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Finance: What Do You Need to Retire? 209 Views
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What do you need to retire? Retirement - think: 401k, pension fund, IRA, roth IRA, etc. All of these savings socked away while you worked hard are tax-deferred. Ordinary income tax gets applied when you take the money out and actually use it.
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Transcript
- 00:02
Finance a la shmoop.. what do you need to retire? well people when I retire I always think [Old man discussing retirement]
- 00:11
good year or Firestone... that's not the right video oh okay then.... all right
- 00:19
what do you need to retire as in have enough money to stop working forever [man fishing]
- 00:23
well like all great questions this one begs the greatest dancer of all time it
- 00:29
depends and no not the diaper company your friends money your enema enemy time... [Hammer smashes an alarm clock]
Full Transcript
- 00:36
it used to be that in the 1970s smoking was really common and it really helped
- 00:42
out the insurance companies and Social Security because most people only lived
- 00:46
into their late sixties maybe early 70s and then they all died so a typical
- 00:51
worker might work until he was 65 retire last three or four years of coughing and [Man smoking]
- 00:56
then... well if you lived on 25 grand a year in the 70s and you're
- 01:00
retired at age 65 and you only lived four years after having saved a hundred grand
- 01:06
in retirement money and you had nobody else in your life didn't care about
- 01:10
leaving anyone any money then man that was the best yeah but then things got
- 01:15
more complicated stores and restaurants began to ban cigarettes, people started [No smoking signs appear]
- 01:20
learning that eating sticks of fried butter and rashers of bacon right out of
- 01:24
the fridge wasn't great for you despite what the bacon industry's research told
- 01:28
you and all of a sudden this happened so yeah today a huge number of people live
- 01:35
well into their 80s and 90s and unfortunately they're all running out of [Life expectancy chart rising in USA]
- 01:39
money by the millions anyway well you know that is before they do the frog thing...
- 01:44
so let's run through an example and see how that fine story fits your life or [Man sprinting through examples]
- 01:49
projected life anyway so Joe Blow retires at 65 with 400 grand in savings
- 01:54
his wife is dead but he has two kids and would like to leave him something Joe's
- 01:59
been living well he has a fully paid for home a paid for car and he spends about [Joe's home and car appear]
- 02:03
30 grand a year for food clothing lost golf balls and a subscription to
- 02:08
magazines we can't talk about here on this video...
- 02:10
he's a big cricket enthusiast if his 400 grand was entirely in $20 bills in
- 02:17
his mattress and he kept spending 30k a year well
- 02:21
then he'd have 400 divided by 30 or 13 years and change before he went totally bust hmm
- 02:27
well that's a problem because he's 65 and his doctors think he'll live until [Joe with his doctor]
- 02:32
85 so what does he do those last seven years hmm well his kids really don't
- 02:39
want him sleeping on their guest couch and he doesn't want to do that either [Joe sleeping on a couch]
- 02:42
hates leather he also owns his home and car free and clear well he could
- 02:47
certainly sell all or part of his home and get 8 grand or so in cash for his
- 02:52
car it saves them car insurance payments and gas maybe let him live and unless
- 02:56
that 30 grand a year and you know that 8 grand goes a long way on uber but before [Joe travelling in an Uber car]
- 03:01
we get into the home selling part let's get to the basics well there are some
- 03:04
key variables here first he doesn't need to spend 30 grand a year he could
- 03:08
certainly cut back on movie nights and dinners at the palm and accessories for
- 03:13
his flip phone he could stretch the 400 grand a consisting of $20 bill stuffed [Joe stretching a 20 dollar bill]
- 03:18
into his mattress so that it lasts much longer than the projected 13 years here
- 03:23
if he wanted to come out exactly even and he knew that on his 85th birthday he
- 03:28
would you know go the way the Frog or if he's planning on doing this when he hits [Joe driving a ferrari]
- 03:33
85 well then he has to make 400 grand stretch only 20 years and it just means
- 03:39
he takes his annual spending down from 30 grand a year to 20 grand a year not
- 03:44
bad at all and he won't miss catching fights on pay-per-view all that much but
- 03:48
most people don't have such certainty on the dates in their lives and most people
- 03:52
don't have a mattress that can hold 400 grand in 20s instead they have as part [Woman balancing on a mattress with dollar bills underneath]
- 03:58
of their savings program a morass of stocks, bonds, cash and a home well to buy
- 04:03
their home they took out a mortgage usually 30 years earlier and slowly paid
- 04:08
off the home debt over that time so that after 30 years of mortgage paying, they own
- 04:14
their home free and clear with no debt most of you have probably heard of a
- 04:17
mortgage but there's also this thing called a reverse mortgage
- 04:21
Well turns out Joe's house was worth 200 grand and he could simply [Joe's house worth shows and banker appears]
- 04:26
borrow against it on his way you know out so instead of four hundred grand in
- 04:31
savings he really has like six hundred grand
- 04:35
available to him well if he spent 30 grand a year his old spending budget for
- 04:39
20 years well then he comes out just even and it's likely that over those
- 04:43
twenty years his house would appreciate in value like say it ended up being [House value increasing]
- 04:48
worth three hundred grand at the end and those kids could still sell it pay off
- 04:52
the 200 grand of reverse mortgage he borrowed on it and still they'd have a
- 04:57
hundred grand buy a Prius or renew their dad magazine subscription that we can't
- 05:02
talk about here but what if Joe wanted to live the high life in his retirement [Joe looking at elephants]
- 05:06
isn't there something better he could have done with his four hundred grand...
- 05:11
this is a finance and stock investing course so we're hinting here...
- 05:16
sure instead of 20s in the mattress he could have taken some risk and put it [Person grabs 20 dollar bills and transform into stocks and bonds]
- 05:21
into stocks and bonds well just for simplicity sake let's say he made five
- 05:25
percent per year net of taxes and fees and his investing well the math is
- 05:29
pretty compelling he needs 30 grand a year to continue the
- 05:32
high-quality full-contact lifestyle he's been leading and we just went through
- 05:36
how easy it was to get there with a combination of slowly borrowing against
- 05:40
the equity value in his house and pilfering the 20s in his mattress but if
- 05:45
instead of the Serta strategy he had invested the money in a relatively safe
- 05:49
5% of your strategy well five percent of four hundred grand is 20 grand a year
- 05:54
for the 20 years of his retirement he could still spend the 30 grand a year 20
- 05:59
grand from investment returns on his 400 KMS tag and 10k a year from borrowing
- 06:04
against his home and he'd still have the entire 400 grand left over to leave to
- 06:09
his kids a bonus round but let's say he wanted to go totally nuts and live life [Joe thinking about ordering in McDonalds]
- 06:15
on 40 grand a year and leave his kids er less
- 06:20
well than each year he could take 10 grand out of his 400k of savings and just spend it the problem
- 06:25
then is that each year the capital base from which he derives his 5% a year
- 06:30
shrinks so after year 1 when he's 66 the 400k of
- 06:35
now 390k and instead of 20k in returns based on his 5% a year return figure he
- 06:41
gets 5% on his 390 or $19,500 but he likes the high life and wants to keep
- 06:48
borrowing 10 grand a year from his nut or nest egg there whatever you call it so
- 06:52
maybe in year 1 he spends the total from his reverse mortgage dough, all 20
- 06:56
grands whatever and just spent a bit last year after year for 20 years like [Joe cost of living decreasing]
- 07:01
nineteen five and nineteen thousand and slowly going down until he kicked the
- 07:05
bucket and leaves his kids 200 grand instead of 400 grand all right you get [Referee whistling and final value appears]
- 07:09
the gist here there are tons of ways Jo's twilight years could have gone
- 07:12
spent more spent less ended up with a ton of money for the kids ended up
- 07:17
destitute how much do you plan to live it off in your later years and if you've
- 07:22
got family are you going to leave them anything or do they just get to inherit
- 07:26
your you know questionable magazine collection [Joe's kids holding magazines]
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