Money Rehab with Nicole Lapin - The Easy Trick for a Rich Retirement: A Formula For Living Off Interest and Leaving Your Principal Untouched

Episode Date: February 28, 2024

Your retirement plan should not involve draining your retirement account. Instead, plan your dreamy retirement around living off of the interest from your awesome investments. Nicole explains how to make this happen while living your best life in retirement. Are you thinking: wait, how am I supposed to grow my retirement to $1.5 million?! Nicole breaks down how to get there in this episode: https://link.chtbl.com/hRuKpMsM $ Investors: Robinhood has the only IRA that gives you a 3% boost on every dollar you contribute when you subscribe to Robinhood Gold. Learn more at Robinhood.com/boost  $ Want the kiddos in your life to become money masters? Check out Greenlight, the best money app and debit card for families (and get one month free!): http://greenlight.com/moneyrehab $ Is mental health a resolution for 2024? Get 10% off your first month of therapy with BetterHelp at: http://betterhelp.com/moneyrehab  $ The secret to health and wealth is in your gut. Literally. Get 20% off a 90 day bottle of Just Thrive Probiotic and Just Calm. Try it at: justthrivehealth.com and use promo code: MONEYREHAB. $ Want one-on-one money coaching from Nicole? Book a meeting with her here: intro.co/moneynewsnetwork 

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. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. All right, the way you've been thinking about retirement is wrong. Sorry, not sorry. It's just wrong. Here's the way most people picture it. They think their retirement account is basically

a piggy bank that they slowly empty out until they have nothing and then they die. First of all, that is so dark. But the good news is I'll teach you a much better way to think about it that is much lighter on the bummer factor as well. But first, to really understand the flawed conventional thinking here, let's put some numbers behind it. People start by thinking how many years they want to be in retirement. So let's call it 25. And then they start thinking about how much they want to spend per year in retirement. Let's call it 60K a year, because why not? So with that framework, you'd think to yourself, okay, I need 60K a year, 25 years in retirement, that's $1.5 million. And then starting the year I retire, I take 60K

from that fund every single year until I have my last 60k and then… Good night, folks. Right now, I really just want us to debunk the idea that the function of a retirement account is to be drained entirely. So if you do have that $1.5 million and the budget and the timing works out perfectly that you happen to run out of money the second you go to the big money rehab in the sky. Sure, that's fine, I guess. You didn't run out of money, which is good. But what about the next generation? Did you want to leave any money behind for them? And then the million dollar

question, literally, what happens if you outlive your savings? If you start thinking about your retirement accounts differently, the right way, then these problems will be solved for you. Because remember, our retirement funds are not stashed under our mattress. We're putting our funds in a retirement investment vehicle, like a 401k, an IRA, a Roth IRA, maybe all of the above. And because we have that money invested, we should be earning interest, assuming we made smart, money rehab approved investments along the way. So there is a world in which our retirement accounts are throwing off just the right amount of interest that our old, wrinkly, adorable retired selves are living off that interest without ever touching the principal. That way, you still have your retirement nest egg uncracked to

use in case of emergency, or just to have a good chunk of change to leave to your kids or your cats or whoever you want to leave money to. Living off the interest. That's how we should be thinking about retirement. That's what we should be aiming for. In order to set our future selves up for this retirement lifestyle, we're going to use the 4% rule. It's a retirement planning hack that is as close to a magic formula as we've got here. Here's how it works. As you know, a good place to start when it comes to allocating your investment portfolio is investing your age in bonds. So when you're 25, you'd invest 25% of your portfolio into bonds and the remaining 75% into stocks. But when you're 75, that flips. You put 75% of your portfolio in bonds and the remaining 25% in stocks. This isn't the only way to set up a

portfolio, of course, but it's a good foundation to then tweak based on your risk tolerance and your goals. Generally, though, your portfolio will get more conservative as you get older. Reason being, when your investments are your only source of income, you don't want to take big risks with it. That's in contrast to when you're in your peak earning years. And at that time, you're going to be mostly invested in stocks. That's where you can hope to earn between 8% to 10% year over year. But when you're squarely in retirement,

you can hope for about 4% returns on your more conservative retirement portfolio. So if we go back to our earlier numbers trail, we said we wanted to have 60K in retirement. So backing into that budget using our trusty 4% rule, you would indeed need a pot of 1.5 million. And for my numberphobics friends, what I did here is take $60,000, your annual budget, divided it by 0.04. That's the 4% withdrawal rate, which is $1.5 million. Here's how this plays out. Say you have $1.5 million by the time you retire. In your first year of retirement, you kick back, you spend that budgeted $60,000 on your

movie nights or your dance classes or whatever you're spending your money on. So if your retirement accounts were just in your checking account, what you'd expect to see at the end of the year is $1.5 million minus 60K or $1,440,000. But because your retirement money is invested, even as you're withdrawing the money, the principal that's in the retirement account is still growing. And so assuming you'd get that 4% growth over that year, by the end of the year, you won't have $1,440,000. You'll be back to nearly $1.5 million in your account.

Now, if this was a perfect system, you'd have $1.5 million every single year for forever. But life is not perfect some years your portfolio will grow less than four percent some years it will grow more some years it might be down overall and remember uncle sam will want to take a piece of your money that's in a traditional ira or a 401k since those withdrawals are taxable and you you're going to have to adjust for inflation too. So your 60k today won't have the same buying power in 10 or 20 or 30 years. You're going to need to give yourself a little raise every single year to keep up with the cost of living. This rule is more of a guideline than an ironclad retirement law. Life and finances are more complicated than a one-size-fits-all

approach. Depending on your lifestyle and your health, you're probably going to need to tweak these numbers. And some years you're going to spend more. Other years you're going to spend less. And hey, if you've got a larger nest egg, you might not even need to withdraw 4% every year. The bottom line here is that that 4% rule is a solid starting point for mapping out your retirement. But most important of all, it really helps to start thinking about how you're going to live off just your interest and protect that principle. For today's tip, you can take straight to the bank. Now, today we only looked at retirement income that you're going to get through your own investing. We didn't even take into consideration Social Security, which is, by the way, going to get less and less exciting every generation.

But it still is a good exercise to estimate how much Social Security you're going to get in retirement and then incorporate that into your game plan for your future self. To help you with some of this guesswork, the Social Security Administration has a calculator that gives a pretty good estimate of how much Social Security money you can expect to get. You can find it at ssa.gov slash benefits slash calculators or for the easy peasy route, check the link in the episode description. 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 Bank Corp 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.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. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself,

which is the most important investment you can make.