How Do I Know If I am On Track to Retire! (Money Q&A)

Transcript:

On this episode of the personal finance podcast, how do I know if I'm on track to retire? What's

up everybody. And welcome to the personal finance podcast. I'm your host, Andrew, founder of master money. co and today on the personal finance podcast, we're going to be going through a money Q and a, with a bunch of your questions. If you guys have any questions, make sure to hit us up on Instagram, tick.

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Now, today we're going to be diving into. Four different questions here on this money Q and a, and if you want to send in your question to a money Q and a, the best way to do that is to be on the master money newsletter, which is always linked up down below in the show notes. And then you can respond to my email when we send out our weekly emails.

And when we send out those weekly emails, I will always read those questions that you send in. And a lot of times, if you send in those questions, we will put them up on money Q and a. So this is the fastest way to get there. We also go through. Instagram DMs, things like that as well. But the fastest way, uh, is to go on email and respond to the master money newsletter.

That is the fastest way to get there. So we're going to go through four questions today. The first one is how do I know if I am on track to retire? This person has a very specific question. And so we're going to show them, Hey, How do you plan out and figure out if you are actually on track to retire?

Really, really great question. Number two is can both my spouse and I max out our HSA three is why do we keep receipts for the HSA? And then number four is this person wants to get into index funds, but they don't have no idea how to weed through all the different options that are out there. So I'm going to give you some tips on how to do that as well.

So if that's something you're into. Let's get into it. All right. So the first question we're going to go through is in the specific situation. How does somebody know if they're on track to retire? So here's the question. Hey, I'm a state employee. I'm 35 married with two kids. My wife and I will both receive a pension when we retire at 65.

We both max out our Roth IRA each year. I also do a split disbursement of 1, 200 each month into deferred comp Roth and traditional. We have 60, 000 in a high yield saving count. Amazing. And also have a brokerage account with a little over a hundred thousand dollars. And we add $200 per month into it. I also have five 20 nines for our kids and add a hundred dollars each into those.

Our house is our only debt and we would like to retire by the time we turn 60. Are we on the right track to do that? Should we save more than 25%? And should we include the pension into that 25%? Here's the kicker, we lose 0.5% for every month. We retire before the age of 67. Thanks. Love the show. So. First of all, you were doing an amazing job thus far in getting all your financial priorities straight, because what you're doing is you're saving some of the big stuff up front, and then you're taking care of some of your kids expenses as well on the back end.

But I love what you're doing with your finances right now. And you are world ahead of a lot of people. Now I love that 60, 000 that you have up in that high yield savings account. That's going to protect you against life. That's your emergency fund. That's going to help you through a lot of different scenarios.

But one big thing we have to figure out here is what are your monthly. Expenses expected in retirement. Now that is a very difficult thing to do when you're at the age of 35 and you want to retire at age 60, you've got 25 years before you're actually going to retire. And so sometimes that's a hard and difficult thing to project.

And so a lot of times what I like to do is figure out, Hey, what am I spending right now with all the hectic stuff going on, I've got kids that I'm paying for and all those different things. And what am I spending right now? And I like to project it based on the number I'm spending right now. And you can adjust it going.

Forward as life progresses, but you're probably spending a lot more money now than you will later on in life because kids are under your roof and there's a lot of different expenses that kids will create when they are under your roof. So that's one thing I would think through. Now, this is a difficult thing, like I said, to project, but let's just say, for example, that you are there and your expenses are at 60, 000 per year, maybe a lot more than that for a lot of people.

It is. I know for me, it's a lot more than that per month, especially with a couple of kids under my roof currently. So. Let's just say, for example, for easy math sake, that it's 60, 000 per year. And if you wanted to spend 60, 000 per year in retirement, you're going to do the rule of 25, meaning that you multiply 60, 000 per year by 25.

And that's going to get you to your number that you would need invested in order to be able to retire. But the kicker here is that you have a pension in place, and that is going to be something that can help save you money. Supplement some of your retirement. So this pension, as long as it's guaranteed, is going to help you supplement your retirement, uh, in some way, shape or form.

So that may help you in some of these projections. And a lot of times if your pension is not guaranteed, or if you're not certain, if it's guaranteed a, I would ask them, but B depends on what entity it is that is sending out the pension. If it is guaranteed, then great. You can factor it in. Wholeheartedly and maybe give yourself a little bit of cushion in case something happens down the line.

But B, if it's not guaranteed, then I would almost plan as if it wasn't there because that's the other side of this coin is that if it's, something's not guaranteed, I want to make sure that my retirement plan is really, really conservative. And then if I have more money when I retire, then so be it.

That's great. And you'll know, as you get closer to retirement age, it's. If you actually are going to be getting that pension anyway. So you don't really have to worry about that part as you get closer. You may be able to retire even earlier, but one big thing to note here is that you mentioned that there is a 0.

5 percent reduction in your pension for every month you retire early, this means retiring at 60 instead of age 67 would reduce your pension by 42%. And so this is essential to calculate when you're doing some of these calculations. So almost, I would say. Factor in that. You're going to get half of your pension when you retire at the age of 60.

And listen, I think time, especially as you get closer to 60 is so much more important than working for an additional 42%. You can cover that right now with financial planning and you get your time freedom back. This is the beautiful. Thing about getting your finances together is who cares about that seven years?

Cause you could get it all together right now. This is so incredibly powerful that you're even thinking through this right now. So this is great. And so I just want you to kind of cut that pension in half. If you plan on retiring at 60, that gives you an extra 8 percent cushion. That extra 8%, if it's something that you actually get in fact, you're in, Hey, that's free vacation money or whatever else you guys want to do in retirement.

All right, so you got deferred compensation here and you're adding 1200 per month across your Roth and traditional accounts. So you're putting 14, 400 per year. Then you have a brokerage account where you're adding an additional 2, 400 annually, and you already have over 100, 000 inside of that brokerage account, and then you have the 529 plans in the high yield savings account.

Okay. So the brokerage account and the deferred compensation are the two big ones that I want you to work on calculating. And the way that you do this. As you go into an investment calculator, you can go somewhere like calculator. net. That's a great investment calculator that I use a lot on the show. And you'll hear me kind of talk through that stuff, you know, a decent amount of time.

Now, when you're doing retirement planning, you'll hear me talk about 10 percent rate of return all the time on the show. And the reason why I do that is because historically that's what the rate of return of the S and P 500 has been. It's been a little over 10%. When you do retirement planning, when you're planning out your retirement, I want you to be much more conservative.

I want you to bring that down to seven, 8%. A lot of times I'll do the low end on 7 percent just because we have no idea what's going to happen in the future. We have no idea where the market's going to land. And so this just gives you that safety net. And if you do that 7 percent rate of return, it's going to give you additional cushion.

I'll run some of these numbers at 10%, just so you can see where it is. It's kind of fun to go through each rate of return, because there is a big difference between the two, but I want you to go conservative. And then if the market returns much better. Then so be it. That's fantastic for you. So we're going to put in a 7 percent rate of return.

And now the only thing I know right now is that you have a hundred thousand dollars in that taxable brokerage account. And so, because you have a hundred thousand dollars in that taxable brokerage account, that's the number I'm going to put in for your starting amount. You may have more went through deferred comp that you were putting in there.

And so that may be something that you can add into the calculator later on as you go through this. Uh, but right now, what I see is that a hundred thousand dollars. Okay. That you have there, and we're gonna put over the course of 25 years because you want to retire at the age of 60. And I'm just gonna tell you how much you're gonna have in here, uh, just based on doing this.

Now, basically what you have is you have $14,400 per year that's going to the deferred comp. And then you have $2,400 per year that is going to your traditional brokerage account that has a hundred thousand dollars in it. So we're gonna put $16,800 per year is getting invested into the market. Okay? And so 16, 800 per year, uh, is going to be invested in the market.

And we're just going to do a 7 percent rate of return. Let's just see what happens if your portfolio is there. So based on that, we ran the numbers here and it looks like you would have based on your current investment rate with a hundred thousand dollars starting amount, you'd have about 1, 605, 327 if you got a 7 percent rate of return.

Fantastic start. What that means is that you could spend a 60, 000 per year in retirement based on just that amount. Now, what is your pension cover? So if your pension is going to cover the rest of the money at 50%, Then you're golden in addition to having things like social security. So there's a couple of things there that I usually don't always plan for social security, but also they've been saying for 50 years that social security is going to go away and it hasn't gone away.

So it's always best to kind of plan that it's not going to be there and just give yourself additional cushion. You know, your boy loves additional flexibility, but we can look at that and say, Hey, maybe we want this additional cushion, and if not, then we can think through this a little bit more. Now let's just look at the rate of return.

If we went to an 8%, for example. So if you went to an 8 percent rate of return, it would jump to 1. 9 million. So there's a big difference here. And this is why it's so important to plan conservatively, just in case that happens. And if it doesn't happen, you're going to have a lot more money there, which means you could spend almost 80, 000 per year instead of 60.

So that gives you an additional 20, 000 per year that you could spend in retirement based on that 4 percent rule. You take 4 percent of whatever your number is invested in your brokerage accounts and whatever you have invested total overall. Now we can look at 9%. And it's going to jump up even more to 2.

285 million. So almost 2. 3 million. And then a 10%. And this is why the numbers change a lot is 2. 7 million at a 10 percent rate of return. Again, the S and P 500 has historically returned over 10%. We just want to plan conservatively. So it'd be a beautiful thing if we could get that 10 percent rate of return.

So this is the power of your money invested as you may be able to see, you know, a 1. 6 million to 2. 7 million in retirement. Now, as we start to plan this stuff out. And as we start to go through this, you're going to see the rate of return. Uh, and you're going to be able to make adjustments accordingly, but the amount that you're contributing right now is absolutely amazing.

And so once you run that math, you say, what are my expenses? Multiply that number by 25. Then you're going to run it through this calculator and investment calculator. And you're going to say to yourself. Okay, I am now investing this money and am I okay here? If I want to put extra in now, you absolutely can.

And that'll kind of get you to that point in time faster. And then thinking through, Hey, I am losing some of this pension, but how does 50 percent of my pension fit into this equation? And if you want to retire even earlier than that, I really wouldn't worry as much about that pension unless it's a massive amount.

I really wouldn't worry as much about that pension because your time freedom is so incredibly important. So that's another amazing thing that you have there. Now, one cool thing about this is your contributions over that timeframe. Since this is a long time horizon, the total amount of money that your money made is 81 percent of the portfolio.

So your money did. 81 percent of the work. This is how you 80, 20 year money is you invest your dollars. And this is why it's so important for everybody listening today to note that you need to invest your dollars to build wealth. 80 percent of this portfolio is going to be the money that your money made only 15 percent is contributions and 4 percent is the actual starting amount.

So such an amazing way to build wealth is just investing over the longterm. We will say that over and over again on this podcast. And it's amazing what you guys are doing here. Uh, so run those numbers through that investment calculator, figure out what that pension number is, and then look at your expenses.

It's threefold there. That's all you have to do is those three things to see, do I need to invest more? And I would always try to uptick your investments, at least at the rate of inflation every single year. But in addition, if you can invest more now. Doing it earlier will give you that safety net later on in life that you've always wanted.

All right. So the next question is a really great question, and there's not a lot of stuff out there on this. And so I'm really glad you asked this question because it's really important for people to note this. Uh, it says, hi, love your podcast and thank you so much for your content and knowledge.

Question regarding the HSA contributions that I can't seem to find a great answer for. If my spouse is on an individual high deductible health plan and me and my son are on a separate family high deductible health plan, can both my spouse and I max out our contributions as long as my spouse stays under the individual contribution limit and I stay under the family limit or despite having separate high deductible health plans, do we need to stay under the family contribution limit as a combined unit?

Right now I am maxing out my contributions to stay under the family limit and she is maxing out to stay under the individual unit. But I fear that we are over contributing despite the separate plants. Thanks. All right. So the rules on this can be complex. So, and I know it's hard to find the answer for this one.

And so this is something that definitely I want a lot of people. I'm going to kind of give you everybody here. That's listening, the coverage of how this works up front. And then we'll kind of dive deeper into the question as we go through this. So. First of all, I want people to understand what the HSA contribution limits are.

So when you have a high deductible health plan, you can open up a health savings account or an HSA. The beautiful thing about the HSA is your money goes in tax free, it grows tax free, and you can pull it out tax free as long as you have a qualified medical expense, and we'll get into those qualified medical expenses more in the next question.

But what we're talking about here. Is that if you have a high deductible health plan in 2024, you can contribute up to $4,150 as an individual and $8,300 as a family. So that is the 2024 limits they went up from last year. Last year it was 3,850 for individual and 77 50 for family coverage. Now, in cases where one spouse has individual coverage and the other has family coverage, each of you can contribute to your own HSA.

So there's no problem there, but you have to contribute up to the limit for your coverage type. However, there's an important point to consider here, and this is really, really important. If either spouse has family coverage, as in your case, The family coverage limit applies across both HSAs, but it can be divided any way you see fit.

So for instance, you could potentially contribute up to 8, 400 between the two accounts, but you cannot contribute the 8, 400 in each. And so this is really important to understand. You still have to stay under those family limit parameters when it comes to contributing to these. So if you're on pace right now, I would kind of slow it down and back it down, um, to be able to kind of make sure that you're under those family limits so your spouse could contribute up to that individual limit.

And you can contribute up to the family limit minus whatever your spouse contributes to their HSA. And so if your spouse contributes all the way up to the 4, 150, then all you have left is you can contribute that 4150, which is half of the 8, 300. So that is exactly, um, how this kind of works. And I wish you could do it the way that you're on pace to do it for it right now, because that'd be amazing.

If you can kind of. Max out both of them, but in this case, you can only contribute up to that family plan limit. So that's a great question. And I'm glad that you were on pace to max that out because that can be an amazing, amazing thing for you and your family going forward. And just maxing that thing out in and of itself is going to be awesome.

And then I would just move on to kind of the next step in the stairway to wealth. Uh, once you get that thing maxed out, because it's going to be something that is going to be really beneficial. Now, question three is also along the same lines and it talks through the HSA. So why do we keep receipts for the HSA?

So this is a question that we got in where the person was asking, you know, why do we keep receipts for the HSA? And this is a great, great question. Now, one. Big note, if you're brand new to HSAs is that I always talk about, you need to keep your receipts because when you have those receipts available, then you can reimburse yourself for contributions in your HSA and some of that growth completely tax free.

This gives you that triple tax benefit that we were talking about at the top of the question number two. And so when it comes to these receipts, I have a system that I like to save them in. And the way that I like to save them is you put them in like a Google drive or a Dropbox or whatever, you know, cloud unit that you use.

And every time you have a receipt, uh, for the HSA, you scan it in and you put it into Dropbox or Google drive or whatever else it says receipts and the year. So I usually just do it by year to keep it a little more organized. So for example, right now, my wife is pregnant with our third, and I guess that's my official announcement.

So right now my wife is pregnant with our third. So we have a lot of medical bills going on right now. So a lot of times I'll take those receipts. I'll scan them in and I will save those receipts for future use. We have a lot of things going on. The kids are always seem to be sick, you know, every other week.

Uh, so there's a lot of things going on at the same time. So we have a lot of medical receipts that come up right now because we are in the messy times of your thirties when you have kids, young kids at that. And so there's a lot of things going on. And so we will. Save all those receipts so that later on down the line, we can reimburse ourselves completely tax free.

The IRS has no limit to when you can reimburse yourself, but why do you have to save those receipts? Is anybody going to come and knock it on your door asking, Hey, where are those receipts? Well, the real reason is, um, Is that, you know, you have to have qualified medical expenses to avoid taxes and penalties when it comes to drawing on your HSA.

And you can draw on your HSA at any point in time. He doesn't have to, you don't have to be in your sixties or anything like that. You can draw on it right now. If you want to, uh, if you have that qualified medical expense, tax free. But the real reason is, is if you start to draw down on your HSA, the IRS may need you to provide documentation to demonstrate that your HSA withdrawals were used for qualified medical expenses, especially if you're audited.

So if you ever get audited by the IRS and you don't have these receipts to prove these qualified medical expenses, There's nothing you can do. If you ever get audited, they're going to make you take those taxes. If you don't have this documentation, you can't go back in time and call up Walgreens and say, Hey, I had a transaction 20 years ago for an ankle wrap when I rolled my ankle.

And now I would like to get that reimbursement, please. Can you find the receipt for me? They're never going to be able to find that. And so you have to make sure that you track those receipts specifically. If you ever get audited now, everyone's like, well, I'll never get audited. Well, Every year the IRS keeps adding agents and I think there's going to be a lot more audits going forward as we have the IRS beefed up because Uncle Sam always wants his money.

And it's also really, really important to kind of maintain records when it comes to the HSA. So the HSA has that triple tax benefit, but it doesn't come without work. Now it's not a lot of work, but you just got to kind of stay on top of it. It's tedious, annoying stuff. Like every time you get a receipt, you just got to scan it, put it in, scan it, put it in.

That's just like the thing you got to do when it comes to the HSA. Okay. But another thing that you can do at it on top, and I need to give an option where you guys can actually have a copy of this spreadsheet, but it's also making sure that you get a detailed spreadsheet every year, just totaling the amount of receipts that you have.

Like you take the receipt, you just write in what the receipt is. And then overall, what you can do is you can just name that receipt, whatever it's called. And then you give the total amount because this will just give you a running total of how much you can withdraw from that HSA so you don't have to go in and start counting the receipts one by one.

If you don't have this spreadsheet, it's not very organized in a system on how you can do this. So honestly, it is just easier. It takes you one minute to scan in the receipt, one minute to put it on the spreadsheet. I know it's annoying. I know it's tedious. Most of the time I really hate doing it, but it's one of those things that we have to do because there's a high chance you get audited if you start to use the HSA without any proof or reimbursement.

So you got to make sure that you're doing that, especially if you have a big HSA and you're starting to draw down on it all the time as you reach retirement age, then they're going to come looking more into that. So you've got to make sure that you are keeping those records. Really, really important stuff.

Now, if you have not done so already and you've lost the receipts, stuff like that, maybe you can call your doctor and say, Hey, can you give me. All of my records from the past, and they may be able to give you some receipts that you can utilize. Um, that's one thing that you can definitely do. And then going forward, just make sure you keep a system into place.

Uh, that is really, really important when it comes to record keeping for these HSA receipts. Now let's get to the last question. All right. So the next question is I want to go into index funds. But I see so many options and I don't know how to weed through all those options. All right. So this is a great question.

And one big thing about index funds is there are a ton of options. Now there's a ton of ETF options as well. And by the way, index funds and ETFs for the most part, if you can find an ETF that is equivalent to the index fund, it's a lot easier just to get into the. ETF for a lot of reasons. Um, we've talked about that in the past is why, but I like going into the ETF for a lot of different reasons.

So when we say index funds and ETFs, I almost use those interchangeably for the most part. Then there are differences between the two. You got to know what the differences are, but I'm talking about these as an interchangeable thing. Um, a lot of times when we're talking through some of this stuff, now, if you are trying to deep dive and figure out, Hey, Which index funds do I buy?

This is something that you want to just do a little bit of research. It doesn't take a ton of time, but there are a lot of options out there. Now I have criteria for myself specifically, like for example, if an index fund follows the S and P 500, you know, not a big deal. They all pretty much do similar things.

And so I'm interested in that index fund. Uh, if I'm in a specific. Portfolio, or if it follows something like the total bond market or whatever else, and I want to get some bond exposure, then I'm interested in that. And so it depends first on what your investment goals are. And obviously what's your risk tolerance is.

That's probably not what you want to hear up front. And what you want me to do is tell you what to do. So, uh, that's not something I can do is recommend specific funds. We do have an index fund cheat sheet that you can go look through. Uh, but I will give you kind of how I think through this and how I look at index funds also.

Okay. When it comes to this on YouTube, if you are a visual learner, I have a series of videos that we've done where we've analyzed a bunch of very specific index funds, and I go through everything in those funds. A lot of people don't even know this exists. I go through every single one of those funds.

They're some of our most popular videos on YouTube. And when I go through those funds, I show exactly why I'm interested in these, why I think they're an interesting option for people. And I tell you exactly how I analyze index fund. So if you watch a couple of those videos, you're going to see exactly how I analyze some of these.

If you're looking to deeper dive into analysis, also index fund pro our course that talks about index fund investing. Is another way that you can learn how to invest in index funds. And we deep dive into that. That's like 40 plus videos. And we go into a bunch of different things on index fund pro. So enough plugs here.

Let me go into what we're talking about. So number one is the expense ratio. I'm looking at the expense ratio on index funds to make sure it's below 0. 30%. If it's above 0. 30%, I'm not as interested in it as I would be, uh, something else. Number two is the fun type. So the fun type is. You know, what is it tracking?

Meaning that a, the fees need to be low on the expense ratio, but B, what is it tracking? I am okay with everything like a total stock market index fund. Love me some VTI or VTSAX. I'm also interested in the S and P 500, like VOO, all of those different great funds. But I'm looking to see, is it going to fit what my asset allocation is going to be?

So for me, a lot of times in portfolios, you'll look at something like, say you want to do a Warren Buffett portfolio. Well, Warren Buffett portfolio means that you're investing in 90 percent stocks. It's usually an S and P 500. 10 percent bonds. Why is it called the Warren Buffett portfolio? Because that's what Warren Buffett puts his entire family's funds in, uh, who are not professional investors.

So, you know, his wife, his kids, they all are in a 90, 10 portfolio. And so really, really important stuff to kind of note here is that a 90 percent in the S and P 500, 10 percent bond is a Warren Buffett portfolio, but you got to know what type of fund that you're going to be doing. And so it's really, really important to go through that as you do this.

And then the third thing I would look at is something maybe like the fund provider. So Vanguard, Fidelity, Schwab, all great companies all have, you know, really good funds. And usually if it's put under those three names, their expenses are pretty low. And so those are three that I would look for. And then if you start to venture out into some of the others, there's like iShares, which is run by BlackRock and they have some good stuff.

There's other things out there, but you got to look at the expense ratios as you start to venture out more outside of the big three that I talked about, which is Vanguard, Fidelity, Schwab, because you got to compare those rates. And then you want to look at like things like a minimum investment requirement.

So index funds have a higher minimum investment requirement than an ETF would. So you just want to look at that and make sure that that's something that you can handle. And then performance history. That's something I'll dive into. As I start to research index funds is just to make sure I see the long term performance is looking good.

Tax efficiency matters a little bit less because inherently index funds are already tax efficient. And then lastly, availability. And so where your accounts are hosted on all that different types of stuff, uh, is going to be really, really important to understand. So those are some of the bullet points that I would go through, but I would check out the YouTube videos that we do, um, where we kind of visually show you exactly what to do.

It's like my head on the screen. I'm showing you exactly what I'm looking at when I analyze these funds. Fund, and a lot of people who have found that have told me it's very helpful. So I'm hoping it can help you out as well. Uh, that is a great place to start doing some of this research. And then if you're interested in really diving deep into some of this stuff, index fund pro is perfect for that.

So thank you guys so much for listening to this episode today. I truly appreciate each and every single one of you and you invested in yourself today. That is an amazing way to spend your time by listening to this podcast. So thank you so much. Uh, I hope you guys have a great rest of your week and we will see you next See ya on the next episode!