Deep Dive
Shownotes Transcript
Remember when you were a kid and your friends would ask how you'd spend three wishes? Or in my case, you wish you had friends that would ask you how you'd spend your three wishes? But you know the rule. Never ask for more wishes. It doesn't work. I've seen Aladdin. You're getting your wishes, so sit down! When I was a kid, this was a no-brainer, right? First wish, ability to fly. Second wish, grow taller. Just me? I'd take 5'8". I mean, is that wrong to wish to be 5'8"? And the last wish, $1 million. $1?
And for years and years, whether you were a seven-year-old or 77 years old, a million dollar was the revered marker of financial success. But in today's world, we're not so sure. And it's got a lot of people understandably worried. Because a million dollars doesn't go as far as it used to. So today, we're going to take a look at what a one million dollar nest egg really looks like in today's day and age, and whether that's enough to retire in style. And that will happen after you fulfill my actual third wish, which is for you to like
and subscribe. That's right, make a kid's wish come true. Now, before we see if a million dollars is a worthy retirement goal, let's talk about the reality of how much people generally have in retirement savings and what that amount will do for them. Now, Americans in their 20s, average 401K balance, $10,500.
For Americans in their 30s, the average balance is $38,400. For Americans in their 40s, the average balance jumps to $93,400. For Americans in their 50s, it jumps to $160,000. For Americans in their 60s, the average balance is $182,100.
And finally, for Americans in their 70s, the average balance is $171,400. I don't know about you, but those numbers made me kind of sad. And not only that, but isn't it ironic? Even more ironic than Alanis Morissette's hit song, where the lyrics aren't even ironic situations. Rain on your wedding day? That's just a bummer. It's not irony. That's a coincidence. A no smoking sign on your cigarette break? You're just in a no smoking zone, Alanis. Move on to the smoking—find the smoking zone.
But you know what's actually ironic? This retirement crisis. Because even though people are worried about whether or not a million bucks is enough to retire on, most of them don't have that. They have 10 to 15% of that number saved up by the time they need to hang up the old work hat and hit the dusty retirement trail. And it's clear that many Americans simply aren't prepared for retirement.
Even the peak at $182,100 is nowhere near enough to cover the later years of your life. And while this number is concerning, as is the thought of life's later years and the disgusting and discolored toenails that come along with them, I do want to point out that it's just the average. There are also plenty of millionaires with a high net worth who are comfortably living out their dream retirement, sipping on cranberry Benefiber cocktails and skimming the old Reader's Digest.
Which, hey, no hate here. That RD article on the trick to peeling hard-boiled eggs perfectly every time, game changer. And guess what? Those millionaires, they're not relying on Social Security to pay for most of their expenses during retirement because they figured out a long time ago that that would be a terrible financial plan. There's more money in the blue banana stand than there is in your Social Security check.
Come on! In 2022, the average social security benefit for retired workers was just $1,669 a month. That's only about 20 grand a year, which to give you some perspective, the federal poverty level for a family of two, that's you and your elderly spouse, is $18,310. So add all of that to a very legitimate question.
will Social Security even be around when you retire? Because the truth is, it's a modern day mystery, a deemed kunst novella, a real Nancy Drew nail biter. Nobody really knows what's gonna happen. Now, conventional wisdom says the program will stay in place, but there might be less money available to go around for us retirees. And if that's true, you definitely don't wanna depend on it for your retirement income.
If you consistently invest over a long period of time, your nest egg will be more than enough for you to feast like a king during your retirement years and still leave a legacy for your loved ones. And if social security is still around, that income's just gonna be icing on the crackers, baby. Which, let's face it,
The iced ones are the only crackers worth eating anyways. And I know you're probably in the comments right now going, "But George, my monthly expenses will be lower in retirement. I won't have to worry about a mortgage because I plan to pay it off. My kids will hopefully have graduated so I won't be paying for college. My gas costs will go down because I won't be driving to work every day." Yadda yadda yadda, I never heard from him again. To that I say, yes and no. Now I can see where you're coming from. And yes, some costs may disappear or drop completely.
But think about this. You still got to pay property taxes, your homeowner's insurance, utility bills, and all of those other monthly expenses, which we know will increase as time goes on. Plus, you'll have one major expense in retirement that's going to be higher than it is now, and that is health care. And that's a whopper of a bill, especially if your health problems are the result of eating too many whoppers in the first place. What?
♪ Whopper, whopper, whopper, whopper ♪ - Now, even if you're healthy and you've been drinking kale smoothies and sweating it out in hot yoga for decades, people turning 65 today have a much higher chance of developing a severe disability that needs some kind of long-term care in their remaining years. And the fact is, nearly 70% of Americans 65 and older will need some form of long-term care at some point. So with all those factors to think about,
It's not hard to see why most people stumble into retirement having no idea how much they need and whether what they have is even enough. All right, so let's look back at our original question. Is $1 million enough to retire on? Well, let's say you're 65 and you've got a million dollars in retirement savings and you're ready to quit that nine to five so you can devote more time to the things that matter to you in life now, like retirement.
Bird watching. But this is going well, Dad, and we still have eight bird types left to go. Now, historically, the stock market has an average annual rate of return between 10 and 12%. And don't come at me with, oh, George is on one. It's nowhere close to that right now. Listen, I know it's not there right now. Simmer down, Terrence. Simmer down now!
This is an average annual return calculated over decades. In 2021, the S&P 500 was up 28%. In 2022, it was down 18%. So sometimes it's lower or even negative. Sometimes it's way up. But 10 to 12% is typically how the rate of return evens out over a long period of time. All right. Now, let's talk about the S&P 500.
Now that Terrence feels better, back to you and your million. If your one million is invested in good growth stock mutual funds, that means your investments could generate $100,000 to $120,000 each year, 10% to 12% of a million. But let's be way more conservative here. Even if your account produces average returns somewhere in the ballpark of 7% each year, that's still $70,000 worth of income to work with.
And keep in mind, that's basically the average household income in America today. Now, if you talk to most financial advisors, they'd recommend a withdrawal rate of about 3% to 5% in retirement in order to remain super conservative and keep those investments going as long as you're still sucking wind.
So on the less conservative side, the question, can you live off a million dollars in retirement, now becomes, can you live off of somewhere between $70,000 to $120,000 a year in retirement, bearing in mind that inflation will go up over that time as well. And on the uber conservative side, the question becomes, can you live on $30,000 to $50,000 a year in retirement?
Now, only you can answer that. Some folks will need $10 million to have the retirement lifestyle they've dreamed about. Others can comfortably live out their golden years with a million-dollar nest egg, happy as a clam. Well, at least I'm not bitter. There's no right or wrong answer here. It all depends on how you want to live in retirement. And let's be honest, there's a whole lot of depends happening in retirement. Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha
So the trick is this. You want a nest egg that's large enough so that you can live off the growth it creates each year without ever touching the principal amount. When you're figuring out what your target retirement number is, you'll want to consider things like cost of living of where you want to retire, because there's a big difference in Boise and Boston. Inflation. It's always going to be a thing, causing life to cost 3% or 4% more every single year. Taxes. Yes, old people have to pay taxes too. Lifestyle. There's a bonus here. The YMCA is free at that age.
Healthcare expenses. This is the big one to worry about that we talked about earlier. And finally, social security. More like social insecurity. Am I right, guys? Guys?
So we've talked about how much is enough, but we haven't exactly talked about how to get there. If you're financially ready, meaning you're out of debt and you've saved up three to six months of emergency expenses, you should begin investing 15% of your household income into good growth stock mutual funds and retirement accounts. That's right. The magic recipe here is time plus compound growth. And I want you to start investing 15% as early as possible into good growth stock mutual funds using these tax advantage retirement accounts
like a 401k and a Roth IRA. If you do this, you're going to have more than enough money saved in retirement. If you don't believe me, let's run the numbers with our handy dandy investment calculator.
So let's say you make the average income of $70,000 and you want to retire at 65 and you're currently 25. So if we just invest 15% from 25 to 65, let's see what that turns out to. 25 here to 65 here, we have $0 in investments to start. We're going to contribute 15% of 70,000. We're going to contribute 875 a month for 40 years with an annual return of let's say 10%. Look at that.
We're going to have $5.5 million saved in retirement. Now, let's be even more conservative. Let's say it's 9%. We got over $4 million. Boo-hoo. Let's take it down to 8%.
$3 million. Let's be uber conservative and say it's 7%. $2.3 million. That's still way above the average, and that's still a great retirement. And let's get crazy. Let's say we do hit that 12%. We're going to be super optimistic. You would have over $10 million in retirement. Holy cow!
That's pretty amazing. But let's face it, I know most of you, you don't want to wait that long to retire. And I don't blame you. We've got shows to catch up on, malls to walk, kids on our lawn to shake an angry fist at. And you're not getting your rock back either. So let's say you want to retire at age 50. Well, let's see what that turns out to be if you invest 15% from 25 to 50.
you would still have $1.6 million with 12%. If you go down 11%, you'd have 1.3. Go down to 10% and it would come down to 1.16 million. That's still pretty incredible.
at 50 years old to have 1.16 million, which we've already established could generate six figures of growth per year. Now, of course, retirement accounts have age restrictions. So in most cases, you got to wait till 59 and a half to tap into those 401ks and IRAs without penalties. So here's a bonus pro tip for you. If you want to retire before then, let's say at age 50, or at least have the ability to do that, you can utilize a normal savings account or a bridge account.
which essentially is a non-retirement investment account that you can use to float you until you're old enough to tap into the retirement accounts. All right, folks, what happens next is up to you. Only you can prevent forest fires and only you can decide how much you need to retire with dignity. That kind of gives you freedom and options and a life on your terms. And no matter where you are or how much you have saved right now, this stuff really works when you put it into practice. I promise you.
Your financial future is in your hands, not someone else's. You start on the path to your dream retirement the moment you take that first step. All right, that's a wrap for this episode. Thank you so much for watching. We'll see you next time.