There are financial formulas to live by, and others that can absolutely derail your retirement dreams! Discover which retirement formulas and rules of thumb may be your golden ticket, and which are your one-way ticket to trouble, on this episode of Your Money, Your Wealth® with Joe Anderson, CFP® and Big Al Clopine, CPA.
Formulas for Retirement
- Investing
- Retirement Spending
- Retirement Income
- Asset Allocation
- Taxes
Important Points:
- 00:00 – Intro
- 00:43 – Albert Einstein on Compound Interest
- 01:55 – Start Saving for Retirement Early
- 02:29 – Investing Rule of 72 (Rate of Return)
- 03:33 – How to Calculate Your Retirement Spending Shortfall
- 04:23 – How to Calculate Your Retirement Savings Goal
- 05:44 – Retirement Readiness Guide – free download
- 06:46 – True/False: Life expectancy has increased over 10 years since 1950
- 07:15 – How Long Will You Live in Retirement?
- 08:31 – 80% Rule for Retirement Spending
- 10:01 – The “Retirement Smile” of Spending – The Go-Go, Slow-Go, and No-Go Years
- 10:45 – 4% Rule for Retirement Spending
- 12:47 – Social Security Income
- 14:16 – Social Security Break-Even Point
- 14:50 – Retirement Readiness Guide – free download
- 15:50 – True/False: Your portfolio should have a 50-50 split of stocks and bonds
- 16:08 – Asset Allocation – 100 Minus Your Age
- 17:40 – Taxes in 2018-2025 vs. 2026 and Beyond
- 20:03 – Where Is Your Money Allocated in Tax-Free, Tax-Deferred, and Taxable Accounts?
- 23:02 – Retirement Readiness Guide – free download
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Transcript:
Joe: In retirement, there’s formulas that you live by and formulas that can absolutely blow up your retirement. Do you know which ones they are?
Joe: We’re going to break it down today. Welcome to the show, everyone. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. And of course, I’m with the big man. He’s sitting right over there. Big Al Clopine.
Al: Formulas, huh?
Joe: Formulas.
Al: Okay. I can’t wait.
Joe: You know, Albert Einstein created E equals MC squared, the theory of relativity. We’re not going to get that deep folks. We are not going to get that deep, but he did come up with the eighth wonder of the world. That’s today’s financial focus. Looking at Albert Einstein talking about compound interest, how money compounds on every dollar. So simple interest versus compound. If you look at compound interest on top of itself, right? You get a lot larger effect. This is one of the best formulas that you need to be thinking about in regards to your overall accumulation strategy in retirement. It also works as a double-edged sword. So when you start taking money out, you need to know the correct formulas from that perspective. To break things down, let’s bring in Big Al.
Al: I’m excited. Formulas today about retirement. So let’s talk about investing. We’ll talk about spending. How about income, creating income? Allocating your assets. And then of course taxes, we don’t want to forget taxes. So today Joe, I guess we’re going to touch on a lot of different things to sort of give high level formulas on what to think about. Some are rules of thumb, which we don’t necessarily endorse, but we’ll kind of go over all.
Investing
Joe: Yeah, I think there’s a lot of information on the internet when it comes to retirement planning. Some you want to follow and some you probably want to run away from. Here’s probably the best, start early. So if you look at a couple of different examples of saving $100 a month with a 5% rate of return, someone starts at age 25 versus age 35. It almost doubles here. And we’re only talking about $100 a month. So that’s a few thousand dollars of added savings could add almost another $100,000 at the end of the day. So starting early, the compounding effect of time is key.
Al: So wherever you’re at, start, or if you’ve already started, think about increasing your savings ’cause it’ll, it will make all the difference in the future.
Joe: Let’s talk about rate of return in looking at dollars. So this is a interesting rule, the rule of 72. If you’ve never heard of this, this is a great starting point as you’re putting together your overall retirement strategy. So the rule of 72 is whatever rate of return you divide it into 72 will equals the years that that dollar will double. For instance, let’s say you have a 7% rate of return, 7% into 72 is roughly 10. So if you have $100,000 growing at 7%, that $100,000 will become $200,000 in 10 years. So the rule of 72, the rate of return that you are anticipating or your expected rate of return into 72 is gonna tell you how long that money will double.
Al: Yeah. I, I like that formula, Joe, that, that really does give you a sense. If you, if it’s 6, it’s about 12 years. If you’re only getting 2% rate of return, it’s gonna take, what, about 36 years to double your money. So it’s just kind of a quick guideline on the investment rate of return and how long it’ll take to double. Let’s say you’re 47 years old and you want to work about 20 more years. You want to look at your fixed income at that point. Maybe you’ve got a Social Security statement. In this example it’s $55,000. Now you look at your spending. Right now it’s $80,000. You want to inflate that by about 3%. Just an example. That would get you up to $144,000. So now we’ve got something to work with. $144,000 is what you want to spend in retirement, roughly, you have about $55,000. Your shortfall is $89,000. So the shortfall means that’s what you have to produce from your savings, from your 401(k), from your IRAs and the like.
Joe: Yeah, this is the key number here. This is what most people need to get to, to understand what that number is. It’s not perfect by any stretch of the imagination, but it’s at least going to give you a target to go to.
Al: All right, so I need to produce $89,000 of income for my expenses in this example, right? Just take that shortfall, $89,000, and times it by 25. In this example, Joe, you end up with $2,200,000.
Joe: So here’s your bogey, $2,200,000. That’s the nest egg amount that you would want to have at age 67 to produce this $89,000 of income from the portfolio.
Al: So in this example, we’re gonna assume you have $400,000 to start with, right? You need to get to $2,200,000. Now you kind of, you need a little financial calculator. We usually use a 6% rate of return to be conservative. Plug it in and it will calculate how much you need to save annually. In this example, it’s about $25,000.
Joe: Phone a friend.
Al: Phone a friend, right?
Joe: That’s the advice you got. Find a friend that has a financial calculator.
Al: That’s it.
Joe: Hey, we talked about the rule of 72, 7% into 72 is 10 years to double your money. Start early, right? The earlier that you start, the more successful that you’re going to be. But it’s never too late to start and start thinking about things such as, what are you spending today? What would you like to spend in retirement? How much money do you have currently saved? What is that savings figure that you need to get to? Those are all the key components of a retirement strategy, and if you need more help from that, you know where to go. Go to YoourMoneyYourWealth.com. Click on our Retirement Readiness Guide. Are you ready for retirement? We could break things down for you, YourMoneyYourWealth.com. Click on our special offer. It’s our Retirement Readiness Guide. When we get back, we got more formulas to go to, more rules of thumb, if you will. Some are good, some are bad. Can’t wait to show you, show’s called Your Money, Your Wealth®.
Retirement Spending
Joe: Hey, welcome back to Your Money, Your Wealth®. Joe Anderson, Big Al talking about formulas for retirement, the good, the bad, and the ugly. Hey, we’re gonna break down spending. One of the hardest things that a lot of people do as they approach retirement is a) how much money are they spending? And before we get to that, let’s go to the true/false question.
Al: Life expectancy has increased by 10 years since 1950. True or false? Hmm, let’s see about that. Well, it seems like maybe we’re living longer. But maybe there’s more pollution, hard to know.
Joe: More pollution. You’re going green on me.
Al: I am.
Joe: So in 2050, so right now the life expectancy is 79 years old. In 2050, it’s going to be 83. So we’re jumping a couple of years.
Al: And I think more importantly is what it looks like if you’re at retirement age, if you are 65 today, right? So males live on average to 83 years of age and females at 65 live to 86 years of age So when you’re planning retirement, you might want to think about planning longer than these, than these ages. Because actually another way to think about this is a couple that’s 65 on average, one of them lives till age 92. So it’s a good idea to plan into your 90s.
Joe: And so there’s the good and the bad with that. The good is that we’re living a lot longer. The bad is that we’re living a lot longer, right? The money needs to last that much longer as we continue to have longer and healthier lives. So as you’re doing your overall financial planning, it’s like, all right, well, I mean, if we knew when we were going to die, the planning is really simple. What makes it challenging is that we don’t know when that day is going to come. And so you want to plan conservatively just to make sure that that money lasts. You know, there’s a couple rules of thumb here, too, that people think about is that I want to leave a legacy to the next generation, or I want to bounce that last check to the mortuary. So depending on what your overall goals are is going to depend on how you think about life expectancy and how you think about your overall strategy. So when we look at spending is kind of the key number here, Al. You know, this is stating another rule of thumb that people will spend less in retirement. You and I have been doing this for more than a couple of years. I would say more people spend more money than less.
Al: Yeah, the people that have it. So that’s I think, so when you watch financial shows or you read financial articles, a lot of them say you’re spending times 80%, that’s what you’re gonna spend in retirement. And maybe that works for is some people. Our experience is some people spend a lot more. Our experience is some people spend a lot less because they don’t have the income. So this is something where you have to give it a little bit of thought. I think first of all Joe, you got to figure out what you’re spending right now. What you like your retirement to be and then what’s possible?
Joe: Yeah I mean, there’s things absolutely that you’re not gonna probably spend money on. You’re gonna save money on FICA tax. You might save money on gas if you have a commute. You might save money on, you know, suits, if you have to wear suits or, or work clothes, you know. But that usually gets replaced with healthcare costs, travel, you know, different things that you’re doing to potentially your house upgrading certain things. So yeah, breaking down your spending is key because if you underestimate this number, it could really blow up the overall retirement. If you think you’re going to spend 80%, but you’re spending 120% of what your current living expenses are, the money’s gonna go that much quicker. So this is key of understanding what you’re spending.
Al: Another way to think about this is the retirement smile. I know you love this one, Joe. So what the concept here is Go-go, slow-go, no-go. Go-go years, you retire. You’re traveling, you’re, you’re playing golf, you’re doing whatever. You’re spending money, right? Which it’s fun. And then slow-go. You’re doing a little bit less than that. Maybe you’re not spending as much, but then you go to no-go years. You’re not really traveling, but your healthcare tends to be a lot higher. So think about your spending in which phase of life you’re in.
Joe: The go-go years, the slow-go years and the no-go years, you know? So you got the retirement smile. So you’re happy the whole time in retirement. Well, I don’t know. Am I gonna be happy if I got a no-go?
Al: I don’t think so.
Joe: I don’t think so. I’m gonna go-go all the way through. That’s what I’m gonna do. All right. Here’s a 4% rule. You have to be careful with this 4% rule. A lot of people throw this thing around. It’s a guideline. It should just tell you how much money that you should have roughly as a nest egg. It doesn’t necessarily have to do with your spending, right? You don’t want to take out any more than 4% out of your portfolio is really what this is stating. So if you have $1,000,000, the 4% rule is that you don’t want to pull out roughly more than $40,000 a year, right? Because the assumption is, is that you’re growing the portfolio at 6%, right? You could take $40,000 out, which is 4%. Then you get a little bit for inflation, and then that money should last you through retirement. But this is just a rule of thumb. This is not a financial strategy by any stretch.
Al: I think the way I think about this, yes, it’s a, it’s kind of a guideline, but the idea I guess is that the $40,000, the 4%, let’s say you got $1,000,000, you start at $40,000. That’s not a static number. ’cause your portfolio is going to change. And the idea behind the 4% rule is that you’re making more than you’re spending, it’s growing, so you’re pulling out more each year, adjusting for inflation.
Joe: Yeah. If you think about the opposite. It’s like man, I need $40,000 roughly to live off of in retirement. So how much should my nest egg be? Well if I want to spend $40,000, I need to grow the nest egg by $1,000,000. But you’re not gonna pull $40,000 out per year if the market goes down, you might have to pull out a lot less. If the market goes up, potentially you could spend a little bit more. So you probably want to make sure that you have a dynamic spending plan. This is more for, in my just humble opinion, the 4% rule should be used as kind of an accumulation guideline. A lot of you don’t have complex financial planning software or even a financial calculator to help you figure out what this number should be. This is really simple. Most people don’t know this number, so if you just do the simple calculation, at least you know roughly how much that you should have in that nest egg as you retire, depending on your spending needs.
Income
Al: Let’s talk a little bit about Social Security and just so you understand the concept. The way this works is the less you make, the higher percentage of your salary you’ll receive. Very low earners, they’ll get about 78% of their salary in Social Security. They don’t define what that is. If you’re making a little bit of money, Social Security will cover more of your income needs. If you’re making a lot of money, it’ll cover less of it.
Joe: Yeah, and then you want to take all right, well when do you want to claim your benefit. You could claim it as early as 62 or you can wait until age 70. The earlier you claim of course, you’re gonna receive a lower benefit just because you’re getting it that many years early. So in this case if your full retirement age is 67 and that’s if you were born in 1960 or later, is that if you take it at 62, you’re gonna receive a 30% haircut on the benefit, right? So if it’s $100 a month, it’s going to go to $70 a month. Or $1000 a month, it’s going to go to $700. But you’re going to claim that benefit at 62 versus age 67. So you have these many years that you’re claiming the overall benefit, or you might want to hold off and wait until age 70. Then you’re going to receive 124% of the overall benefit. So, or anywhere in between depends on a lot of different scenarios. It’s going to depend on, do you need the money? Take it early. Do you think the system’s going to be broke? Take the money. If you have longer life expectancy, probably hold off. If you’re still working, hold off. So there’s a lot of strategies in regards to this. Some people look at this as a break even. If I claim it early, when do I break even given life expectancy?
Al: It depends upon the assumptions you use. Most of them, the break even is between about 78 and 82. But to me, it’s more important to realize Social Security, it’s just a longevity hedge. In other words, if you live a long life, you’re going to have extra income. That’s how we look at it instead of break even. I think that’s a better way to think about it.
Joe: Alright, we talked about spending. We talked about Social Security. How do you combine everything and make sure that you have the solid strategy in place? If you need more help, go to our website, YourMoneyYourWealth.com. Click on the special offer. It’s our Retirement Readiness Guide. YourMoneyYourWealth.com, special offer, Retirement Readiness Guide. We gotta take another break. We’ll be back in just a second.
Allocation
Joe: All right, welcome back to the program, Your Money, Your Wealth®, Joe Anderson, Big Al. We’re talking about formulas in retirement. Coming up next, we have the worst formula of all time. Do not use this formula that we’ll talk about, and then we’ll get into some of the best when it comes to taxes. Before we get through those, let’s see how you did on the true/false question.
Al: Your portfolio should have a 50/50 split of stocks and bonds. That is, it might be true for some, but as a blanket statement, absolutely false. It’s different for everybody depending upon what your needs are.
Joe: Yeah, I think this is where, I don’t know who came up with this. But it’s like the rule of 100 is what’s your age. All right. Your age minus 100 should tell you how much money that you have in stocks and bonds. Please don’t use this. I think this was created by like, salespeople that sell product and say it that self-fixed types of products and say, all right, well, here, if you’re 50, 100 minus 50, so half of your portfolio should be stocks. And then this happened, bonds or maybe a fixed instrument, like an annuity or some sort. This is 100% dedicated on what the portfolio needs to do. If you don’t need any income from the portfolio, you don’t need anything from it, you’re fine with your fixed income, you have a nice pension, you don’t spend a lot of money, Social Security’s covering everything, well, I don’t know. Maybe you want 100% stocks because you’re investing that for the next generation. Or you want to keep it in cash just because there’s no need to grow the portfolio and there’s no need to risk anything from the portfolio.
Al: So the point is it depends upon your goals, right? It’s not a formula. And just just as kind of a fun aside, for many years, this seemed like kind of out of whack. So someone got a great idea. Let’s take 120 minus your age. It’s still garbage. I mean, think about what your goals are to help figure this out.
Taxes
Joe: Hey, well, let’s get into taxes. A lot of talk around taxes because here in 2026, that’s just right around the corner, taxes revert back to where they were prior to Trump changing the tax law. So there’s some interesting opportunity for a lot of you as you start thinking about taxes and there’s strategies that you might want to make sure that you think about, or at least look at, or maybe even implement over the next couple of years. I think this window could be a really awesome opportunity for most.
Al: I think so too. And I think one of the things to think about with lower taxes for the next two years is maybe you want to take some of that money out of your IRA. And convert it to a Roth IRA. Yes, you pay tax today at potentially lower rates, but then that money grows tax-free. So think about this, in 2026, the rates go up, or at least that’s what’s scheduled. Now it’s possible they could extend the rates, but if the rates go back to what they are, a lot of you are in the 24% bracket, which will be 28%. A lot of you in that bracket will be subject to alternative minimum tax, which will actually be an effective rate of 35% for reasons that I won’t get into at the moment. Just realize right now, we’ve got an opportunity to make some shifting around in your retirement.
Joe: Right. So first step is you have to understand where you fall in your tax bracket. What tax bracket are you in? What marginal rate are you in right now? Are you in the 12% marginal rate? So if you’re married, taxable income is right around $80,000. If you’re single, it’s around $50,000, give or take a couple of bucks. 22%, 24%, most people are probably going to fall right here in this zone. If you’re in the 12%, well, your tax rates are going up to 15%. So this could be a lot of retirees. Maybe you have your Social Security, and then you have some cash that you’re living on. Maybe it’s a brokerage account, and then you’re pulling some distributions from the retirement account. Well, 12% is gonna be 15%. Alright? If you’re in that 22% tax bracket, you’re probably currently working, now your income is gonna jump to 25%. The 24% tax bracket is gonna jump to 28%. 32% will go to 33%. But here in this zone, this is where you need to focus. What bracket are you in now? Because the brackets will go up given tax on, unless they extend it or they do something different, which is very possible. But then I’m looking at where is my money? Where is it allocated from a tax perspective? So tax-free dollars would be your Roth IRA monies, municipal bonds, things like that. Your taxable dollars would be your brokerage account, real estate, right? Stocks, bonds mutual funds, things like that that are held outside of a retirement account. So they’re not in your Roth IRA. They’re not in your retirement account. They’re just in your brokerage account outside. And then the biggest asset class for a lot of us are tax-deferred assets. This is your IRAs, 401(k)s, 403(b), TSP, things like that. So when you pull dollars from this account, your tax-deferred accounts, it’s going to be taxed at ordinary income. So we just went through the rates. Here’s your ordinary income rates. Right. I pulled the dollars out. It’s going to be at 12%. A couple years as I pull those dollars out. It’s going to jump to 15%. So on and so forth. So if I know that the tax rates potentially are going to go up when I pull money from these accounts, does it make sense to pull more money from these accounts at lower rates? The answer could be yes. So I might want to utilize those brackets. If I’m in the 12% bracket, I might pull enough out of this account to get me to the top of the 12% tax bracket. If I’m in the 22%, 24%, so on and so forth. So I can pull those dollars out and I’d pay that tax on it. But then where do I want to put it? Should I put it in my brokerage account? You could do that. Or I can move it up here, into my Roth account. So I’m utilizing those lower brackets, getting the money out, paying the tax on it. But now those dollars are sitting here. It could be $10,000, $50,000, $100,000. There is no limit on a conversion. You’re just going to have to pay the tax on it. But those dollars now will grow 100% tax-free. This will give you so much more flexibility in retirement. Or if you want to pass assets to the next generation. Just giving you more control over your dollars from a tax perspective is key. And understanding where rates are today, where they potentially are going to go, will give you that leverage in arbitrage.
Al: Yeah, and I think when you, when you think about this opportunity right now, that 24% bracket goes a long way, almost $200,000 of income, single, almost $400,000 of income married. So there’s a real opportunity next couple years. If it makes sense for you to take some of that money outta your IRA, 401(k), move it to a Roth, pay the tax now, but then that future growth, income and principle will be tax-free. Not only for you, but if you pass away your spouse, if you both pass away your kids, grandkids, whoever ends up getting the money.
Joe: Alright, that’s it for us today. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Retirement Readiness Guide. We talked about formulas, the good, the bad, and the ugly. The rule of 72, the 4% rule, the rule of 100. All of that was just jam packed full of fun information. If you want more of it, go to YourMoneyYourWealth.com. Click on that special offer. For Big Al Clopine, I’m Joe Anderson, and we’ll see you next time folks.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
