I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. All right, the way you've been thinking about retirement is wrong. Sorry, not sorry, it's just wrong. Here's the way most people picture it. They think their retirement account is basically a piggy bank that they slowly empty out until they have nothing, and then they die. First of all, that is so dark. But the good news is, I'll teach you a much better way to think about it that is much lighter on the bummer factor as well. But first, to really understand the flawed conventional thinking here, let's put some numbers behind it. People start by thinking how many years they want to be in retirement. So let's call it 25. And then they start thinking about how much they want to spend per year in retirement. Let's call it 60K a year, because why not? So with that framework, you'd think to yourself, Okay, I need 60K a year, 25 years in retirement That's $1.5 million. And then starting the year I retire, I take 60K from that fund every single year until I have my last 60K.

And then... Good night, folks. Right now, I really just want us to debunk the idea that the function of a retirement account is to be drained entirely. So if you do have that $1.5 million and the budget and the timing works out perfectly, that you happen to run out of money the second you go to the big money rehab in the sky, Sure, that's fine, I guess. You didn't run out of money, which is good. But what about the next generation? Did you want to leave any money behind for them? And then the million dollar question, literally, what happens if you outlive your savings? If you start thinking about your retirement accounts differently, the right way, then these problems will be solved for you. Because remember, our retirement funds are not stashed under our mattress. We're putting our funds in a retirement investment vehicle, like a 401k, an IRA, a Roth IRA, way, maybe all of the above. And because we have that money invested, we should be earning interest, assuming we made smart, money rehab-approved investments along the way. So there is a world in which our retirement accounts are throwing off just the right amount of interest that our old, wrinkly, adorable retired selves are living off that interest without ever touching the principle.

That way, you still have your retirement nest egg uncracked to use in case of emergency or just to have a good chunk of change to leave to your kids or your cats or whoever you want to leave money to. Living off the interest. That's how we should be thinking about retirement. That's what we should be aiming for. In order to set our future selves up for this retirement lifestyle, we're going to use the 4% rule. It's a retirement planning hack that is as close to a magic formula as we've got here. Here's how it works. As you know, a good place to start when it comes to allegating your investment portfolio is investing your age in bonds. Bonds. So when you're 25, you'd invest 25% of your portfolio into bonds and the remaining 75% into stocks. But when you're 75, that flips. You'd put 75% of your portfolio in bonds and the remaining 25% in stocks. This isn't the only way to set up a portfolio, of course, but it's a good foundation to then tweak based on your risk tolerance and your goals. Generally, though, your portfolio will get more conservative as you get older.

The reason being when when your investments are your only source of income, you don't want to take big risks with it. That's in contrast to when you're in your peak earning years, and at that time, you're going to be mostly invested in stocks. That's where you can hope to earn between 8 to 10 % year over year. But when you're squarely in retirement, you can hope for about 4 % returns on your more conservative retirement portfolio. So if we go back to our earlier numbers trail, we said we wanted to have 60K in retirement. So backing into that budget using our trustee 4 % rule, you would indeed need a pot of 1.5 million. And for my number phobics, friends, what I did here is take $60,000, your annual budget, divided it by 0.04, that's the 4 % withdrawal rate, which is $1.5 million. Here's how this plays out. Say you have $1.5 million by the time you retire. In your first year of retirement, you kick back, you spend that budgeted 60K on your movie nights or your dance classes or whatever you're spending your money on. So if your retirement were just in your checking account, what you'd expect to see at the end of the year is 1.5 million minus $60K or $1,440,000.

But because your retirement money is invested, even as you're withdrawing the money, the principle that's in the retirement account is still growing. And so assuming you'd get that 4% growth over that year, by the end of the year, you won't have $1,440,000. You'll be back to nearly $1.5 million in your account. Now, if this was a perfect system, you'd have $1.5 million every single year for forever. But life is not perfect. Some years, your portfolio will grow less than 4%, some years, it will grow more, some years, it might be down overall. And remember, Uncle Sam will want to take a piece of your money that's in a traditional IRA or a 401k since those withdrawals are taxable. And you're going to have to adjust for inflation, too. So your 60k today won't have the same buying power in 10 or 20 or 30 years. You're going to need to give yourself a little raise every single year to keep up with the cost of living. This rule is more of a guideline than an ironclad retirement law. Life and finances are more complicated than a one-size-fits-all approach. Depending on your lifestyle and your health, you're probably going to need to tweak these numbers, and some years you're going to spend more, other years you're going to spend less.

And hey, if you've got a larger nest egg, you might not even need to withdraw 4% every year. The bottom line here is that that 4% rule is a solid starting point for mapping out your retirement. But most important of all, it really helps to start thinking about how you're going to live off just your interest and protect that principle. For today's tip, you can take straight to the bank. Now, today we only looked at retirement income that you're going to get through your own investing. We didn't even take into consideration social security, which is, by the way, going to get less and less exciting every generation. But it still is a good exercise to estimate how much social security you're going to get in a retirement, and then incorporate that into your game plan for your future self. To help you with some of this guesswork, the Social Security Administration has a calculator that gives a pretty good estimate of how much social security money you can expect to get. You can find it at ssa. Gov/better benefits/calculators, or for the easy peasy route, check the link in the episode description. Did you know that even if you have a 401k for retirement, you can still have an IRA?

Robinhood has the only IRA that gives you a 3% boost on every dollar you contribute when you subscribe to Robin hood Gold. But get this, now through April 30th, Robin hood is even boosting every single dollar you transfer in from other retirement accounts with a 3% match. That's right, no cap on the 3% match. Robin hood Gold gets you the most for your retirement thanks to their IRA with a 3% match. The offer is good through April 30th. Get started at Robin hood. Com/boost. Subscription fees apply. And now for some legal info, Claim As of Q1 2024, validated by Radius Global Market Research. Investing involves risk, including loss. Limitations apply to IRAs and 401(k)s. 3% match requires Robinhood Gold for one year from the date of the first 3% match. Must Robinhood IRA for five years. The 3% matching on transfers is subject to specific terms and conditions. Robinhood IRA available to US customers in good standing. Robinhood Financial, LLC. Member, Sippik, a registered broker dealer. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan LaVoy. Our researcher is Emily Holmes. Do you need some money rehab?

And let's be honest, we all do. So email us your money questions, moneyrehab. Com. @moneynewsnetwork. Com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. Thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.