Tag: ryan scribner
The simplest retirement plan ever.
Jason 0 Comments Career after Retirement Retire Wealthy
there are a lot of complex strategies out there when it comes to withdrawing your money in retirement we've already gone over some of them such as the Guyton clinger rule but not all strategies have to be that complicated to work well sometimes the simplest strategy is the most brilliant of all and today that's what we're gonna talk about we're gonna be talking about two of the simplest retirement spending strategies out there we're gonna discuss their pros and cons as well as who should be using them let's get started but before we get going be sure to LIKE this video if you haven't already as it really does help out the channel a lot and subscribe with notifications on for more money related videos like this one every single week so the strategies that we're gonna be covering today are very similar to one another in that they are both known as fixed withdrawal strategies they are the fixed dollar withdrawal strategy and the fixed percentage withdrawal strategy let's start with the simpler of the two the fixed dollar withdrawal strategy the fixed dollar withdrawal strategy is exactly what it sounds like you begin by withdrawing a certain dollar amount from your nest egg every single month and keep that amount constant throughout your entire retirement it literally doesn't get any simpler than that say if John were living on this strategy in retirement he has a 1 million dollar nest egg and wants to be able to live on $40,000 a year he withdraws $40,000 in that first year of retirement does the same thing in the second and so on and so forth in other words there are no adjustments for inflation using this method to analyze this strategy let's look at the four factors of retirement which for those who are new to this channel our income risk stability and buying power income measures how much money is coming in the door each month as well as when that money is coming in its measured this way because not all retirement spending strategies are systematic and linear with their income growth and none of us know how long we're gonna be in retirement so we tend to put more of a priority in having abnormally high income years in the earliest portion of our retirements since we don't know if we'll ever get to the later portions risk is the likelihood of outliving your money stability is graded by how often you experienced anything that would be considered an undesirable change in your income from one year to another this could come in the form of a freeze on the growth of your income or just a decline in your income from near to the next and buying power is defined like it always is it's a measure of how much your money can actually get you at any given time and is largely tied to inflation the fixed dollar strategy is generally considered to be a little stronger on income and risk in comparison to other popular strategies like the 4% rule but it does suffer in terms of stability and buying power the reason for this is simple as long as your initial withdrawals aren't too high you're relatively unlikely to outlive your money using this strategy and you may actually be able to live at a higher standard of living at least initially than you would have in other similar strategies like the 4% rule in fact going all the way back to 1950 if John had had that one million dollar nest egg invested in something like the S&P 500 he would not actually outlive his money during any 20 30 40 or 50 year retirement as long as he would true no more than fifty four thousand dollars a year or forty five hundred a month so even things like the housing crisis in dot-com crash didn't cause him to run out of money so this does grant John a higher standard of living initially than the 4% rule would have because of course with a 1 million dollar nest egg the 4% rule would only allow him to draw $40,000 a year to live on though eventually like I said the inflation effect would catch up with him using the fixed dollar approach and that's where this strategy does tend to fall short it's not meant for longer retirements because while John may be able to handle living on $54,000 a year particularly if he's retiring debt free with a paid off home it becomes increasingly difficult to do that as the years go on due to the inflation effect historically speaking inflation has averaged somewhere between 2 and 3% per year in the United States if we assume that our personal average inflation rate in retirement is nearer the top of that scale well at 3 percent per year then John's $54,000 a year income will get him the equivalent of what $40,000 would buy him today in just 10 years time in 20 years his money would only be able to buy him about what twenty nine thousand nine hundred dollars would buy him today and his money would be worth the equivalent of twenty two thousand two hundred and fifty dollars sixteen thousand five hundred and fifty dollars and twelve thousand three dollars a year in 30 40 and 50 years respectively just because of the effect of inflation so just for a minute let's imagine that John had decided to follow the financially independent retire early movement but instead of using the 4% rule which helps to protect your buying power over longer term retirements like those in the fire community are aiming for John decides to use the fixed dollar withdrawal method assuming everything else stayed the same John would retire at the age of 30 with a $54,000 a year income and a 1 million dollar nest egg again at the age of 30 that would be perfectly fine for him however the average life expectancy for people living in the u.s.
Is about 79 years old as of 2019 and it's possible that that number will continue to grow as technology and medicine continues to advance so assuming he doesn't die young it isn't out of the question that he would have a near 50-year retirement and be living on the equivalent of about $1,000 a month when he's aging and his medical costs are at their highest as you can imagine that wouldn't be an ideal situation for John and that's why this strategy generally isn't the best idea for longer term retirements but for the right person in terms of the four factors of retirement the fixed dollar strategy is above average and income and risk but below average instability and buying power in comparison to the 4% rule the fixed percentage method works very similarly to the fixed dollar method except that you're withdrawing a certain percentage of your nest egg every year as opposed to a certain dollar value this strategy also doesn't adjust for inflation but it does at least adjust with the value of your portfolio and depending on what you're invested in and what initial percentages you choose this method may work out all right say John just wanted to withdraw a 4% of his investments each year in retirement since the value of his investments were $1,000,000 when he retired he would withdraw $40,000 in his first year that would leave him with nine hundred and sixty thousand dollars left over if his investments went up by 10 percent that year the value of his portfolio would be somewhere in the neighborhood of a million and fifty six thousand dollars at the start of his second year of retirement since he's withdrawing four percent of that he would live on forty two thousand two hundred and forty dollars in that second year assuming inflation was three percent during that first year of his retirement his buying power would have actually gone up if he had merely adjusted his withdrawals for inflation like he would have if he were using the actual 4% rule he would have withdrawn 40 1200 dollars in his second year or about a thousand and $40 less than he did using the fixed percentage withdrawal method in this scenario the downside that I'm sure a lot of you already see is that the reverse can also happen say that the following year john's investments fell by 20% bringing the value of his nest egg down to about eight hundred and eleven thousand dollars and forcing him to withdraw thirty two thousand four hundred and forty dollars in the third year of his retirement that would be significantly less than the forty two thousand four hundred dollars that John would have withdrew in that third year using the actual four percent rule so as you can see depending on the situation stability is something that this strategy could have a very low score in given that the value of a nest egg especially if it's invested in something like stocks can grow or shrink by 20 30 or even 40 percent from one year to the next the bright side of course is that you have a very low risk of running out of money theoretically it's actually zero if you're able to follow this strategy to a tee and I specifically say theoretically because like many things it's only gonna be true up to a certain point if we take it to a logical extreme we can break this down say if John had $10,000 in his nest egg and he wanted to live on fifty percent of that nest egg for the next five years in theory he'd be fine and he'd never run out of money because he'd always be withdrawing fifty percent of whatever that nest egg is but how many of us are gonna be able to live on five thousand dollars a year that would be what he'd be withdrawing that first year and of course it would be even less the second year if his investments stayed flat his second years withdrawals would be half of five thousand dollars or twenty five hundred dollars and I don't know many people that are living on two hundred dollars a month but the point is if you're willing to take the hit to the stability of your income in retirement you can usually safely squeeze out a little more than four percent of your nest egg each year in a typical retirement using this strategy you just have to be prepared to see the average raw dollar income that you receive shrink as you go further into your retirement to illustrate this let's say that John withdrew 10% of his nest egg each year assuming he had that one million-dollar nest egg he would start out with a six-figure income however if he ended up living longer than he planned on he could eventually find himself living on what would only be generously described as a shoestring budget for example in the simulations I ran covering the various retirement lengths starting from 1950 onward assuming John had invested in the S&P 500 he would have had a median monthly income of about $6,500 a month in 20 and 30 year retirements which when adjusting for inflation would be about $3,600 a month in 20 years scenarios and twenty seven hundred dollars a month in thirty-year scenarios but that number did shrink a lot as the retirements got longer for example in 50 year retirements his average median monthly income was about forty four hundred dollars which again doesn't sound bad but when we look at the final few years worth of his monthly withdrawals we find that it's actually about $2,300 a month on average which is considerably less than the six-figure income he started with and of course that $2,300 a month was what he was actually withdrawing almost 50 years from now once we adjust for inflation over that time it may not even buy John what $1,000 a month would buy him today so similar to the fixed dollar withdrawals your buying power could be taking a significant hit if the initial percentages you set in this strategy are too high in summation the fixed percentage method scores reasonably well though not elite when it comes to income particularly when used in early retirements it does great in terms of risk again assuming you're not too aggressive with your initial percentages but is questionable with stability and below average in terms of buying power so in the end who should use these strategies now I'll admit I am personally biased here I believe there's very few people who should realistically be using these strategies as their primary method it's mainly limited to those with very short expected retirements so that their buying power doesn't become too damaged over time and even then ideally only by those who are also approaching that same retirement with little to no debt because especially with the fixed percentage method you'll often need to be pretty flexible with your spending from your year but for those who aren't retiring early and will have no more than nine or ten years that they expect to be retired they have little debt to speak of and want something very simple to follow when figuring out how much of their money they should withdraw each year one of these strategies could work out well it gives you some advantages in terms of income without significant increases in risk but what are your thoughts do you agree with my assessment of the strategy or do you think that I'm missing something do you think another strategy would work better for people in that situation let me know in the comments section below but that'll do it for me today once again if you haven't already be sure to LIKE the video as it really helps the channel a lot and if you want to learn more about various retirement planning strategies be sure to check the links on the screen for my videos on how to safely spend money in retirement as well as protect your nest egg and as always thanks for watchingRead More
The #1 Wealth KILLER
Jason 0 Comments Retire Wealthy
Albert Einstein once referred to compound interest as the 8th wonder of the world. Saying he who understands it earns it; he who doesn’t pays it. And he couldn’t have been more right. Today we’re going to be looking at the miracle that is compound interest and how can protect my retirement as it relates to the #1 killer of your wealth. Let’s get started. So the #1 wealth killer is debt. Yeah, I know, big shocker. But it’s really true and today we’re going to look at why that is.
The truth is, having too much debt can put a limit on your greatest wealth-building tool – your income. While it may be tempting to invest rather than pay off your debt, compound interest is a force to be reckoned with. In fact, I recently dedicated an entire video to its power. Financial advisors often use the example of Jane, who invests $100 per month ($1,200 per year) from the age of 18 to 25 and earns an average of 10% per year on her investments. By the time she stops investing at age 25, her nest egg will be worth just over $15,000.
However, before you start investing, it’s important to consider your debt load. Here are some reasons why paying off your debt first may be the smarter choice:
High-interest rates: Many forms of debt, such as credit card debt or personal loans, carry high-interest rates that can negate any potential investment gains.
Risk: Investing always carries some degree of risk, and if you have high levels of debt, taking on additional risk may not be advisable.
Stress: Debt can be a significant source of stress and anxiety, which can have negative impacts on your overall financial well-being.
Freedom: Paying off debt can give you a sense of freedom and control over your financial situation, allowing you to make better long-term decisions.
That being said, paying off debt doesn’t mean you can’t invest at all. Here are some steps you can take to balance debt repayment and investing:
Create a budget: Determine how much money you can allocate towards debt repayment and investing each month.
Focus on high-interest debt: Prioritize paying off high-interest debt first, as this will save you the most money in the long run.
Consider employer-matched retirement accounts: If your employer offers a retirement plan with a matching contribution, take advantage of it. This is essentially free money that can help you save for the future.
Seek professional advice: A financial advisor can help you create a personalized plan that takes your unique financial situation into account.
In conclusion, while compound interest is a powerful tool for building wealth, it’s important to consider your debt load before investing. Paying off high-interest debt should be a priority, but that doesn’t mean you can’t invest at all. By creating a budget, focusing on high-interest debt, taking advantage of employer-matched retirement accounts, and seeking professional advice, you can balance debt repayment and investing to achieve your financial goals.
Over the course of the next 45 years, those investments will continue to grow. Assuming that it continues to grow at an average annualized rate of 10% per year she will end up with $1.1 million in her portfolio at age 70. That’s all achieved with eight years of investing $100 a month. Jane becomes a millionaire by investing $9,600 of her own money. On the other hand, we have John. John doesn’t start investing at age 18. Instead, he starts at the age of 26 (just after Jane had finished all of her investing). He also invests $100 a month. However, unlike Jane, he does it from the age of 26 all the way until the age of 70. John invests $54,000 of his own money over the course of those years and ends up with a nest egg of just under $950,000. So John ends up with approximately $150,000 less than Jane. This is in spite of the fact that he invested six times more of his own money than she did.
It’s no secret that excessive debt can put a damper on your ability to build wealth using your most powerful tool – your income. While the concept of compound interest is widely known to be an effective way to grow your money over time, paying off debt may seem like a counterproductive move. However, it’s important to remember that not all investments are created equal, especially when you’re dealing with debt payments.
Let’s take a look at an example: Jane invests $100 a month for 7 years starting at 18 and ends up with a net worth of $1.1 million at the age of 70. Now, let’s say John starts investing $100 a month at the same age and earns an average of 10% per year, just like Jane. Even if John continues to invest until he’s 100 years old, Jane would still have more money than him, and her lead would only increase with time. In fact, at the age of 100, Jane would have $19.2 million to her name, while John would have $16.7 million. This just goes to show the power of compound interest, as famously called by Albert Einstein as the 8th Wonder of the world.
However, when it comes to investing, it’s important to consider the context of one’s financial situation. Comparing someone who is debt-free to someone who is not will not provide an accurate comparison. While Jane invested $100 a month for 7 years, John was dealing with debt payments and didn’t invest anything for those first 8 years. But what if John managed to free up an extra $200 a year, or less than $17 a month, by paying off his debts? In that case, he would come out ahead of Jane by the time they’re both 70. And if he freed up more money than that, he would pass Jane even earlier.
So, what’s the takeaway? While compound interest is undoubtedly a powerful tool, it’s important to also consider the impact of debt on one’s ability to invest. Paying off debt and freeing up funds for investment can ultimately lead to greater financial success in the long run.
And given the state of the average American debt situation, $17 a month in payments is a remarkably conservative estimate. According to articles in business insider,
CNBC, and Forbes the average American debt situation looks like this: About $9,000 in credit card debt which is
often split between several cards. $30,000 in student loan debt. And assuming a used vehicle was bought a little
over $21,000 on a car loan. That’s around $60,000 in total debt. If we assume 18% interest on the credit cards
and 4.5% interest on the other loans and terms of 5 and 10 years on the car loan and student
loan respectively, the minimum payments could be roughly $900 a month. Freeing up that much cashflow could make a
tremendous difference in the previous example. Let’s look back at John’s situation from before
and assume that his household’s debt situation was that of the average American. John uses his $100 a month of excess cash
flow to pay off these debts.
Based on the numbers it would take him roughly
six years to become debt-free. This is assuming he did not work any extra
hours or sell anything to get out of debt faster. Once he was debt-free he would have almost
$1,000 a month left over to invest. If he starts the process of becoming debt-free
at the age of 18 when Jane was starting to invest he would have become debt-free by his
24th birthday. If he then turned around and started investing
the full $1,000 a month he would actually be further along in his investments by his
25th birthday then Jane was. Granted this is largely because he has invested
more money than Jane has at this point. Jane by her 25th birthday had only invested
$8,400. That’s quite a bit less than John’s $12,000
but think of the potential payoff of this down the road if John keepS investing that
He’ll also likely be able to lead a much
better lifestyle than Jane in the present due to his lower monthly expenses. Jane may eventually equal him in that regard
if she gets her debts paid off, but for those first several years after John is debt-free,
it is worth noting. Remember, compound interest is an incredibly
powerful mathematical force. But it can work just as hard against you as
it can for you. So it’s important to make sure that compound
interest is your ally in your finances, not your enemy. So with that being said how do we avoid this
killer of wealth? First, if you’re lucky enough to not have
any debt right now research some ways to ensure that you keep it that way.
If you’re planning to go to college look into
ESA or 529 plans. They are ways to start saving for college
while lowering your tax burden (which is always a nice perk). Also, look into scholarship opportunities
or PSEO. Don’t be afraid to have a summer job and work
during the school year part-time. For the record, this can also be a good option
in high school to give yourself a head start financially so long as it doesn’t take away
from your studies too much. Make sure that you always have an emergency
fund. It should contain three to six months worth
of expenses so that you don’t have to take on debt for those moments when life happens. Make sure you have insurance for those catastrophes
that you wouldn’t be able to cover with your savings. Catastrophic health emergencies are a good
candidate for this.
If you’re already in debt, learn about how
people have paid off their debts. Then choose the strategy that is most likely
to get you (and keep you) completely out of debt. Three of the most popular strategies are the
debt snowball, debt avalanche, and debt tsunami. I have done videos on all three of those and
they will be linked in the description. The debt snowball is the one made famous by
financial personalities such as Dave Ramsey. It has you order your debts from smallest
to largest balance and pay them off in that order regardless of the interest rates on
those debts. The plus side is the momentum you can build
up for yourself by quickly wiping out those bills. The downside is it isn’t the most mathematically
efficient way to get out of debt, all else being equal.
The debt avalanche is the more mathematically
efficient option if you can stick to it. It has you order your debts from highest to
lowest interest rate and pay them off in that order. This is regardless of the size of the loan
itself. The upside is the fact that you’ll be paying
less in interest. The downside is in some situations it may
take quite a while to get rid of that first bill. For those who are more motivated by seeing
the balances of the debts themselves going down this may not be much of an issue.
For those that are more motivated by the lowering
of bills, this could be an issue in some situations. The debt tsunami has you order your debts
from the most emotionally stressful to the least emotionally stressful and pay them off
in that order. In some cases, this could mean paying off
the largest balance that also has the lowest interest rate first. However in my experience that is not commonly
how it goes. Most of the people that I’ve seen use this
strategy tend to use it because there are personal loans between family or friends that
are causing a lot of stress in the relationship. The person with the debt uses the tsunami
to get rid of that loan first and then often switches to a different strategy such as the
snowball or avalanche. Which is another viable option for many people. There’s nothing stopping you from starting
with one strategy that will help get you going and then switching to another that will work
for you longer-term.
I know a lot of people who have started with
the snowball to get themselves some momentum and then switched to the avalanche once they
were on a roll so that they could save on interest. Another thing I would recommend looking into
is the power of the debt snowflake. If you haven’t heard, the debt snowflake is
a strategy where you find ways to free up money (or just happened to find the money)
that you can put towards your debt payoff strategy. The nice thing about it is it works well with
any of the other three strategies I mentioned. While by itself it isn’t game-changing it
does help your primary strategy do its job a little better. And as we know every little bit helps. If you need more motivation make sure to check
out Dave Ramsey’s YouTube channel and their debt-free screams playlist.
It’s filled with a lot of amazing stories
of people paying off loads of debt on various levels of income and getting to see their
relief when they are finally debt-free is very inspiring. You might also find their Turning Points playlist
interesting. It is essentially interviews of people who
have become debt-free talking about what made them decide to go through that process and
achieve that lifestyle. I’ll leave a link to both playlists in the
description as well..