Retire with dignity. Don't want to rely on spam sandwiches and off-brand prune juice in your old age? Retirement savings are pretty much a must. The government, for all their stupidity, actually realizes this fact, and allows for savings beyond the very flimsy Social Security system, in the form of a 401k retirement system.
The Roth 401k was created back in 1978. The 401k is a "defined contribution plan," meaning that the money put in by the employer and worker are defined. It is not a "defined benefit plan," where your boss would be on the hook for investment return minimums. That is, if you worked for the government and had their version of a 401k, you would qualify for a minimum stock market return, whether the market did well or poorly. The taxpayers would make up the difference to whatever minimum your union had negotiated for you. Lucky you.
A lot of people choose a 401k because most employers will match contributions. For every buck you put in, your employer may give you another buck—until you retire. It's like a twofer on your investing dollar before you even start investing the dough, and it's probably the closest you're going to get to free money from your boss. The key idea behind a 401k plan, in whatever flavor you invest, is that the investment, in whatever amount it ends up being when you retire and begin withdrawing cash from it at the mandatory 70-1/2 distribution age, is that the money withdrawn at that point is taxable as ordinary income. Why all the bother to defer your money if you're going to be taxed on it anyway? Because most people pay a much higher marginal tax rate in the glory days of their 58-hour-a-week work careers, and pay a much lower percentage rate when they need less money in their old age, when instead of worrying about paying their kids' college tuition, their dreams revolve mostly around new dentures.
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Finance: What Do You Need to Retire?209 Views
Finance a la shmoop.. what do you need to retire? well people when I retire I always think [Old man discussing retirement]
good year or Firestone... that's not the right video oh okay then.... all right
what do you need to retire as in have enough money to stop working forever [man fishing]
well like all great questions this one begs the greatest dancer of all time it
depends and no not the diaper company your friends money your enema enemy time... [Hammer smashes an alarm clock]
it used to be that in the 1970s smoking was really common and it really helped
out the insurance companies and Social Security because most people only lived
into their late sixties maybe early 70s and then they all died so a typical
worker might work until he was 65 retire last three or four years of coughing and [Man smoking]
then... well if you lived on 25 grand a year in the 70s and you're
retired at age 65 and you only lived four years after having saved a hundred grand
in retirement money and you had nobody else in your life didn't care about
leaving anyone any money then man that was the best yeah but then things got
more complicated stores and restaurants began to ban cigarettes, people started [No smoking signs appear]
learning that eating sticks of fried butter and rashers of bacon right out of
the fridge wasn't great for you despite what the bacon industry's research told
you and all of a sudden this happened so yeah today a huge number of people live
well into their 80s and 90s and unfortunately they're all running out of [Life expectancy chart rising in USA]
money by the millions anyway well you know that is before they do the frog thing...
so let's run through an example and see how that fine story fits your life or [Man sprinting through examples]
projected life anyway so Joe Blow retires at 65 with 400 grand in savings
his wife is dead but he has two kids and would like to leave him something Joe's
been living well he has a fully paid for home a paid for car and he spends about [Joe's home and car appear]
30 grand a year for food clothing lost golf balls and a subscription to
magazines we can't talk about here on this video...
he's a big cricket enthusiast if his 400 grand was entirely in $20 bills in
his mattress and he kept spending 30k a year well
then he'd have 400 divided by 30 or 13 years and change before he went totally bust hmm
well that's a problem because he's 65 and his doctors think he'll live until [Joe with his doctor]
85 so what does he do those last seven years hmm well his kids really don't
want him sleeping on their guest couch and he doesn't want to do that either [Joe sleeping on a couch]
hates leather he also owns his home and car free and clear well he could
certainly sell all or part of his home and get 8 grand or so in cash for his
car it saves them car insurance payments and gas maybe let him live and unless
that 30 grand a year and you know that 8 grand goes a long way on uber but before [Joe travelling in an Uber car]
we get into the home selling part let's get to the basics well there are some
key variables here first he doesn't need to spend 30 grand a year he could
certainly cut back on movie nights and dinners at the palm and accessories for
his flip phone he could stretch the 400 grand a consisting of $20 bill stuffed [Joe stretching a 20 dollar bill]
into his mattress so that it lasts much longer than the projected 13 years here
if he wanted to come out exactly even and he knew that on his 85th birthday he
would you know go the way the Frog or if he's planning on doing this when he hits [Joe driving a ferrari]
85 well then he has to make 400 grand stretch only 20 years and it just means
he takes his annual spending down from 30 grand a year to 20 grand a year not
bad at all and he won't miss catching fights on pay-per-view all that much but
most people don't have such certainty on the dates in their lives and most people
don't have a mattress that can hold 400 grand in 20s instead they have as part [Woman balancing on a mattress with dollar bills underneath]
of their savings program a morass of stocks, bonds, cash and a home well to buy
their home they took out a mortgage usually 30 years earlier and slowly paid
off the home debt over that time so that after 30 years of mortgage paying, they own
their home free and clear with no debt most of you have probably heard of a
mortgage but there's also this thing called a reverse mortgage
Well turns out Joe's house was worth 200 grand and he could simply [Joe's house worth shows and banker appears]
borrow against it on his way you know out so instead of four hundred grand in
savings he really has like six hundred grand
available to him well if he spent 30 grand a year his old spending budget for
20 years well then he comes out just even and it's likely that over those
twenty years his house would appreciate in value like say it ended up being [House value increasing]
worth three hundred grand at the end and those kids could still sell it pay off
the 200 grand of reverse mortgage he borrowed on it and still they'd have a
hundred grand buy a Prius or renew their dad magazine subscription that we can't
talk about here but what if Joe wanted to live the high life in his retirement [Joe looking at elephants]
isn't there something better he could have done with his four hundred grand...
this is a finance and stock investing course so we're hinting here...
sure instead of 20s in the mattress he could have taken some risk and put it [Person grabs 20 dollar bills and transform into stocks and bonds]
into stocks and bonds well just for simplicity sake let's say he made five
percent per year net of taxes and fees and his investing well the math is
pretty compelling he needs 30 grand a year to continue the
high-quality full-contact lifestyle he's been leading and we just went through
how easy it was to get there with a combination of slowly borrowing against
the equity value in his house and pilfering the 20s in his mattress but if
instead of the Serta strategy he had invested the money in a relatively safe
5% of your strategy well five percent of four hundred grand is 20 grand a year
for the 20 years of his retirement he could still spend the 30 grand a year 20
grand from investment returns on his 400 KMS tag and 10k a year from borrowing
against his home and he'd still have the entire 400 grand left over to leave to
his kids a bonus round but let's say he wanted to go totally nuts and live life [Joe thinking about ordering in McDonalds]
on 40 grand a year and leave his kids er less
well than each year he could take 10 grand out of his 400k of savings and just spend it the problem
then is that each year the capital base from which he derives his 5% a year
shrinks so after year 1 when he's 66 the 400k of
now 390k and instead of 20k in returns based on his 5% a year return figure he
gets 5% on his 390 or $19,500 but he likes the high life and wants to keep
borrowing 10 grand a year from his nut or nest egg there whatever you call it so
maybe in year 1 he spends the total from his reverse mortgage dough, all 20
grands whatever and just spent a bit last year after year for 20 years like [Joe cost of living decreasing]
nineteen five and nineteen thousand and slowly going down until he kicked the
bucket and leaves his kids 200 grand instead of 400 grand all right you get [Referee whistling and final value appears]
the gist here there are tons of ways Jo's twilight years could have gone
spent more spent less ended up with a ton of money for the kids ended up
destitute how much do you plan to live it off in your later years and if you've
got family are you going to leave them anything or do they just get to inherit
your you know questionable magazine collection [Joe's kids holding magazines]
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