Can YOU Afford Retirement? | 4% Rule Explained | Safe Withdrawal Rate

welcome back to whiteboard finance my name is Marco and I'm here to help you master your money and build your wealth today we're talking about how much you need in

retirement

we're talking about the 4%

rule

and also

safe

retirement

qualifies well so If you're like me, you're probably thinking: I know I need to save for retirement, but how much do I really need? What am I aiming for? So the typical

rule

of thumb is 20 to 25 times your annual salary, okay, and when I say annual salary, that's what you want to earn in retirement, okay, so if you want to live on 50 grand a year , it will be 25 times 50,000, that is 1.25 million dollars, it is what you need for your savings.

Being able to pay you 50 grand a year for 25 years makes sense, so at this point I've already lost half of you because you're heavier, like how the hell do you think it's

safe

up to 1.25 million and the other half You were thinking, hey, I can. I need about $50,000 a year to live on, so again guys, this is personal finance, everything is personal to us. I can live on 50 grand depending on where I live if you live in LA or New York you might need 150 this is all proportional so again what we're going to talk about is how to actually use the 4% rule so that we never have to go down on our capital in that retirement account, so what is the 4% rule?

So, let's say. that you have a 401k well and you are about to retire in this 401k you have $450,000 and you also opened a Roth IRA a few years ago because you have been watching and listening to the financials of the board and in that Roth IRA you have $50,000 so in both accounts we have $500,000. Well, the 4% rule is actually what tells us that we can withdraw 4% from whatever this retirement account is without touching the capital that we live off of 4% each year and that is replenished each year, so, what? how is this replaced? The stock market has generally returned six to ten percent historically, so think about it logically, guys, if you have a retirement account and you're taking out 4% every year to live on.

In fact, you will make up for it with market returns. Well, 6 to 10% is greater than the 4% you are withdrawing, so not only are you living off of it, but you are also making some money. by the end of the year, so let's look at a real life example here, so again we will use this $500,000 that we have set aside, we have saved for many years and we are ready to enjoy retirement, so if you take this $500,000, okay, multiply it by point zero four, that's four percent, which comes out to $20,000, okay, again, this is all personal. They might be able to live on 20 grand.

They may need more, so they should save more for retirement. However, this 4% again gives us a cushion to be able to take out this money but still be able to live and not touch our principal payment, so when you account for this, this 500 thousand subtracted 20 becomes four hundred and eighty thousand dollars. Let's say we take out this 20 thousand dollars on January 1, 2020, okay, we're going to take out at the beginning of the year and a lump sum, normally you wouldn't do that, you would average out whatever you want and pay yourself monthly and live. Aside from that, but we are going for an extreme scenario.

I'm going to get all of this out on January 1 so that this four hundred and eighty thousand dollars has all of 2020 to grow and achieve that six to ten percent growth that we've talked about. Okay, so if we take four hundred eighty thousand dollars multiplied by one point zero six, that six comes from here, the six percent growth in the market, this now becomes five hundred eight thousand eight hundred dollars by December 31st. Curious twenty, does that make sense? Not only have we lived on this 20 grand a year, our 480 has actually grown to this amount by the end of the year.

Well, then I don't have these calculations. You know, I'm not doing this in my head. In fact, I have them. written, but I just want to make sure that we are covering all our bases here, so now let's think about this logically, we all know that inflation exists, so we know that inflation is usually two to three percent annually, so now with 4%. method, you can actually

afford

to pay yourself a 2% raise each year, so how is this possible? So let's do the math, let's take the number that we have, this is the end of the year 2020 that we just calculated, okay and now we take the $20,000 which was 4% of last year, which was our $20,000, we take the 20,000 and we multiply them by a point zero two, that two is our two percent increase or two percent increase, so now this 20,000 becomes twenty thousand four hundred dollars.

Now we've adjusted for inflation, so we're no longer making twenty thousand or twenty thousand four hundred, so now let's do the math if we take this five hundred eight thousand dollars, the 20 thousand four hundred, so let's do 508 - 20 thousand four. One hundred basic mathematics tells us that we have four hundred eighty-eight thousand four hundred dollars, so now we take out these 20 thousand four hundred dollars on January 1, 2021 and now these four hundred eighty-eight thousand dollars have all this year to grow in that six to ten percent that we talked about before, okay, now even if you figure that you're taking out two percent more to get an increase to protect against inflation, you take this 488 four and if you multiply it again by one point zero six you actually get give your starting number for next year, which is actually higher, it will be five hundred and seventeen thousand 704 on December 1, 2021, so you started with five hundred thousand, you have lived for two years, they give it to yourself. a 2% increase and now your savings have actually increased by seventeen thousand dollars.

Do you see now how powerful this four percent rule is? Obviously, this represents six percent growth in the market each year. Will you achieve it every year? You are not going to go negative at all for a few years, however, studies have been done and this has been studied numerous times that, over the course of 33 years, there has never been a large enough downward fluctuation in the market to devour all of someone's courage. principle to devour all this principle that they start with, so there has never been such a long streak and usually when people retire, let's call it when they are in their 50s and 60s, most of them don't last 33 years , so you're living. take out of your savings without even touching your principle, does that make sense?

And now, if you extrapolate this number thirty years, okay, so how we start in 2020, let's say it's the year 2050, this number is actually like seven hundred something thousand if you stick with it. I know that you earn 6% year after year, so not only have you lived for those thirty years, but you have never touched your capital, but you have also increased your money by two hundred thousand dollars, plus, okay, now I personally, Now that I know this math, "I'm probably going to be conservative. I'm probably going to take out, you know, four to five percent a year on my safe

withdrawal

rate

using that 4% rule and I'm going to buy Benzes Beamer mansions and, just kidding, That's something you can do." You can't take large amounts and you have to be super disciplined so you really have to live off that 4% so that's the only caveat and obviously apart from market conditions so I hope they got some value of this video, guys, yes Please like this video and share it with a person who values ​​their retirement.

Thank you very much and have a prosperous day.