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- [00:00]
A
Here's a big question. Is a million dollars enough?
- [00:10]
B
Brian, I am so excited to talk about this because everyone always aspires to be a millionaire. They want to hit that magical seven figure status. But the question that everyone has, and a lot of the trolls in the comments will say to us, a million dollars is not enough or a million, why would you even set your sights on a million dollars that just is not going to get the job done?
- [00:32]
A
Well, I get it. Inflation. And then even if you put withdrawal rates on there, if you do like a safe withdrawal rate, I mean depending upon how aggressive you want to be, if you use what's considered industry standard of around 4%. Yeah, maybe a million dollars. We need to visit that.
- [00:49]
B
Yeah, at a 4% withdrawal rate, $1 million portfolio could cash flow you $40,000 a year, increasing with inflation. And so the question becomes, well, if I can't live off of $40,000 a year, is that enough? And even more so, depending on my age, if $1 million isn't enough right now, will it even be close to being enough when I get to retirement? And we thought it'd be interesting to just show you an exercise of how inflation can erode the value of your dollars through time. I mean obviously for a 65 year old retiring today, a million dollars is worth a million dollars. But for a 55 year old, by the time that they get to retirement age at 65, a million dollars at that time would only be the equivalent of about $744,000, the purchasing power in today's dollars. And age 45 by the time that they get to 65, a million dollars then would only be worth a little bit more than $550,000. If you come all the way down to a 25 year old by the time a 25 year old gets all the way to retirement at age 65, 40 years in the future, a million dollars then would be the equivalent of about $306,000 today.
- [02:04]
A
Now I do want to hit the pause button. I love that we're giving the trolls, they're loving this, they're like preach, preach, preach. But let's hit pause. I still want people to know I have content out there that talks about the value and how hard it is to reach that first hundred thousand dollars. And that's an achievement upon itself because you start building your army of dollar bills, it starts building upon itself. Let me go and just tell you $1 million is still an incredible achievement. And there's a reason we even did a content a show on the milestones you should be trying to reach. And we still kept $1 million. Because you know what doesn't happen without your first million? You don't get to 3 million, you don't get 5 million without crossing that seven figures. So don't let some troll out there, even the way we've set this up so far tell you, hey, that's just a million dollars isn't a lot of money. No, it's still a ton of money. We're just going to tell you. Let's answer the questions. We have some key questions that I think we should challenge. What is a million dollars? How can it help you? Let's go into detail on what we want to cover today.
- [03:08]
B
Yeah, and I think mutants intuitively get this, you kind of understand this, but a lot of you still have the goal of, hey, I want to hit million dollar status by age 55 or by 45 or by even maybe early on at 35. So like you said, Brian, we're going to answer some questions. One, if you have a million dollars now today, are you at the stage where you could take your foot off the gas? How about this? If not a million dollars, if that's not enough, how much do I need in order to be able to retire comfortably when I get to retirement age? Or if you don't have enough now, what steps do you need to be taking? Or how much should you be saving in order to be able to get there? And so we want to be able to quantify and specify that for you so that wherever you are in your financial journey, you'll understand your path forward.
- [03:53]
A
So for every decade, 20s, 30s, 40s, even 50s, we're going to answer these three questions. I got to tell you, when we were doing our content meeting, I was just like, I can't wait to do this show. Because this is going to answer all of you financial mutants. I want you to strap in, we're going to load you up and we're going to look at this in angles that I haven't seen anybody else cover. So I'm kind of excited to hit these.
- [04:17]
B
So let's jump right into your 20s. I mean, the 20s isn't exciting decade because you are young and you're ambitious and you have your entire life ahead of you. And so what if you happen to be a 25 year old who all of a sudden had $1 million?
- [04:37]
A
First of all, even though we live in this social media world where they have everybody believing that your neighbors make a million dollars a year, if they don't make a million, they make a half a million dollars a year. It's just not reality. I want you guys, not many. I got to think it is a rounding error of data of how many 25 year olds have a million dollars. But we love numbers, we love data. So we said let's go with it. Let's actually daydream. What is it like for a 25 year old to have a million dollars at age 25? What does that mean?
- [05:10]
B
So without doing anything else, if you just had a million dollars to date, age 25 and you could earn an annualized 9.5% rate of return between now and the time you get to retirement, by the time you get to age 65, that million dollars could have grown into $44 million. But I know what you trolls are out there saying, well, 44 million then. What about inflation? We got to factor that. Well, even factoring in inflation, do you recognize that at that stage of life, $44 million then would feel like $13.5 million today.
- [05:46]
A
That's still a lot of money.
- [05:47]
B
I think you could do okay on that, right? If we were again to apply just a safe withdrawal rate to that, that means at age 65, this portfolio could provide for you about $540,000 in annual cash flow in today's dollars. So if you are a 25 year old and you have a million dollars banked right now, yeah, you know what, you're on easy straight now.
- [06:12]
A
This is a fun exercise. It was a fun thought exercise. But like we said, that's a rounding error. There's just not a lot of 25 year olds. If you're out there, you're welcome to reach out to us aboundworld.com but let's actually bring this back now. If we've told people, well, 25, if you had a million dollars, you couldn't quit working though, even though as powerful as that. Because you assumed on this, there's a key assumption. 25 year old has a million dollars, doesn't need the money until they turn 65 and we just let it grow. But the reality is somebody might come to it and say I'm 25, I want to quit working. That doesn't really work. What does somebody need to be doing if they actually want to be successful?
- [06:50]
B
So let's think through this in sort of a case study format. Let's say that you're 25 years old. And what we did is we said that the median income for our financial mutants, we actually pulled this from our Financial Mutant survey. Median Income for folks in their 20s was somewhere between 50 and $100,000 of annual income. So we just went right in the middle and said let's assume that at 25, your income is $87,500. And let's assume that over your working career you have a 3% pay raise each year on average. You are going to be an aggressive investor because you're starting so early. So let's assume that you can make 9.5% on your investments. And then when you get to retirement at age 65, we're just going to use a 4% safe withdrawal rate to determine how much we can count on that portfolio. Providing us and our goal for financial independence is going to say we want to be able to replace 80% of our pre retirement income. Now before they even say when you get to retirement, we recognize that it's not income you're trying to replace, it is expenses. We understand that that's the way that you plan. However, for someone who's 25, they don't know what their expenses are going to be. So the best thing that we can use, the best metric we're going to use for this exercise is just to replace 80% of your pre retirement income. So let's see how the numbers play out again. At age 25, you start with an income of $87,500. Well, just because of inflationary pressures and because you're getting pay raises at the rate of inflation each year, by the time you get to age 65, your terminal working income is about $285,000 a year. Pretty respectable.
- [08:28]
A
That is respectable.
- [08:29]
B
So what that means is that if you are going to aim for a portfolio that's going have an 80% replacement ratio of that income, you would need of a portfolio of about $5.7 million by the time that you get to age 65. So for a 25 year old, that would be the number that you're shooting towards.
- [08:49]
A
Okay, that doesn't that number by the way, because if we think about this from an inflation that doesn't even seem that crazy to me, not at all. Because if I had to say what a million dollars When I was in the mid-90s, when I looked at a million dollars, I would say right now probably somewhere between two and a half to $3 million. Is that because of what's happened in INFL the 30 plus years that I've been out? So this makes sense that probably in the Future for a 25 year old, 5.7 million. But what would they need to have today. Because look, for a 25 year old, you've got 40 years for your money to grow. And I know the power of compounding growth is just exponential. So I bet this number is more digestible than people probably realize.
- [09:30]
B
Before we even go there, I want to normalize it because 5.7 sounds like a lot of money and it is, but this is 40 years in the future. So just to sort of level set, what this means is when you're drawing that 80% of your pre retirement income, it's going to be the equivalent purchasing power of $70,000 in today's dollar. So I just want to say we're not talking about like crazy, crazy out there assumptions. This is very realistic assumptions. A portfolio that would generate $70,000 in today's dollars. So the question you ask is, if I'm 25 and I want to get to 5.7 by the time I get to retirement, how much would I need saved today? $130,000.
- [10:07]
A
Okay. By the way, that still we had a Q and A show that we recorded earlier this morning. 27 year old couple had a little over $100,000. I was like, man, that's incredible. So even that's a lot of money. So I think that the reality is even most 25 year olds just being very self reflective and transparent, I didn't have $129,000 when I was 25. And I think that's going to probably be the majority of our audience. So what is their savings rate? Because I always tell people in the beginning, your savings rate is even more important than even what you get in rate of return or investments. So what's the savings rate that would help a 25 year old? Because they're a billionaire of time, they probably can get away with a lot for a little.
- [10:50]
B
They certainly can. If you start at zero and your goal is to be able to get to 5.7 by the time you get to 65, your savings rate throughout your entire working career would need to be about 9.6%. You notice we didn't say 25%, which is what we aspire to. That's what we want you saving because you're starting so early. So what this means is that in year one you'd be saving about $700 a month. And then every year as your income increased, you would keep your savings percentage static at 9.6%. So for my 25 year olds, this should get you excited. You should recognize that the future is yours. If you can just start saving and putting Something away today.
- [11:32]
A
Well, I love this number because 10% is very doable. A lot of times when you think about, especially if you have employer match with your retirement plans and other things in your income, you've got this knocked out, you're going to hit 10%. But I do want to caution you because a lot of you feel like you got to get out of jail free card. It's not 25% like we talk about for all the other decades. Well, that's because I recognize in your 20s it's aspirational. You just don't have. You're not in your peak earning years yet. Life is expensive. Money's hard to come into. But do not sleep on this. As you start getting pay raises, I do want you to aspire and even make movement towards that 25%, because guess what? It'll do for you. Every assumption we've got here is that you're working until you're age 65. If you can actually get aggressive with that savings rate at a young age, guess what you get. You get the option, the flexibility to do things on your terms. And maybe that retirement date, Instead of being 65, maybe it's 55, maybe it's 50. You get to choose your own adventure by investing more earlier. Give yourself that type of flexibility and own your time that much sooner.
- [12:38]
B
I love it. All right, Brad, so 25 is a pretty hard charge to hit a million. But maybe you're someone who is very ambitious to say, you know what, I have a goal. I want to hit $1 million of liquid wealth by the time that I get to 35 now, that's still going to be very, very difficult to do, but not outside the realm of possibility. And so if I do that, what do the numbers look like? Well, if you have a million dollars invested at age 35 and you can earn 8 and a half percent annualized over the course of your working career, that million dollars, without adding another dollar to it, has the potential to grow to almost $12.7 million by the time that you get to retirement age. But we know that 12.7 then won't be worth the same as it is now. So if we account for inflation, that means that your portfolio would be the equivalent of about $5.2 million in today's dollars.
- [13:34]
A
Man, it is amazing as we go on through these decades, I keep saying that 3 to 5%, 3 to $5 million really is the key number that I think a lot of people are aspiring to. I'm noticing a trend here just like, yes, the $13 million is big, but that's future dollars. You can't really pay attention to that because numbers do crazy things. When you get to exponential and you got decades of growth. But if you bring it back would need in today's purchasing I think $5 million for a 35 year old to know they have 30 years to get there. I bet this is going to feel a little more doable than most people even realize.
- [14:13]
B
Yeah. What's wild is if we just applied a 4% withdrawal rate to that $5.2 million at age 65 that could provide you with $209,000 in today's dollar. So you're talking about a very, very healthy retirement lifestyle, a very, very healthy cash flow in retirement. That's if you can get to a million dollars by the age of 35.
- [14:40]
A
But most million you financial mutants by the way, a lot of you work with us and we are just so thankful to have you. But I still want to put it under the lens of myself. You guys know I had several goals. I wanted to make six figures by the time I was 30 and I wanted to be liquid seven figures by the time I was 40. I didn't reach the 40 number. I'm just being honest with you guys. I did not have now I had a net worth over seven figures. But if I was looking at just retirement assets, investment assets, I didn't reach that goal. So I still think this is very aspirational. Not many 35 year olds have a million dollars. So we need to show them what does it look like if you really are trying to figure out what do I need if it's not a million dollars.
- [15:23]
B
So again, let's look at a very similar case. Now let' that you're 35 years old. Let's say you're now at this part of your career making $100,000 a year. We're again gonna assume that your salary increase is on average about 3% per year. To keep up with inflation, we're gonna assume your rate of return is 8.5% between now and retirement. We're gonna use a 4% safe withdrawal rate when you get to age 65. And again our goal is gonna be an income replacement of 80% of your pre retirement income. Because we don't know what your expenses are gonna be. There's still so much life to happen. So we're gonna shoot for a high income replacement ratio. Well, what this means is that at 35 your income is $100,000. By the time that you get to age 65, your income will have grown to be about $243,000 a year. Again, our goal is going to be able to replace 80% of this number. So in order to do that, by the time that this 35 year old gets to age 65, they will need to have accumulated a portfolio worth about $4.85 million.
- [16:29]
A
It is amazing how it comes back. It really does. And what I like is like I said, we have 30 years for somebody who's 35 right now watching this and say, well, what would I need to be at right now because I don't have a million dollars. You guys showed that. A million dollars at 35, but that's still so aspirational. That's such a hard goal to reach. What would somebody who's actually really been trying hard been saving, been prioritizing, saving for the future. What would it take right now at 35 without another dollar to get there?
- [17:01]
B
If you at 35 have saved and invested $382,000 without saving another dollar, without putting any more into the pot, that $382,000, if it can grow at 8 1/2% annualized, has the potential to turn into $4.8 million by the time that you get to age 65. 380,000 Again, still difficult, but not impossible by the time that you get to age 35.
- [17:27]
A
But don't worry if you've just now watching this because I realize there's a lot of research and depend upon what year I go pull the data from. Because for a few years the data was around age 33. But I think most recently, and it's probably because of some of the inflation and cost of living, it has been age 36 for a lot of people that they actually discover investing somewhere in their mid-30s. So a lot of you are probably just now finding the money guy show and you're saying, hey, I want to turn on the ability for my army of dollar bills to work harder than I can with my brain, my back, my hands, how do I do this and where do I start? And we. So we have a case study now for you or give. We've done the research for you. Even if you're starting at zero right now and you're age 35, you can still reach these goals with what savings rate?
- [18:12]
B
If you can save 24.1% of your gross income and you can st to that savings percentage for your entire working career, even starting at zero at 35, you still have the ability to build to a portfolio worth $4.8 million by the time that you get to age 65.
- [18:31]
A
Now, I think this is where hopefully you guys are starting to see that there's something beyond just us trying to motivate you. We're actually pretty nerdy. We've put the math behind it. That 25% savings rate that we tell you guys, by the way, if you make under 200,000 as a married couple, 100,000 as a single individual, you get to count your employer matching that number. You can quickly see that's tied to numbers. It's tied to the math. That's why I also encourage you go to moneyguy.com resources. We have what will 25% do for you? And it is a very powerful tool because maybe you're not perfectly 35, maybe you're 32, maybe you're 41. Go check out that resource. So you can kind of figure out what savings rate and your age and the power of time can do for you.
- [19:15]
B
Again, for someone this person at 35, they have 100,000 doll income. This means that in the first year, they're saving about $2,000 a month. Then that number increases as their salary goes up through time. Again, that's basically maxing out your 401k. That would be the equivalent of someone doing that. If you can do that, Even starting at 35, you can set your future financial self up for success. That's why we tell you to shoot for 25%, because there's a really good chance. For folks that are in their 20s and their 30s, a lot of life has not happened for you yet. You may be in the messy middle or about to go into the messy middle. You don't know what your future health is going to look like, your lifestyle, your income, your career, your location. So if you can start early and if you can save consistently, there's a really good chance that when those unknown unknowns come your way and you've done the hard work early on, you will be able to push through that and still reach the financial goals you have as your life begins to take shape.
- [20:17]
A
But I also want to take the coach power here and tell you stay motivated in the fact that I know in the messy middle, there's a lot of chances. When you're short on time, you're short on money, you got the kids, you got your career obligations. All these things are pushing hard on you. It's easy to say, I need relief and I'll just take this period of time off and come back later. Don't do it. Make really hard decisions on how do you live your life, where do you live, what type of car, cars do you drive? Because you'll never, ever, ever get those 30s back. You can't get your 20s back. You'll never be able to get the 30s back. Don't sleep on this very important time because the wealth multiplier of what every dollar has the potential to become is still super strong in your 30s.
- [21:02]
B
All right, Brian, let's now talk about the 40s. A lot of folks, a lot of folks have said, you know what, by the time I get into my 40s, I want to be a liquid millionaire. I mean, this was even one of your goals that you laid out. And we know studies have shown that Most people cross seven figure status somewhere in their late 40s. So I think this is in reality a realistic option for folks in the 40s to get to a million dollars. And so the question becomes, is it enough?
- [21:30]
A
Yeah, I was pretty excited about getting to the 40s because it's kind of like when I, you know, everybody knows I love Millionaire Next Door, but when you see the Millionaire Next Door has their whole wealth calculation or what your net worth should be. And I've always said, you know, it's not really fair for a 20 something or 30 something to do that millionaire calculation because that's just not the reality of when people cross in. So when we've done this for the 20s, done this for the 30s, it was definitely kind of in that aspirational of shooting for the moon. More of this is what you'd see on Instagram, more than what you'd see on the Money Guy show. But now that we're in the 40s, I think this is the decade where you kind of count to see Millionaire seven figure status cross. So I don't think this number is going to be as crazy as like the 20 something. What was it close to $40 million in the 40s? You'll see because you're older, it's a lot different.
- [22:21]
B
If you've been able to accumulate a million dollars by the time that you get to 45 and you can earn 7.5% on your investments for the rest of your career, that million dollars, without adding another dollar to it, has the ability to turn into almost four and a half million dollars. Just so you know, $4.5 million 20 years in the future will feel the equivalent of $2.5 million today. And $2.5 million today is still a very healthy retirement portfolio. If we applied a 4% withdrawal rate to that sum of money. This means that you could count on cash flow from your portfolio of just under $100,000 a year in today's dollars.
- [23:02]
A
You remember how earlier, I can't remember if it was in the 20s or 30s. I was talking about that when graduated College in the mid-90s and I read Millionaire Next Door. The whole goal of a million dollars was just so powerful to me, but now I feel like it's changed a little bit and it's somewhere between two and a half to probably three and a half million dollars. And I think it's very telling that right now if you've reached this at age 45 and did absolutely nothing else, you're going to have the equivalent of that two and a half million dollars or $100,000 a year for the rest of your life. That's pretty successful.
- [23:38]
B
But let's say that you don't want to just stop now. You say, okay, I want not just a general plan that tells me a general idea, I want something a little more specialized. Let's look at a case study. Let's assume that you are 45 years old and your income is $125,000 a year. And for the remainder of your career you get 3% salary increases. You can invest your dollars, they can earn 7.5%. And then when you get to retirement at 65, you're going to count on a 4% withdrawal rate. And again, your goal is to replace 80% of your pre retirement income for the 45 year old while they're making $125,000 today, when they get to retirement, their immediate pre retirement income has grown to about $225,000. Well, if the goal is to replace 80% of that amount, the amount that this 45 year old will need to build towards is about four and a half million dollars. It lines up very, very nicely.
- [24:36]
A
But how much would you actually have to bring it back to if we were going to make this work? And it does tie in. It is amazing. This is the first decade where we're going to see an intersection, isn't it? And that's what's so wild about it.
- [24:49]
B
When you bring it back. How much would you need to have saved today to be able to accomplish that? Right at a million dollars, $1,012,000 are financial mutants that behave like financial mutants. This is the reality that they actually get to see inside their financial life.
- [25:07]
A
And I'll go ahead, throw one more cold water point and then I want to put some rays of sunshine on. This is that if you had to start from zero at age 45 and still want to reach this same four and a half million dollars by 65, that's only 20 years. What percentage of savings rate would be required?
- [25:24]
B
You'd actually have to save almost 57% of your gross income. And frankly, that becomes daunting and difficult.
- [25:31]
A
But let me tell you, the rays of sunshine here, realize we're saying for somebody who has a million dollars and does absolutely nothing else until age 65, is going to have this sweet path forward. A lot of you guys might be finding this content and you're 150,000, 250,000 and you're in your 40s. It's not over for you. All you have to do is you need to say, I've heard these guys. It sounds like there's another scenario that I can choose and still be successful is what If I'm saving 25, 30, maybe even 35%. I don't have to do 56%. But these guys didn't give me credit that I might have a quarter of a million dollars already working for me. You can still do this. It just means more of the responsibility falls on your shoulder because you have less time. It doesn't mean that the game is over. It just means you got to get serious and don't waste another day, another ounce of your time.
- [26:24]
B
I love it. All right, Brian, now let's talk about those in the 50s. The question is, is a million dollars enough if I am in my 50s? So if I'm a 55 year old and I have a million dollars without saving any more, that 1 million over the next decade, the last decade of my career can nearly double. It turns into $1.9 million. And if we count for inflation, that's actually equivalent today of about a million and a half, $1.4 million. If I apply a 4% withdrawal rate to that number, that means I can count on my portfolio to generate for me about $57,000 a year in annual cash flow. Not too shabby.
- [27:07]
A
Not too shabby. Especially because we haven't talked about it a lot with the others 20s, 30s, and 40s. I wouldn't want to be talking about Social Security that much because it's just so much weird stuff going on with funding and making sure there's enough resources there. That might be changes coming up with how Social Security is handled. But If I'm a 55 year old and you know you're retiring in 10 years, you're probably getting into that safety zone where the Politicians aren't going to necessarily change all the rules. So you take that 57,000, plus the social safety net of Social Security. This still is not the worst thing I've ever seen. This is actually a pretty good retirement.
- [27:41]
B
But our financial mutants are mutants. So let's assume that you're 55 years old and you make $150,000 a year. @ this stage of your career, your salary is going to increase about 3% per year over the next decade. You're going to earn about 6.5% on your money because you're now starting to reassess your risk tolerance and timeline. You're going to have a 4% safe withdrawal rate, and you still are going to aim for an 80% income replacement ratio while you're making $150,000 today. By the time you get to retirement at age 65, your income will have grown to just over $200,000. And if I want to replace 80% of that number, I will need to have accumulated about $4 million by the time I get to age 65. So the question becomes, if I'm going to do that, where do I need to be at 55 if I want to be on track to get to 4 million by 65? And the answer is about $2.1 million. But I don't feel like this does it justice, Brian, because what we know is just because we get to 55 and just because we get to multimillionaire status, it doesn't mean that we stop saving. This doesn't even account for someone who hits these numbers in their 50s and keeps adding to the pot and keeps saving and keeps putting dollars in.
- [28:59]
A
I feel like for the two scenarios we just laid out for the 55 year old who's watching this, if you have a million dollars at 55, that's good. I mean, it's good now to be great. And that's kind of what this slide is showing. It'd be nice if you had 2.1, because now you can really let it roll. All this shows is, man, is it incredibly powerful if you use and leverage time. And a lot of you guys are watching this. We threw so many numbers at you. You're probably like, how do I do this for myself? Because I love what y'all did, but y'all didn't run my scenario because I'm not 55, I'm not 35. I'm some number in between there. That's okay. We got you covered. If you go check us out@learn.moneyguy, dot com. We actually have a know your number course and why we designed this course was I think there's a lot of people that don't need a financial advisor, but they're trying to figure out are they ahead of the curve, are they behind the curve or right where they need to be? And on top of that, what is changed by your behavior? If you save a few hundred dollars more a month or if you have this amount of lump sum that comes in, how does that impact things? We have built it all in. Or how about inflation? We just came through a post inflationary period. What if our inflation percentage of 3% isn't what it should be? Maybe you want to play around and you want to do 4%. Or what about if you didn't like how we lowered the rates of returns over time based upon your age and your risk profile? You can play around with the know your number course and actually pull every one of those levers, play with the different numbers, come up with different scenarios and really kind of string together what does your financial situation look like.
- [30:33]
B
At the end of the day, personal finance is incredibly personal. And while a million dollars is a wonderful goal and it's an amazing milestone to hit, it may not be your milestone or it may not be the end of your journey. But remember, you can't get 2 million, 3 million, 4 million, 5 million, 10 million, unless you get to 1 million first.
- [30:56]
A
Guys, we give you tons of free stuff. Go to moneyguy.com resources the Big Takeaway I want everybod to hear out of today is your money should work harder than you do. So don't let another second of time pass you by. Get that money working ASAP. I'm your host, Brian Preston. Mr. Bo Hanson. Money Guy team out.
- [31:18]
B
The Money Guy show is hosted by Brian Preston.
- [31:20]
A
Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.