33: How to Calculate Your Freedom Number

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0:35Mrs. Claus here. You think Santa has it tough delivering all over the world? Try cooking for hundreds of elves. Good thing BJ's offers low prices on all the menu must-haves, plus free same-day delivery on your first order of$100 or more. No more squeezing in trips to the store. The only squeezing here is the big guy into a suit after dinner. For terms, visit bjs.com slash holiday and get the same great prices online as in-club. Hey, everyone, and welcome back to the Rich Habits Podcast, a now number one business podcast on Spotify. Robert, can you believe this? We are so incredibly thankful for the 67 ,000 of you that come back every single week to listen to what we have to say about business, finance, and mindset.

1:21It happened Saturday, October 7th, and we are just over the moon. Like, oh, my gosh, we are so thankful. It was the most amazing thing to wake up to. You know, I spoke about this recently, how Austin and I are like two high school kids talking at 12, one o 'clock in the morning. And we literally did that Friday night. And then I wake up Saturday morning to my text going off at like 8.05. And it's Austin with the screenshots that we were number one. And I am just blown away. I was speechless all day. I had goosebumps and just overwhelmed with joy. We thank all of you for that because we couldn't do it without you.

1:58It is unbelievable. Speechless is really a good way to describe it, Robert. I mean, at the end of the day, we started this podcast late February, right? 33, 34 episodes ago, just trying to share our perspectives and help people build their own rich habits. And now we are number one on the business chart above Dave Ramsey, above Patrick Bet David, above Morning Brew, all these incredible personalities and people on the internet with great things to say. And to us, that just, it's humbling. It's incredible. So thank you all so very much for propelling us to the number one spot on Spotify's business charts.

2:34Now, before we jump into this week's episode, we have a very urgent reminder for all of our listeners. There is a scammer account on Instagram going around with a name that is Rich Habits Podcast, but the I in habit, I think is the letter L. So it kind of looks like an I, very deceitful. I think their name is Kelvin or something weird like that. and they're trying to scam our followers out of money using cryptocurrency. We will never, ever, ever DM any of you asking for money, asking to buy something that is not obviously our video course, right? It's like we would never do anything like that.

3:11So please, please, please do us a favor. Do not fall for any of their tricks. Do not direct message them back. We are working with Instagram right now to hopefully get the account taken down. But if you want to also help us out in that process by hitting the report button and reporting that account if they do follow you or do DM you, that would help tremendously. And we are really, really sorry that this is happening. So with that being said, Robert, what are we going to be talking about in today's episode? In today's episode of the Rich Habits podcast, we're going to be digging in on how to calculate your freedom number and figure out how much you really need to retire comfortably.

3:45We get so many DMs and emails every week from all of you asking, how much do I need in retirement? So by the end of this episode, you're going to know exactly what you need to do now to remove that fear of retirement later. This episode is so important, Robert. I just read an article from the Wall Street Journal that stated 79 % of American families have less than$100 ,000 in their retirement accounts upon turning 65. That is a shocking statistic. Now, here's the deal. I don't blame the people who don't have much in retirement. I get more upset about the lack of resources and education out there.

4:23So we hope that this episode can be the definitive answer to the question, how much money do I need to retire? Robert, kick us off. So step number one, you need a budget. I recently read only one in three households in America have a detailed budget. So if there was ever a podcast episode to take notes and take action, this is the one. You will never know how much money you need to retire if you don't know what you're spending on a monthly and annual basis is. Here's how I want you to be thinking about this budget. Start with the essential spend. This is your housing costs, food, transportation, insurances, everything you need to spend money on every single month to survive.

5:06Dedicate an entire column to this category of essentials. Next is discretionary. These are for your restaurants, your subscriptions, your streaming services, concerts, travel, and everything that you spend money on outside of your essential needs, put these in a separate column as well. Finally, and it's time to do some math, add up all of the expenses on the essential side and write that number down. Then add up all of the expenses on the discretionary side and write that number down. You now know how little money you can spend on a monthly basis to survive. The essentials. And you now also know how much money you need to spend on a monthly basis to thrive.

5:49The discretionary. It's really simple. All we're doing is helping you figure out how much money absolutely must leave my bank account every month to survive. Because once we have that number now as our base, we can build upon it when we want to thrive in retirement. So now that we understand how much we spend on a monthly basis to survive, as well as how much we'll need to spend on a monthly basis to thrive, it's time to convert these present day numbers to future state retirement numbers. For example, if you're 45 right now and you're able to thrive off of$5 ,000 per month, assuming a 2.5 % annual inflation rate, you'll need$8 ,200 per month in 20 years from now to have the same purchasing power.

6:35There's an awesome website we use to calculate this, so go check it out in the show notes below and play around with it for yourself. It's pretty straightforward and really simple. This is such a great illustration that shows just how important it is to begin taking your monthly and annual budgeting seriously. Retirement planning isn't just for people in their 50s and 60s. Remember, it's all about investing early and often. Okay, step number three, the rule of 25, the 4 % rule. Time to find your freedom number. Continuing with our example,$8 ,200 per month is$98 ,400 per year. This is your inflation-adjusted annualized spending limit in retirement.

7:19Great. So what does that mean? You need to build a large enough nest egg that will produce$98 ,400 per year in after-tax income to retire comfortably. Here's how you figure out just how big that nest egg needs to be to produce that much money every year. Take that$98 ,400 figure and multiply it by 25. Your nest egg will need to be worth$2.5 million to produce that$98 ,400 per year. Yeah, so you guys are probably asking, I don't understand what's all the math behind it. So let's dig in, right? So in 1998, there was actually a research paper published called the Trinity Study. The paper was written by a handful of economics and finance professors at Trinity University, and they were trying to figure out what the perfect retirement portfolio looked like, and here's what they found.

8:11Assuming 60 % of your retirement portfolio was invested into the S &P 500, and the other 40 % was invested into bonds, you can withdraw 4 % of your portfolio's entire worth every single year and not run out of money for at least 30 years. So if you started this at 65, you'll still have money to live off of when you're 95. This includes withdrawing a little bit more every year to keep up with that 2 to 2.5 % inflation assumption shared in our example before. To everyone listening, these are the real numbers that you must take seriously if you plan to retire at a reasonable age. For some, a$2.5 million nest egg may seem daunting.

8:53If that's the case, how can you decrease your monthly spending habits where that$2.5 million is now maybe only$1.5 million. It all comes back to your monthly spending patterns. Step number four, how to actually get there and achieve this nest egg. So let's say you're 35 years old now and you're spending$4 ,000 per month today. This will be$8 ,400 per month in 30 years after adjusting for inflation. Annualized, that's$101 ,000 per year. Using our rule of 25, That's a$2.5 million nest egg. Now that may seem daunting, but if you're contributing towards your 401k at work, you're maxing out your Roth IRA every year, and you're building wealth using the rich habits that we share in every episode, you're going to get there much faster and easier than you think.

9:44Robert, people have to take this seriously, especially if time is on your side, right? 30 years of compound interest is so much more powerful than just 10 or 15. So if you're listening right now and you're 25, 35, or even 45 years old, you need to start this today. I speak to hundreds of people a month about their wealth building and retirement journeys, and many of them don't take this seriously and don't have an actual plan. They believe that by just adding a little bit of money to their 401k, or occasionally putting money into their Roth IRA, that it's all gonna magically work out, and that is not a retirement plan.

10:23So by having an actual plan and a number and knowing where you're going, it's going to help you so much more if you execute on that plan and know what it takes monthly to get you there. I couldn't have said it better myself, Robert. Having a number as to where we're going helps people make decisions on a monthly and annualized basis to get there. Couldn't have said it better, man. I love it. So with that being said, let's introduce today's episode sponsor. This episode of the Rich Habits podcast is brought to you by Neos Investments. Neos offers ETFs that aim to offer monthly income while providing core portfolio exposure across equities, fixed income, and cash alternatives like T-Bits.

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12:32SPYI is the largest holding inside of my dividend-focused portfolio, and CSHI is a great place for anyone looking to earn some extra yield on their savings account. So definitely go check out their ETFs. Now, with that being said, it's time to introduce everyone's favorite segment of the episode, question and answer. Our first question comes from Timothy A. Timothy A says, my girlfriend and I have about$175 ,000 in student loan debt and we're not sure if we should focus entirely on paying it off or instead investing while making minimum payments on the loans. Our interest rate is 5%. What do you all think?

13:06Now, I'm gonna give you my hot take and then let Robert dig in on this one, but I just wanna make two important call-outs. One, you said your girlfriend, not your wife. Her debt is not your debt until you guys are married. Make sure you guys are on the same page on that, right? Second thing I wanna call out, your interest rate is 5%, which is reasonable, right? That's pretty low. A lot of student loans right now are in that six, seven, eight, 9%, so having a 5 % interest rate on student loans are really good, and if I was facing this amount of student loan debt, it's pretty obvious that either you can go So all in for six or seven years trying to pay off the student loan debt, take all of your time, energy, and money paying them off and then not have that minimum payment anymore, or kind of do a hybrid model of pay them off while also investing.

13:51I'm going to lean toward the pay them off while also investing because I think that you're going to be able to generate a higher return than just 5 % in your Roth IRA or your 401k at work. So for me, I'm going to be focused on that Roth IRA and maxing it out so I actually have something in retirement, right? We just talked about how important that is at a young age. So definitely consider maxing out that Roth IRA, which is$550 per month. And if you're able to max out that Roth IRA while also making minimum payments on these student loans, you are in really good shape. And as you earn more money in your career, you can take that extra money instead of having lifestyle creep, you can take that extra earnings and begin allocating that extra cash toward these student loans to get them paid off faster.

14:33But Robert, I want to hear your perspective here. Shopping is hard, right? But I found a better way. Stitch Fix online personal styling makes it easy. I just give my stylist my size, style, and budget preferences. I order boxes when I want and how I want. No subscription required. And he sends just for me pieces, plus outfit recommendations and styling tips. I keep what works and send back the rest. It's so easy. Make style easy. Get started today at stitchfix.com slash Spotify. That's stitchfix.com slash Spotify. This is a real good story about Bronx and his dad, Ryan, real United Airlines customers.

15:10We were returning home and one of the flight attendants asked Bronx if he wanted to see the flight deck and meet Captain Andrew. I got to sit in the driver's seat. I grew up in an aviation family and seeing Bronx kind of reminded me of myself when I was that age. That's Andrew, a real United pilot. These small interactions can shape a kid's future. It felt like I was the captain. Allowing my son to see the flight deck will stick with us forever. That's how good leads the way. Timothy A, great question in Austin, an even better call out on the fact that they're not married yet. So Timothy A, I'm going to address your part of the debt.

15:44In my opinion, it's always about positive arbitrage with my money. Even if it's only two, three, four percent, I look at it this way. For student loan debt right now, with not knowing where the government's going with relief and programs and excusing the debt, I would pay the minimum. I would arbitrage the rest of that money into my Roth IRA and other investment vehicles and just pay the minimums because you never know what's going to happen. And I think it's better to have your money working for you and have that positive arbitrage on your side. I do want to call out though, before we move on to our next question, that Timothy A, you need to have a plan to pay them off, right?

16:21I don't want you to have student loans in retirement. I don't want you to have a$200 ,000 loan balance when you're 65, right? No one wants that. So make a plan to pay them off, but include inside that plan some investing along the way. Compound interest is a beautiful thing. So if you're able to invest that$550 per month toward your Roth IRA from maybe you're 25 or 30 right now until you're$4555, that's going to be major in retirement. So definitely prioritize that along the way. Thanks for the question, Timothy. And we look forward to hearing the results. Our next question comes from Enrique R.

16:55Enrique says, I'm 45 years old and I'm saving for a down payment on a house that I want to buy next year. I'm not sure where I should be saving this money. Do I put it in a high yield savings account or do I invest it in the stock market? Now, my take here, and maybe Roberts is different, but my take is if you are saving for something that's going to take place in the next 12, 24, maybe 36 months, right? So one, two, or three years, I wouldn't put it in the stock market just because of the volatility. Now, if that savings is for something that's in five or 10 years down the road, then sure, put it in the stock market, let your money compound on itself.

17:30But we all saw what happened in 2022, right? So maybe you started saving this money in 2021. you're ready to buy your house in 2022, then the stock market crashed and you lost 30 % of your savings. That's not what we want, right? So I think about it in this sort of one, two, three, maybe four-year horizon. Park it in that high-yield savings account so you know the money is going to be there at the end of the road. But if you're saving for something that's five, 10, or 15 years away, then put it in the stock market to allow compound interest to do its thing. Robert, what do you think about this strategy?

18:02Yeah, normally I'd be on the other side of the fence from you, Austin. But in this case right now, I totally agree. With us being in a sideways market and not knowing what the future holds in the immediate, let's say, 6 to 12 months, I think it would be a little bit incorrect to put the money in the stock market. So for me, a little bit of a different wrinkle. I definitely like the high-yield savings idea, but I also like treasury bills. Treasury bills are performing really well right now, and I think that's a great place to start so you can have some diversity of where this money goes, because at the end of the day, you want to keep it safe, but you also want to make sure that it's at least keeping up with inflation and you have it earning money.

18:41That's the key. Parked money is dead money. So I would look at high yield savings, treasury bills, and maybe some safer index funds where you're not so much directly into the higher risk portion of the stock market. So that would be my takeaway of what I would do in your position. I love it. And just to remind everyone, our favorite high yield savings account that I use is Wealthfront. They pay 4.8%. And my favorite T-bills purchasing platform is public.com. They pay, I think right now, 5.5 % on their treasury bills. Really simple to use both platforms. And I like them both. And one of the key takeaways of the Treasury bill is that there's no taxes from a state and local level on your gains.

19:23So it's a little bit better in that aspect from a strategy perspective than a high yield savings account. But you should probably have both. Now, our last question comes from Taylor R. Taylor says, I'm$15 ,000 in credit card debt, and I'm considering a balance transfer to a card with a 0 % intro APR, allowing me 12 to 18 months to pay down my debt without having to pay this$400 per month interest every month weighing me down in the process. What do you guys think about this strategy? Robert, want to take this one away? I love the idea, Taylor, and great question. We want to get you out of that high interest debt as soon as possible so you can get cash flow positive.

20:01And I like this idea. As long as you understand that there are fees associated with the zero balance transfer card, you're gonna pay three to 5 % in the fees to be able to do that balance transfer. But on top of that, just by mitigating and getting rid of the high interest debt, whether it's 25 or 30 % is gonna help you so much in getting cash flow positive sooner by addressing it and knocking it out. 100 % and I also wouldn't worry about you know any hard inquiries on your credit in the process I mean at the end of the day your credit's going to rebound just fine and by doing this strategy you'll be saving$400 a month right that's$400 extra per month allocated toward your principal right that's only going to speed up this entire process so I love the strategy and to find those balance transfer cards, I would definitely check out like a nerd wallet, a credit karma, a bank rate type marketplace website.

20:58And to Robert's point, make sure that you do keep those fees in mind, right? Because there is going to be some sort of fee that you'll have to pay in the beginning. But I really like this idea and it's going to help you pay this debt off much faster. This episode is probably a top five, if not top three most important episode we've ever published because we all want to retire. We all want to build wealth throughout our lives so we can have a comfortable retirement. But it's so hard to retire or think about retiring without knowing what our freedom number is, right? So that rule of 25, that 4 % rule, the Trinity study, go read it.

21:32It's a great study. By understanding these calculations, you'll be able to say, okay, I know where I need to go. Time to make a plan to get there. So we hope this episode can help you figure out and strategize on that plan. Thanks everyone for listening. I feel this is an incredibly important episode of the Rich Habits podcast, and we appreciate all of your support week in and week out with our top five business podcast. And we're so glad to have you along on this journey. And please, please take notes and take action on this episode because it's so important for all of you in your wealth building and retirement journey.

22:10So everyone, thank you all so much. We hope you have a great start to your week. And don't forget, if you haven't yet sent us a question on Instagram, definitely do that. And again, a reminder, we get hundreds per day. We're working on getting back to everyone. We're just super grateful that you all send them regardless. Don't forget to join the Discord group in our show notes below. And also don't forget to check out the Rich Habits Podcast, Wealth Building Blueprint, our four-module video course that talks about earning more money in a side hustle, paying off your debt as effectively as possible, repairing and building your credit, as well as building a retirement strategy that actually works.

22:43There's going to be a link to that in the show notes below and have a great start to your week.