529 Savings Plan

Finance a la shmoop.. what do you need to retire? well people when I retire I always think [Old man discussing retirement]

good year or Firestone... that's not the right video oh okay then.... all right

what do you need to retire as in have enough money to stop working forever [man fishing]

well like all great questions this one begs the greatest dancer of all time it

depends and no not the diaper company your friends money your enema enemy time... [Hammer smashes an alarm clock]

it used to be that in the 1970s smoking was really common and it really helped

out the insurance companies and Social Security because most people only lived

into their late sixties maybe early 70s and then they all died so a typical

worker might work until he was 65 retire last three or four years of coughing and [Man smoking]

then... well if you lived on 25 grand a year in the 70s and you're

retired at age 65 and you only lived four years after having saved a hundred grand

in retirement money and you had nobody else in your life didn't care about

leaving anyone any money then man that was the best yeah but then things got

more complicated stores and restaurants began to ban cigarettes, people started [No smoking signs appear]

learning that eating sticks of fried butter and rashers of bacon right out of

the fridge wasn't great for you despite what the bacon industry's research told

you and all of a sudden this happened so yeah today a huge number of people live

well into their 80s and 90s and unfortunately they're all running out of [Life expectancy chart rising in USA]

money by the millions anyway well you know that is before they do the frog thing...

so let's run through an example and see how that fine story fits your life or [Man sprinting through examples]

projected life anyway so Joe Blow retires at 65 with 400 grand in savings

his wife is dead but he has two kids and would like to leave him something Joe's

been living well he has a fully paid for home a paid for car and he spends about [Joe's home and car appear]

30 grand a year for food clothing lost golf balls and a subscription to

magazines we can't talk about here on this video...

he's a big cricket enthusiast if his 400 grand was entirely in $20 bills in

his mattress and he kept spending 30k a year well

then he'd have 400 divided by 30 or 13 years and change before he went totally bust hmm

well that's a problem because he's 65 and his doctors think he'll live until [Joe with his doctor]

85 so what does he do those last seven years hmm well his kids really don't

want him sleeping on their guest couch and he doesn't want to do that either [Joe sleeping on a couch]

hates leather he also owns his home and car free and clear well he could

certainly sell all or part of his home and get 8 grand or so in cash for his

car it saves them car insurance payments and gas maybe let him live and unless

that 30 grand a year and you know that 8 grand goes a long way on uber but before [Joe travelling in an Uber car]

we get into the home selling part let's get to the basics well there are some

key variables here first he doesn't need to spend 30 grand a year he could

certainly cut back on movie nights and dinners at the palm and accessories for

his flip phone he could stretch the 400 grand a consisting of $20 bill stuffed [Joe stretching a 20 dollar bill]

into his mattress so that it lasts much longer than the projected 13 years here

if he wanted to come out exactly even and he knew that on his 85th birthday he

would you know go the way the Frog or if he's planning on doing this when he hits [Joe driving a ferrari]

85 well then he has to make 400 grand stretch only 20 years and it just means

he takes his annual spending down from 30 grand a year to 20 grand a year not

bad at all and he won't miss catching fights on pay-per-view all that much but

most people don't have such certainty on the dates in their lives and most people

don't have a mattress that can hold 400 grand in 20s instead they have as part [Woman balancing on a mattress with dollar bills underneath]

of their savings program a morass of stocks, bonds, cash and a home well to buy

their home they took out a mortgage usually 30 years earlier and slowly paid

off the home debt over that time so that after 30 years of mortgage paying, they own

their home free and clear with no debt most of you have probably heard of a

mortgage but there's also this thing called a reverse mortgage

Well turns out Joe's house was worth 200 grand and he could simply [Joe's house worth shows and banker appears]

borrow against it on his way you know out so instead of four hundred grand in

savings he really has like six hundred grand

available to him well if he spent 30 grand a year his old spending budget for

20 years well then he comes out just even and it's likely that over those

twenty years his house would appreciate in value like say it ended up being [House value increasing]

worth three hundred grand at the end and those kids could still sell it pay off

the 200 grand of reverse mortgage he borrowed on it and still they'd have a

hundred grand buy a Prius or renew their dad magazine subscription that we can't

talk about here but what if Joe wanted to live the high life in his retirement [Joe looking at elephants]

isn't there something better he could have done with his four hundred grand...

this is a finance and stock investing course so we're hinting here...

sure instead of 20s in the mattress he could have taken some risk and put it [Person grabs 20 dollar bills and transform into stocks and bonds]

into stocks and bonds well just for simplicity sake let's say he made five

percent per year net of taxes and fees and his investing well the math is

pretty compelling he needs 30 grand a year to continue the

high-quality full-contact lifestyle he's been leading and we just went through

how easy it was to get there with a combination of slowly borrowing against

the equity value in his house and pilfering the 20s in his mattress but if

instead of the Serta strategy he had invested the money in a relatively safe

5% of your strategy well five percent of four hundred grand is 20 grand a year

for the 20 years of his retirement he could still spend the 30 grand a year 20

grand from investment returns on his 400 KMS tag and 10k a year from borrowing

against his home and he'd still have the entire 400 grand left over to leave to

his kids a bonus round but let's say he wanted to go totally nuts and live life [Joe thinking about ordering in McDonalds]

on 40 grand a year and leave his kids er less

well than each year he could take 10 grand out of his 400k of savings and just spend it the problem

then is that each year the capital base from which he derives his 5% a year

shrinks so after year 1 when he's 66 the 400k of

now 390k and instead of 20k in returns based on his 5% a year return figure he

gets 5% on his 390 or $19,500 but he likes the high life and wants to keep

borrowing 10 grand a year from his nut or nest egg there whatever you call it so

maybe in year 1 he spends the total from his reverse mortgage dough, all 20

grands whatever and just spent a bit last year after year for 20 years like [Joe cost of living decreasing]

nineteen five and nineteen thousand and slowly going down until he kicked the

bucket and leaves his kids 200 grand instead of 400 grand all right you get [Referee whistling and final value appears]

the gist here there are tons of ways Jo's twilight years could have gone

spent more spent less ended up with a ton of money for the kids ended up

destitute how much do you plan to live it off in your later years and if you've

got family are you going to leave them anything or do they just get to inherit

your you know questionable magazine collection [Joe's kids holding magazines]