The Safest and Earliest Time To Stop Saving for Retirement, According to Humphrey Yang
Written by
Crystal Mayer
Edited by
Jenna Klaverweiden
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When it comes to saving for retirement, it can be challenging to know when enough is enough. A quick internet search will turn up a dozen different theories on what a fully funded retirement plan looks like and how to achieve it.
Unfortunately, retirement is far from a one-size-fits-all scenario. As personal finance expert Humphrey Yang recently explained to his YouTube followers, here are the six variables you need to determine the safest and earliest time to stop saving for retirement.
Determine Your Retirement Number
The short answer is that a person can stop saving for retirement when their portfolio is fully funded, but the real answer is that when to stop requires analyzing multiple factors and may not be as straightforward as one might hope.
Yang, a former financial advisor, said there are six variables that need to be considered to determine whether you can stop saving for retirement. First, people must ascertain their retirement number. This is how much money they need to save to retire comfortably. To figure out this number, Yang advised taking the expected annual spend and dividing it by the withdrawal rate, which is 4% to 5% for an average retirement duration of 30 years. The result is the amount that would need to be saved in a retirement portfolio to retire comfortably. However, it is important, as Yang noted, to account for inflation.
Determining the magic retirement number can be challenging and heavily dependent on lifestyle preferences. The experts at T. Rowe Price recommend a 40-year-old have at least 1 1/2 times to 2 1/2 times their salary saved, while a 50-year-old should have 3 1/2 times to 5 1/2 times their salary saved.
Unfortunately, retirement savings are rarely cut and dried. They can fluctuate, which is why taking into consideration other variables, such as savings rate and spending needs, can play a critical role in determining when a person can stop saving and start playing.
Calculate Savings or Net Worth
The second variable, according to Yang, is a person’s savings or net worth. This figure represents the portfolio size and should incorporate savings accounts, retirement accounts and other assets, such as the equity in a home.
Estimate the Expected Returns
Yang estimated the expected returns to be 6% but noted in the YouTube video that this conservative number could be adjusted to ensure that enough money is being saved even if returns are less than anticipated.
Factor In Current Savings Rate
Saving for retirement is critical, but as Yang pointed out, oversaving for retirement may not be worth it. Scrimping every penny in an effort to have more money during retirement can backfire if there is not enough time left in life to enjoy the money saved.
The idea is that at some point, enough is saved for the portfolio to continue growing on its own without new contributions. The money that was being saved can then be spent on experiences or luxuries previously avoided.
Decide Retirement Spending Needs
One of the most important variables, and one that is highly subjective, is spending needs. This number will depend on retirement lifestyle preference and should take into account things like healthcare costs, living expenses and travel plans.
According to Fidelity, people can expect to spend 55% to 80% of their current income each year during retirement, depending on whether they hope to have a more active lifestyle. Calculating expected monthly retirement spend is fundamental to assessing whether there is enough saved now.
Take Into Account Other Income Sources
Lastly, Yang recommended taking into account other expected income sources during retirement, such as Social Security, pensions, rental income or part-time income. It is important, however, to note that future income may not be guaranteed or relied upon.
A financial advisor can help determine how to take additional income sources into consideration when planning for retirement.
Arriving at a Final Number
Yang suggested using a trusted artificial intelligence platform to help determine whether a person could stop saving for retirement based on the variables listed above. He also mentioned other methods, such as the Coast FIRE strategy, where a person can still work a little (or coast) to cover expenses.
The bottom line is that no matter what method is used, saving for retirement is complex with a variety of variables that can drastically change whether there is enough money to live comfortably without working. Partnering with a financial professional can help to ensure that when it comes time to retire, there is money in the bank and enough time on the clock to still enjoy life.
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