Money Rehab with Nicole Lapin - Here’s How Much You Really Need For Retirement

Episode Date: December 13, 2021

The very first step in making a successful retirement plan (yes, even before starting that IRA) is to know how much you’ll actually need for retirement. Today, Nicole answers a question from a listener about how the heck to make that prediction. Tune in to find out! Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. In the financial world, retirement is a really big deal.

So it's a really big deal here on Money Rehab as well. Naturally, I have covered it on the show, like in episode 136, The Secret Way to Snag a Roth, and episode 63, Choose Your Fighter, 401k, or Roth IRA. But the very first step in making a successful retirement plan is to know how much you'll actually need for retirement. Money rehabber Mara wants to know exactly how the heck to make that prediction. Here she is. Hey, Nicole. My name is Mara, and after listening to Some Money Rehab, I'm ready to get serious about planning for retirement. I started making contributions to my 401k, but I'm not sure if I'm contributing enough because I'm not sure how much I should save for retirement in general. How do I

know how much is enough? Thanks so much. Love the show. In my upcoming book, Miss Independent, Mara, I outline three levels of wealth, but I'll give you a quick sneak peek before it comes out. Here is number one. I affectionately call this one rich enough, where your super basic expenses are covered without any frills. Think of the brown rice and beans diet. Here's number two. If you feel best maintaining your current lifestyle, complete with occasional splurges like dining out or buying yourself something pretty, we all do, it is the pretty rich life for you. Being pretty rich in retirement allows you to live comfortably with some indulgences, but doesn't factor in a ton of future growth. And here's the third.

indulgences, but doesn't factor in a ton of future growth. And here's the third. Last but not least, we have the super rich level, which entails having more money than you can reasonably spend, aka baller status. You may already have a sense of which lifestyle you want to shoot for, but the next step is to crunch the numbers to see how much you'd need to save in order to achieve this lifestyle. There is no one right answer for how you want to spend when you retire. The only way to get this wrong is to not think about retirement savings at all. Your plans can and will change, but having a realistic idea of what you're aiming for is the only way you'll be able to figure out how to get there. So let's make your retirement roadmap.

For this, you'll need a writing utensil, a pen, paper, a Word document on your computer, whatever you have handy. First, we're going to map out how much money you need per year for the rich enough lifestyle. To do that, write down all of the monthly expenses in your bare bones budget. These are the expenses that are absolutely essential. No more, no less. I'm talking housing, brown rice and beans, utilities, the necessities. Once you have your list, add up all of the expenses in your monthly budget and ta-da, you have the rich enough category. Now multiply that number by 12 and you get your annual rich enough budget. Keep that writing utensil handy

because we're going to go through this same calculation two more times. Get excited. Next, let's find your annual expenses for the pretty rich lifestyle. To do this, you should take your minimalist rich enough budget and then add on some extra layers of, well, extras. For this step, list out some mid-level financial treats. Eating out every so often, signing up for a bougie gym membership, whatever sounds good to you. Then add up these extras and multiply that number by 12 so you get your annual extras for the pretty rich lifestyle. And then on top of that, add your rich enough annual expenses to get your total pretty rich budget. Should I still have you see what I did there? Your pretty rich budget is going to be your rich enough budget plus some pretty rich extras. Got it? Got it? Good. Now let's calculate the

super rich annual budget. This is where we dream really big with the biggest ticket items you ever think you could possibly want. Again, we'll end up doing some layering here. To find your total super rich budget, you're taking your pretty rich annual expenses and then add on all of the annual expenses for everything else you could possibly think of. A vacation home, a yacht, a fleet of jet skis, a big monument with your name on it. Seriously, go crazy. Now estimate how much per month you think you'd shell out to maintain that fleet of jet skis. And honestly, some of these things are totally within your reach. If you think about the spirit of what you want, maybe it's not buying a fleet of jet skis,

but maybe it's renting one at a lake once a year. Then you know what to do. Multiply the total monthly costs by 12. Now you should have three numbers. Your annual rich enough budget, your annual pretty rich budget, and your annual super rich budget. We're not quite done yet because this is just the amount you're anticipating spending in one year.

Remember, this is your retirement budget we're talking about. You won't be working. That's kind of the point. So you won't have any income coming in. So your next task is to calculate how much you need saved in total to support your lifestyle throughout the whole span of your retirement. You do this by taking your annual totals for your rich enough, pretty rich, and super rich levels and multiply those numbers by how many years you expect to be in retirement. Typically, when I coach people on calculating their goal retirement savings, I recommend that they anticipate spending 20 non-working years in retirement. Other financial experts recommend budgeting for 30 non-working years. Really, that's a personal decision. I know you might be thinking, sheesh, warn us before you

bring up our mortality. I get it. No one wants to think about how much time we have left. It is the big ol' elephant in the retirement room, though. Here on Money Rehab, I don't let that elephant go unacknowledged. Dumbo can grab a seat and join the rest of us in the pod closet. So did you do the math? I'm going to throw out some numbers for three levels of retirement wealth, but your numbers might not look exactly like this. I'm just going to make some educated guesses so we can talk hard numbers. Let's start with the rich enough level. The median household income in the United States is about $63,000 a year before taxes. The average annual burn rate, that is how much you spend per month and per year, is about half of that or $30,000.

If we go off the average American needs, that's 20 years times $30,000 a year, and we get $600,000 we need to live the rich enough lifestyle in retirement. Now let's move on to pretty rich. For the purpose of this example, I'm going to use the $67,000 figure as the target annual spending in retirement because it's the average salary in the United States. So that means you'll need to have $1.2 million for a pretty rich lifestyle level of retirement. Finally, let's check out our super rich option. If you want to be super rich and your annual spending is clocking in

at something like a hundred grand, then you'll need to aim for around 2 million bucks to live out your days like our patron saint of badass old ladydom, Betty White. For today's pep talk, you can dig straight to the bank. Listen, in today's episode, we face the music. Well, numbers, but we'll end with some music. And we started with some too, which is by far the hardest step when thinking about planning for retirement. Crunching the numbers may have made you realize that the retirement life you're envisioning will take more work than you actually thought, or you may need to scale back. That may be the case. But also remember,

after listening to the show, you're not going to have just one source of funding for your retirement. I am not saying you have to make $2 million to have $2 million by retirement. You can make part of your retirement nest egg through index funds and chilling, for example, and retirement accounts that are growing with the beautiful, beautiful forces of compound interest and investment gains. And rest assured, you are here in Money Rehab, which makes you in the exact right place to get your retirement shit together. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are

Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.