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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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his mattress and he kept spending 30k a year well

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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

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

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

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

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

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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]

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

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

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

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

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

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

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

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savings he really has like six hundred grand

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

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

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

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

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

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

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

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

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

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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]

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

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

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pretty compelling he needs 30 grand a year to continue the

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

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

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

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

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

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

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

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

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

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on 40 grand a year and leave his kids er less

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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