Humphrey Yang Says This Is the Biggest Retirement Trap — Is He Right?
Research from CNBC shows that 56% of Americans aren’t on track to retire comfortably. That’s a huge percentage, underscoring the importance of planning for retirement from an early age.
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However, popular financial YouTuber Humphrey Yang says many people aren’t paying enough attention to the number one retirement trap. Are you? Or do you need to make some adjustments to your strategy? Read on to find out.
Yang’s Top Retirement Trap: Not Knowing How Much Money Is Enough
In a recent video he posted, Yang says the number one retirement trap is not knowing how much money is enough to retire. This creates a few problems.
First, you may wind up ready to retire but incapable of supporting yourself financially. If you don’t know your goal, you can’t know if you’ve reached it. You may have to continue working longer than you planned because of this.
You can also put off retirement longer than you need to if you aren’t sure how much money is enough. For example, you might be perfectly capable of retiring comfortably with $1 million in your account. But if you don’t know that, you may continue working until the figure reaches $1.5 or $2 million — even if you don’t need it.
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Calculating How Much You Need for Retirement
If you aren’t sure how much you need for retirement, there’s no time like the present to fix that. Your number will depend on your answers to a few personal questions, as you’ll see below.
What Are Your Expenses Today?
Most retirement advisors say you should expect to spend around 80% of your annual income in retirement. So, if you earn $60,000 the year before you retire, plan on spending $48,000 annually after quitting.
That being said, 80% is more of a starting point than a rule. You’ll still need to consider if 80% of your pre-retirement income is enough to cover your likely spending habits. This brings you to the next question.
Will Your Lifestyle Change?
When many people think of retiring, they imagine seeing the world and trying things they put off while working. However, your lifestyle may not change as much as you think.
A survey by the Bureau of Labor Statistics found that retirees spend 6.24 hours on relaxing and leisure activities daily and another 4.5 hours watching TV. The survey found that the average retiree lives a simple life without many of the high-cost vacations and activities you might expect.
This shows your lifestyle may not change as much as you think once you stop working. You may not need to save as much for retirement because of that.
Of course, you may not be the average retiree. Maybe you will spend your golden years traveling and pursuing new hobbies. If so, you should start planning for those expenses today.
The 4% Rule
When calculating the amount you need to retire, you should use the 4% rule. This says that you can withdraw 4% from your retirement account annually without having to worry about running out of money during a 30-year retirement.
So, if you have $1 million in your account, you could safely withdraw $40,000 per year. This strategy also assumes you invest your retirement funds in a roughly 50/50 blend of low-risk equities and bonds.
You can use the 4% rule to estimate how much you need for retirement quickly. For example, if you think you’ll need $60,000 per year to live on, you shouldn’t retire until you have $1.5 million.
This rule doesn’t work for every situation. Your expenses might be significantly higher or lower than 4% of your total retirement portfolio. But, you can use the rule as a starting point and then make adjustments based on your answers to the previous two questions.
Yang’s Advice for Those Worried About Retirement
Again, the majority of Americans aren’t on track to retire comfortably. If you’re one of them and don’t think you’ll be able to fix the problem, Yang has two tips that may help.
Start Building Passive Income Streams Now
When you retire, your goals shift from growing wealth to meeting your income needs. You need enough money to cover your expenses each year without running out one day.
That’s why Yang says it’s smart to start building passive income streams now — before you need them. These can act as a secondary source of income in retirement so you don’t have to cover all of your expenses with your savings.
Some of Yang’s top passive income recommendations for people focused on retirement include:
Investing in rental properties
Building a portfolio that focuses on dividend income
Monetizing a hobby
Of these, monetizing a hobby stands out as something you can do even if you have no spare income. From teaching singing lessons to selling your woodwork, there are plenty of opportunities to supplement your income this way.
Consider Relocating
Yang also says you may want to consider relocating in retirement. Doing so can help you lower your expenses, which reduces the amount of income you need.
There are plenty of great places to retire in the United States, and moving can be a new adventure to kick-start the next chapter of your life. But it’s hard to leave family behind.
If you aren’t willing to move to another region in retirement, maybe there’s a more affordable place that’s closer to home. Simply moving away from your area’s most desirable locations could save you a lot of money on housing.
Final Take
Retiring is a dream for millions of Americans — but you can only plan for yours effectively if you know the dollar amount you need to quit working. You can use the 4% rule to estimate your retirement number or plug your information into a retirement calculator.
If the figure you arrive at is too high, look for opportunities to bring in more income or reduce your expenses in retirement. That could mean picking up a part-time job, moving to a cheaper area or adjusting your lifestyle.
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This article originally appeared on GOBankingRates.com: Humphrey Yang Says This Is the Biggest Retirement Trap — Is He Right?
