting these figures into this calculator all of the links to this are inside of that early retirement Academy. So that tool that allows you you can see it on the videos, you can hear it on the podcast that allows you to do all of this. You want to run your own what if scenarios? You can, of course, do that. So if we go back to this time value of money calculator, it allows us to help this person understand how much money do they need to save so they can do what they want to do in retirement.

Speaker 1: 4:25

Now, for this person, it's fairly simple. They want to spend $2,000 a month in retirement. So when they have Social Security and it's bringing in $3,000 a month, they're going to be more than okay. The difference is what do they do in the meantime? And if they just stopped working today and this is one of the cool things about this program is they could go plug that in and let's look at what the impact is. So instead of having $900,000 at the end, you can see there'd certainly be less dollars. There's now $890,000, but they'd be okay. Now the big thing is what if they wanted to spend $3,500 a month in retirement? Well, $3,500 a month and retiring earlier, you can see they're going to run out of money at $67. So the big variable here is how long do they want to work. That's what this comes down to, in addition to how much they want to spend. Now, $500, you can see, makes big differences in their spending. Now what they told me is, once again, they have a health condition. For them, their goal is to retire earlier. It's not necessarily to spend more money. So for them, if they even upped it to $2,500 a month there's about 237 leftover.

Speaker 1: 5:35

Well, that's kind of pretty close and I don't think that's going to really allow him to do everything he wants to do. So what we can do is go in here and go how much should he be saving to do everything he wants to do? So what we can do is go in here and go how much should he be saving? So what we can do is, if he has $527,000 today is, let's just assume he spends $527,000. Let's just say he saves $10,000 a year. I could pick way more, way less. Now we're going to assume an 8% rate of return. The reality is he could do way better because the S&P 500 has done 10% per year. But I'm just going to choose that. And he says he wants to work four more years, so I can calculate what's the future value. So if he saves $10,000 a year and gets an average 8% for the next four years, he'll have 762,000 at age 58.

Speaker 1: 6:22

That's significant, but that's not going deep enough and the reason for that is we don't really know what account is that going to and where is he going to pull from in retirement, and a lot of different factors. So the reason this time value of money calculator is so interesting is we want to know what's going to give us the most bang for our buck. If we look at this example and we switch this annual percentage, this return, from 8% to 9% and we click refresh here, you're going to see it's adding about $40,000 more. He didn't work any harder. That's nearly half of his salary and he just invested more appropriately. But what if, instead of that, we put it back to 8% and instead we actually saved more? We saved $20,000 a year. Well, now he's got north of $800,000. Closer to retiring the value of him. Saving money is a little bit more impactful than investing the right way, getting one or two more percentage points, but it's not nearly as important. Because if he were to instead save 10,000 instead of 20,000, but get a 10% return the average of the S&P 500, he'd actually end up with even more money. So the reason this is important and I'll tell this story often to clients I've had a child of a client come to me and they said I want you to help me put Bitcoin into my 401k.

Speaker 1: 7:47

And I went to the parent and I said hey, is it okay if I talk like super transparently to your kid right now? And they're like go for it. And I said okay. So I told the kid to shut up and he's like oh my God, I've never been talked to this way. What's going on? And I said look, I'm not saying shut up just to be mean. I'm saying you have $1,000 and you're getting 10% on $1,000. That's $100. That doesn't help nearly as much as you saving another $1,000. Your dad is in the exact opposite situation. If your dad puts ten thousand dollars into his account and he has a million, that's not nearly as impactful as putting a ten percent return on that million, which is a hundred thousand dollars. So when you're close to retirement, the importance of saving new money isn't nearly as valuable as investing the right way.

Speaker 1: 8:36

So for all of you out there, if you're five years out from retirement, I'll often encourage you to stop saving which sounds really weird coming from a financial advisor. But I don't want you to keep saving, because it's who you are which is, by the way, why you probably have the money you have. I want you to start taking care of some of these big expenses, whether it's a home remodel or Maybe it's actually seeing how much travel you want to do in retirement. I have people that retire and can't wait to travel. And then they do it and they go. I loved it for a week, not for a year. So really, can you start practicing retirement before you get there and determine, hey, how much do I really love doing this? And what if it turns out you love it more than you thought? Well, great, you just found out you want to travel more than you projected. It might mean you have to work another two years, but if that allows you to really live the life you want to live, better, find that out now versus when you retire. And now you go. I have to go back to work just to go travel, like I didn't project the beginning. Well, that would really suck.

Speaker 1: 9:34

So want you to always play around with this. There's a really cool time value of money calculator. Nothing fancy about this. This is the super simple version, but this present value figure this is what you're starting with. So I'll show this to children If I'm helping them to get started with investing. I'll say what if you have $10,000? And what if you add, let's just say, $7,000, every single year you max out your Roth IRA? Well, let's assume you were to do that for 40 years and get a 10% return and they'll go. I mean it's kind of cool, but not that cool, I'll go. Well, you personally, over 40 years, you put in $280,000 and it grew to $3.5 million. So about 3.2 million of that is just growth on the money that you didn't actually have to work for. And they're like, yeah, but it takes 40 years, maybe I'll be dead by then anyways, and you know, at that point I've lost them. But I do my best. I try to come up with examples and stories that hit, so they go. I'm going to take action. So, with that being said, the overall summary for this episode is yes, the earlier you start investing, the better spot you're going to be in.

Speaker 1: 10:45

But many of you that are watching slash, listening to this you're already in, want to know is how much income could that throw off? And it depends. Does he have 700,000 all in a Roth IRA? No, he has a little bit in a Roth, a little bit in a 401k, a little bit in a brokerage account. He has more than a little bit. But what we want to understand roughly is how much could that allow us to spend? So if we were to take a 4% withdrawal rate on $700,000, that's $28,000 a year. So $30,000 a year is what this person needs so he can do everything he wants to do, and we need that after taxes. We need that adjusted for inflation. So if I take that $28,000 divided by 12, that's $2,300 a month after taxes adjusted for inflation. So we might need actually to sell $2,600 or $2,700 worth of his 401k so that he can end up with $2,300 to actually go spend.

Speaker 1: 11:53

Now some of you are going I need way more than that. That's okay. You just might need to save or invest more. Let's assume you have $2.5 million. That's what you're on track for in five years to retire. Well, that can conservatively throw off. I'm just calculating it with you guys right now about $100,000 a year. So that's super conservative using the 4% rule.

Speaker 1: 12:17

I believe there's a rule that's way more impactful and applicable. 4% is just what a lot of people start with. The reason I don't like the 4% rule, if you don't already know, is it assumes you invest in US large caps and intermediate term US bonds. It's not going deep into saying what about real estate? What about small companies? What about being more strategic with how we pull income from and which account? So this is a starting spot If you're investing the right way, you can probably pull out not probably. You can pull out between 5.2 and 5.6% of your portfolio.

Speaker 1: 12:52

I went over this in a previous video. You can search the withdrawal strategy and then just put my name in Ari Taublieb, t-a-u-b-l-i-e-b. You just search that in YouTube or it'll be a recommended video. If you're watching right now, this is where you can go if you want to learn more about the withdrawal strategy. So specifically, which account do I pull from and how do I change that in retirement? Hopefully this was helpful just to kind of see this time value of money calculator at work. Once again, the link to this is in the academy and then this tool to play around with your own retirement projection also in the academy.

Speaker 1: 13:29

If you're looking for a full service holistic financial planner, that's what we love to do. I hire advisors that love getting to do the type of planning that I talk about, so you're not just getting another advisor, you're getting someone that's watching my videos, listening to the podcast, going. I want to work for you. I just want to make sure I get to choose who I work with, and that's important because if you're reaching out because the videos or podcasts are resonating. I want you to know you're getting the same approach that the advisor is hoping to essentially implement in, and that's important because you guys almost have your own language where you could hop into the meeting and go hey advisor, how much cauliflower am I going to eat? And they're going to know what you're talking about.

Speaker 1: 14:06

Now, if you're a recent listener or recent viewer, you're going to be confused with what I just said. Cauliflower is me going into Roth conversions and tax strategy. If you want more on those videos and podcasts, I invite you to subscribe to the Early Retirement Podcast as as well as the YouTube channel, so you can learn everything you need to retire early with confidence. That's it for this episode. See you guys next time.

Speaker 1: 14:27

Thank you all, as always, for listening to the Early Retirement Podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this. Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney? Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom. If you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people, I will absolutely make an episode on it, at the very least give you some insight. That's it. Thanks, guys.