Money Rehab with Nicole Lapin - “How Much Should I Be Saving For Retirement?”

Episode Date: September 25, 2024

This Listener Intervention is all about balancing today’s desires with tomorrow’s needs. If you’re not sure how much should be in your retirement nest egg, tune in! Originally aired 9.22.21 $ Take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Visit: http://chime.com/MNN  $ Looking for the perfect holiday gift for your coworkers, friends, and everyone in between? Choose Nicole’s favorite wine, Justin. Get 20 percent off your order for a limited time with the code “MONEY20” at http://justinwine.com/  $ Ready to find a financial advisor that’s right for your financial goals? Get matched with a trusted, vetted financial advisor at: http://moneypickle.com/MNN  All investment strategies involve risk of loss. The information shared in this podcast is for informational and entertainment purposes only. Listeners should do their own research and consult a financial advisor before making any investment decisions. See terms for additional details: https://moneynewsnetwork.com/terms/ 

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your

reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k?

You don't do it? No, I never have. You think the whole world revolves around you and your money. 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. We all know we should be saving for retirement. But just how much should we be saving? How do we get the Goldilocks sweet spot where we're not contributing too little, but also not contributing too much? We want to contribute just the right amount. But what's that golden number? Today's listener intervention is with Ashley, a money rehabber who is wondering if she's spending a little too much for retirement. So Ashley, welcome to Money Rehab.

What a great question you have. It makes me so happy because I feel like this means that you're already in such a strong financial position. That's funny. Why is that funny? Do you not think that's true? I don't think that's true because after reading your books, listening to your podcast, and following blips from you, I think we could be better because maybe what I've done is contributed too much to retirement in future planning that maybe it's made us more strapped where we are right now. I see. So your company has a pension that you've been contributing to for how long? How long have you been at that job? 10 years. So how much is in your pension? I don't know. Okay. What's great about pensions?

Do you know the difference between pensions and a 401k? Probably just very elementary. So if you want to explain it. Got you, girl. So pensions sound like they're super old school and they went by the way of the dodo bird or the blackberry. But pensions are actually amazing because they were intended to replace your income in retirement. 401ks are actually not. 401ks are marketed in a fantastic way where people think they are contributing to a retirement fund that's going to replace their income come retirement. But that's actually not true because it's linked to the market. And we don't know what the market is going to do. And by the time you retire, the market could be in the shitter. The market could be great.

But it's all dependent on what the market is doing and where your particular funds are connected. The pension doesn't have anything to do with the market. The pension is something that you contribute to and actually helps you maintain your lifestyle in a guaranteed way. So I worry about folks who only have one. Now, it sounds like you have many, which makes my heart so happy because the more the merrier when it comes to retirement options and the more diverse you can be, the better.

So you can hedge against any issues that happen in the market and any tax issues. So the difference between a Roth anything and a traditional anything, because there could be Roth 401ks, there could be Roth IRAs, there could be traditional 401ks, there could be traditional IRAs, is just how you're paying taxes. So with the Roth versions, you're paying taxes now so that you don't pay taxes later when you're an old sexy lady. And then the traditional versions are the ones where you do have to pay taxes later. So you might see this ginormous number in that account or whatever traditional account you have, but that's not the full amount you're going to get later. Did that help? Yep. Cool. So I have the pension and then I also have the TSP. So through TSP, that's where I'm contributing, where my employer will match

5%. So I've done 5% and that's where our 401ks come into play. But I did 10% over the 10 years on my own. So I already have a six figure value in there saved. And so that's where kind of my question came from, not realizing how beneficial my pension would be. If I'm already putting 10% of my own in, my employer's matching 5%, I know I have my pension. Do I feel comfortable knowing that that's kind of like that borderline 15% you refer to with your three E's? Because then I'll just keep going. And this is where I'm wondering if we did too much because we also have private wealth that we invested in. Right now we have like $35,000 saved through a private company. And then we also did private through our credit union, which is like another 10 grand. So I'm looking at all

of this and I'm like, holy moly, we have a lot of money tied up in these things. money tied up in these things. When like we built a home two years ago and we had to take out like a home equity right away to do like different projects and stuff that couldn't get done. Cause we built, we finished building in November in Wisconsin. So, you know, you can't put in a driveway and things like that. So now I look at this and I'm like, Holy moly, we have all this money tied up in private wealth in our credit union that would have been helpful on the front side. Do I need to reconsider how much money I'm actually putting away for retirement in the long run so we have more available cash for these sort of things? And then another question I have is how do you kind of figure out how much you should have for retirement?

I love this question so much because that was actually the question I was going to ask you. Have you even figured out how much you need for retirement? That is the first step before you even know if you're putting in too much or too little. You have no benchmark. Right. Exactly. I have no idea. One of the questions I have is, how do we predict slash calculate how we plan for retirement? And I was hoping that that's where I could get more navigation. Yes, absolutely. Hold on to your wallets, boys and girls. Money rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves.

So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your If I had Chime back then, that wouldn't even be a story. Make your fall

finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime feels like progress. Banking services and debit card provided by the Bank Corp Bank N.A. or Stride Bank N.A. Members FDIC. Spot me eligibility requirements and overdraft limits apply. Booths are available I love hosting on Airbnb. It's a great way to bring in some extra cash. But I totally get it that it might sound overwhelming to start, or even too complicated if, say, you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco

and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work,

but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. Now for some more money rehab. So all of these questions make me want to take a more bird's eye view into all of your finances first. So when you say home equity line, you mean you have a mortgage and a home equity line of approximately how much? $35,000, naturally.

Okay. And then do you have any other kind of debt? So we have our mortgage. We have our home equity loan, which that one's $35,000. Our home mortgage is like $350,000 that we have. The only other debt we have right now would be a student loan. Okay. And I've been just slowly paying on that, waiting to see if anything will change. Yeah, that makes sense. I mean, I always like to put student loans at the bottom of the list because they can take away your house, they can take away your car, they can't take away your brain. So are you feeling like you are not having the lifestyle or the financial freedom today that you would want?

I think so. I think we have, from what I feel like is maybe it'd be nice to have more cash flow. And how much cash flow? I guess enough to get like a new vehicle for our family. Okay. So probably like an additional 500 bucks a month would be nice. Okay. Now that we have that like cushion for those sort of things. Well, I love that you're over indexing on saving for the future and not the other way around, because you're already then accumulating interest. You're having it grow through all of these

different vehicles, which is awesome. And now you're saying, hey, you know, I get it. There's a sweet spot between thinking I'm going to live forever and thinking I'm going to die tomorrow. And I'm kind of, you know, more in the zone. You tell me if I'm wrong. I'm speaking as Ashley, more of the zone as I'm going to live forever, which is a more conservative zone, right? Because you're really trying to squirrel as much money away as you possibly can. Now, whether or not you're squirreling away too much money has to do with how much you need as a nest egg. So I think of it as three different levels. And this all is coming out, by the way, in my next book, which I'm really excited about because it takes rich bitch to the next level. I like to break down three categories because it gives you three different benchmarks for

what you'll need in retirement. So rich enough is sort of my idea around having the bare bones lifestyle that you're going to have. around having the bare bones lifestyle that you're going to have. Pretty rich is having maybe the same lifestyle you'll have along with, you know, the better creature comforts that you might want. Super rich is the next version where you're just living large. And I think it's really, really important to figure out what those are before you even start asking those questions. So if you think of all of your expenses, your basic expenses, you'll want to find out what your monthly burn is.

So what is your monthly burn, would you say, for the basic stuff that you would need to keep the lights on, to eat, no mani-pedis, but like brown rice and beans diet? Right now for just bills and everything, it's like 5,300. And then what you would want to do is you would want to times that by 12. And then you would want to times that by, let's say, 20 for right now. Then you're going to get a general picture for what that looks like. So then I want to teach you about two really cool things. One is the 4% rule and one is the rule of 72.

So the 4% rule refers to how much of your nest egg that you want to take out yearly so that you're living only off your interest and not off your principal. So for easy reference, a million dollar retirement portfolio would get you $40,000 a year for living expenses because you would just then be living off the interest that you would be getting on that bulk million dollars. Two million dollars would get you $80,000 a year, which sounds more along the lines of what you guys are spending a year. You know, $3 million would get you $120,000 and so on and so on. mean that you don't touch the lump sum that's earning you the interest and you're living off the interest. So that is a really good goal that a lot of people think about when they're thinking about how much they're in a need for retirement. The other one is the rule of 72. And that helps you see how long it's going to take you to double your money. So basically, you divide 72 by the interest rate you're getting. And so the answer

is close to the number of years that it's going to take for your money to double at that rate. So it takes 72 years, for instance, for your money to double at 1% compound interest. So 72 divided by 1. It takes 36 years to double your money at 2%. So 72 divided by two is 36. Takes your money at 10% 7.2 years, right? If you're following that same idea. So that also gives you an idea of how much time it's going to take for your money to grow at the current rates. Do you know how much interest you're getting in all of these interest-bearing accounts? No, I've never looked at that, but I will. Yes, please. So here's what I want you to do. I want you to figure out how much is in your pension.

I want you to figure out where your money is going when you're contributing the 5% or 10% to the thrift savings plan? Is it going to a Roth 401k? Do you know the answer? To a 401k, to an IRA, or a combination of mutual funds? 5% is going to a 401k and 5% to a Roth IRA. I believe. Okay. And what is 5%?

Like how much? Yeah. Because if you're asking me if you're spending too much on retirement, then we can see where we can potentially scale back. 240. Okay, great. So when it comes to deciding whether you should pay off your debt or invest, it really comes down to how much interest you're earning.

off your debt or invest, it really comes down to how much interest you're earning. So how much are you paying on your home equity line at $35,000? I pay about $500 a month just because I want to get it paid off. But we only have the interest rate on that's like 5.5. I think it's only like 375 a month I would have to pay. 5.5. I think it's only like 375 a month I would have to pay. So at 5.5%, you want to make sure that your investments are bringing in more than 5.5%, or you should pay that debt off before investing. Some of the investments I'm assuming are going to be in equities, which is a fancy term for in the stock market, which is probably going to yield more than that. But a lot of it's going to be in market, which is probably going to yield more than that. But a lot of it's going to be in bonds, which is probably going to yield a lot less than that. So you're losing money if you're paying all of this money in interest, but you are then putting in

other good money that could be used to pay down that home equity line and not making as much as 5.5%. So you might want to take a look at getting that down first, because ultimately that's going to cost you more in the long run. And that's like anything else. If you want student loans, another reason why I put that lower on the list is because usually those interest rates are quite low. And so you can make more money in the market than you would be paying on those interest loans. So that's like an arbitrage, which is where you're kind of playing the system to your most advantageous way to make money. In order to answer the question of are you saving too much for retirement, you really have to know how much you want for retirement. So I think the

biggest homework for you right now is to sit down with your husband and have a really honest conversation like, hey, babe, you know, do you want to have a target lawn chair in the back of a cottage? Or do you want to roll in a yacht? I mean, these are really important questions to determine how much money you're going to need for retirement. Do you have a sense of the lifestyle you want? Because oftentimes I like to figure that out first so we can reverse engineer. So maybe you're right on track for it, or maybe you're not, but depending on what the

goal is. We're not yachts. We would be comfortable or middle of the road. The way... Option one and two you had, not three, that disinterests us. That's why it's really important to break down what it is you want, then reverse engineer it to figure out how to get the money to live that life. Because arbitrarily, if you're like, hey, I want a million dollars for retirement, then I'm going to say, what do you want to do with that million dollars? Do you want to just live off your interest? In which case,

then we'll use the 4% rule. If you want to use the lump sum and not leave your kids anything, then that's a different conversation. If you say that your burn for a year, you said it was, you know what, five-ish thousand dollars. If you need $60,000 a year, then where are we going to get that? Are we going to get that from living off interest payments? Are we going to get that from, you know, multiplying 60 times 20 or 25. This is not super fun stuff to talk about, but actually you can, you know, look at different retirement calculators and try to look at your life expectancy and see how many years you would need. But typically like a good rule, you know, 20, 25 years, generally speaking, women do live longer than men, which is is awesome but also that means we need more money what is fun for ashley that's a very hard question right now why huh why having two toddlers it would be a day to myself so can we prioritize that Can we try to think of what that looks like and how much that

costs? Is that childcare for the entire day? Yeah. And that's changing too. We just made those changes for the next, for the fall and winter. So that's also projected in the essential budget. So it is really important to, you've heard me say this before, put your oxygen mask on first, even before helping your kids. And I know as a parent, that's really hard to think about because, you know, kids, who knows if your kids are going to go to do, if they want to go to clown school, whatever. I don't know. So that's going to give them a lot of flexibility. But you want to make sure that you have the most flexibility because by the time they go to college or do whatever they want to do, they can have grants and scholarships and federal aid, student loans, all the things that you had, right? But there's no federal aid or grants or scholarships for your guys' retirement. There's no other option to pay besides you. And that's not going to be helpful to your kids if you are then dependent on them in retirement, which it doesn't sound like that's going to be you. But some parents, you know, really over index trying to save for their kids

and they deprioritize themselves. And then by the time they hit retirement, they're like, oh, shit, we have no money. And then, hey, kids, like, we live with you or can you take care of us or something? And then that just negates the whole idea of trying to, you know, give your kids independence and freedom that you started out with by saving for them. But it doesn't sound like you're in that position. For today's tip, you can take straight to the bank. You have to take care of your future self and your present self. I know a lot of people who have a financial mindset that they have to put their present

desires on pause now or they won't be able to provide for their future needs later. But you should make sure that in your spending plan, you have room for your present day small indulgences. Financial freedom is a long road. So you'll need to allow yourself some fun, pack some snacks along the way, or you'll never get to your final destination. 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.