MOM-enomics with Booth Parker, CPA

Saving for retirement can take large amounts of planning and discipline, but with the right guidance, wisdom and habits it can be straightforward. Booth teaches you the "4% rule" for retirement, and illuminates the variety of factors you need to consider when planning for your retirement years.

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  • (00:00) - The Four Percent Rule
  • (00:16) - Introduction: The Four Percent Rule
  • (01:24) - Retirement Goals, Adjusted For Inflation
  • (04:41) - Long-Term Planning For Retirement
  • (06:19) - Strategies to Save While Young
  • (07:18) - Outro

This podcast is produced by Rooster High Productions.

Creators & Guests

Host
Booth Parker, CPA
Financial guru by day; domestic diva by night and sharing it all in between.

What is MOM-enomics with Booth Parker, CPA?

Real moms. Real mom financial issues. Real moms in business. Real stories. I am Booth Parker. A CPA, wife, and mom that loves all things home and family. In this podcast, I talk all things money for moms, families, and small business. From tips to ideas to info you just need to know, I break it down so moms can apply it to their own families and businesses!

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Introduction: The Four Percent Rule
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Today we are talking about the 4% rule, and this is a rule that applies to retirement savings. So the 4% rule in essence says that if you take out to live off of say, 4% of your retirement savings a year and leave them invested, that you won't run out of money. So maybe you would like to retire early and make sure that you have enough money so that you don't run out. Or maybe you want to have a comfortable retirement, but still leave a good inheritance to your children. Or maybe you have the desire to leave money to a charity, but regardless, you're not wanting to spend every [00:01:00] last dollar that's in your retirement savings, so you live off of the 4% rule so that that money doesn't run out. Before you can make a plan to live off of the 4% rule, you need to define what your retirement lifestyle is going to be and how much that costs, not necessarily today, but at the time you retire.

Retirement Goals, Adjusted For Inflation
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So that part can obviously be a little easier said than done, especially when you look at the difference, uh, that inflation has made in the cost of living in just the last few years. So you generally are gonna look at it over a longer timeline. For example, say you were 30 years old in 1993 and you had decided that you were gonna retire in 30 years, 2023 today, and that you decided that a hundred thousand dollars lifestyle was the lifestyle that would support the travel and all the things you wanted. So that a hundred thousand dollars [00:02:00] lifestyle in 1993 would be about a $210,000 lifestyle in 2023. So you have to plan for that 4% number to be that cost of living number at the retirement age.

So in this particular example, to have the $210,000 to pull out and follow the 4% rule, you would need at least 5.25 million in your retirement savings.

So let's look at another example. Let's say you are 55 and you have decided to retire early. You're debt free, you're tired of the rat race, and you have $4 million in your retirement savings.

So at the 4%, that would give you $160,000 a year. So that sounds pretty good, right? To live off of. But then you need to remember you're only 55 and you could easily live another 30 years.

So from a historical perspective, that[00:03:00] $160,000 you have at 55 would be worth about half that in a purchasing power perspective 30 years later. So you would be declining in your lifestyle. So you want to make sure you account for that when you're calculating your 4%.

So maybe you would want to live off of two or 3% in those early years. You would still be in the 80 to $120,000 range in this example. And let those retirement savings continue to grow so that as the cost of living increases, you still can utilize the 4% rule as you get older and still not run out of money. Do keep in mind though, that if you decide to retire early, you could have withdrawal penalties depending on the type of retirement or savings account you are utilizing. So just keep that in mind because some of those penalties can be 10% and it can can really make a difference in the money you have in those retirement savings [00:04:00] and the amount you can take out. So on the flip side, say you are a young adult and you're going to want to look at the 4% rule for retirement.

That's kind of the plan you're going to have. The 4% rule can help guide you in how much you need to be saving to meet your retirement goals. So you do it kind of the same way you define what that lifestyle you you're going to want to have in a retirement. You look at it in today's dollars, you adjust it for inflation, and then you get your goal number that you're going to need to have to live off the 4% rule.

Long-Term Planning For Retirement
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So let's say you're currently 25 and you would like to retire at 60, and you, quantify the dollar amount for the lifestyle you are going to want, uh, in retirement, and you quantify it in today's dollars, and that comes out to be [00:05:00] $75,000.

Once you calculate that for inflation, that number's going to be more like $178,000 at your retirement age of 60.

So you would need about four and a half million dollars in your retirement savings to make that happen. So now you have your minimum goal number, that four and a half million dollars that you can make a plan a savings plan to achieve that number at your desired age 60 retirement number.

Now remember, if you're retiring at 60, there's a good chance, and hopefully you'll live another 20 to 25 years, so you may want to go ahead and increase that goal number. The four and a half was kind of a minimum to get that lifestyle you wanted. So pushing it to say, $6 million is gonna give you a cushion for lifestyle inflation and all of those kind of things down the road.

So knowing that number, [00:06:00] then you can start backing into how much you need to save per month. Putting that into your budget and tracking where you are on your financial goals. It is often hard for young people to have enough excess budget to be putting aside a large amount of money into savings every month.

Strategies to Save While Young
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But if you can start that when you are young, maybe live a little frugally, if you start that when you're young, it will grow. It has so much longer to grow that it will grow to a bigger number. So really try to think about if you're using this method to calculate savings goals when you're young. Really trying to hit those good numbers in your monthly budget and start saving early.

And the thing is, is once you've quantified this number and you see what that monthly number needs to be, it can help keep you. It can be a motivator, so to speak, to help keep you on track, to meet your budget and stick to it. And if for some reason you you're not seeing enough [00:07:00] room in your budget to save that much, maybe it's a motivator for a little side hustle or something like that while you're young, maybe you don't have children yet, and you have some flexibility in your time to go ahead, make some of that extra money and get it saved away for the long term.

Outro
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