Episode 14: Crunching The Numbers For Retirement: How Much Do I Need To Retire?
Now that we’ve taken some time in the last episode to discuss what your retirement is going to look like and even gave you some homework for what you might want to think about as you look down the road, we will dive deeper down the retirement rabbit hole to crunch some numbers for retirement.
Stick around as Jon and Kyle geek out on the numbers when they jump into a spreadsheet and play with the magic of compound interest and the silver bullets of real estate for those who have defined pension plans all the way to those who are left to plan it all on their own. Don’t worry, Matt wasn’t hurt in this episode.
What you’ll learn:
- How much money do I need to retire at 55? …at 65?
- Am I on track to have enough money to retire and feel financially free?
- What strategies can help me grow my planned retirement amounts to live the lifestyle of my dreams?
- Tax benefits of borrowing against your rental property to defer capital gains taxes; and,
- Should I invest in real estate or invest in the stock market when it comes to growing my retirement nest egg?
- Retirement Planning Spreadsheet
- Download our Wealth Building Blueprint
- The Invested Teacher Wealth Building Booklist
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For those interested in potential Joint Venture (JV) Partnerships, reach out to us here.
Kyle Pearce: Welcome to the Invested Teacher Podcast with Kyle Pearce, Matt Biggley and Jon Orr.
Matt Biggley: Get ready to be taught as we share our successes and failures encountered during our real life lessons, learning how to build generational wealth from the ground up.
Jon Orr: Welcome invested students to yet another episode of the Invested Teacher Podcast.
Kyle Pearce: Well, my friends where we left off last week, we had a challenge for all of you. So if you haven't listened to that episode yet, you need to go back and listen to it. We were chatting about what your retirement will look like. And we had a great discussion about your personal beliefs using that Don Campbell sort of approach to thinking about what your retirement might look like. We also talked about how retirement doesn't have to mean stopping your work. Matt's envisioning that he's going to continue doing some work, and I've got a funny feeling, Jon, you and I are going to be of the same mindset and the same approach, that we're always going to be learning, we're always going to be trying new things and, really, doing things that make us feel good, which is helping. And I know in the math space for you and I, we love helping more educators help more students to achieve at high level.
So lots of goodness in that episode. But the specific piece that we wanted you reflecting on is: what do you see for yourself, for your family, as you approach maybe the more secure financial years of your life? Or at least hopefully we're setting ourselves up so it's a more financially secure future where you have some more freedom to do what you want. And I think that's the big hurdle here, is what is it that you actually want to do?
Jon Orr: Yeah, and if you thought about that over the last week and envisioned what your lifestyle should look like, it's going to naturally bring up this question that we're going to dive in here to today, which is, how much do I need to make that a reality? We briefly talked about that last episode, but we want to go into two specific examples here in this episode by looking at what does it look like if you have your defined benefit plan or a defined retirement benefit plan and how can that look for the rest of your life? And then also, what happens if we have some investments, what happens if we buy a rental property and we have that equity growing? What is that going to look like to add to my retirement planning and what can I expect that to do over the course of my life if I keep adding to it, but also using it. So that'll be one example we'll look at.
The second example that says, "Maybe I don't have a pension. Maybe I have been contributing to my own retirement plans, my own retirement funds myself, and what does that look like? And do I have enough to make that grow so that it will sustain my lifestyle that I'm choosing and what I'm thinking about past my retirement and into say, the rest of my life?" So we're going to look at two specific examples with numbers.
So folks, we're going to do our best here to highlight, explain, be very clear on what numbers we're talking about, so that if you're listening, you're driving, you're on your run or you are like me, you're on your bike kind of pedaling along, you can understand what we're talking about here. But if you are near a computer or you're sitting on the couch and you want to pull up YouTube, you might want to watch because while we do our examples, we are going to share our screen with a spreadsheet that we've built. Kyle, I, Matt, we love to look at and analyze some of those numbers. So that's going to be helpful to see the spreadsheet. We'll also share a link to the spreadsheet so you can play around with your numbers as well.
Matt Biggley: This is where I am so grateful to be on this podcast with two bean counters, math educators and number crunchers because this can get intimidating when you start to throw out all these numbers and terms. One of the strengths that the two of you bring is just this clarity with being able to simplify things, because there's really two parts of this conversation. There's this logical part, numerical part of the numbers, and then there's this emotional side of your why and what it looks like. And we talked about that before. So I'm really glad that we can marry these two together. And interestingly, I can relate to this conversation so much because Kyle, gosh, we've had dozens, hundreds, I'm probably driving everyone around me crazy as I have transitioned from full-time teaching into full-time real estate and had to evaluate how I create a retirement for myself outside of this defined benefit pension.
It's been fascinating as we've had all these conversations and I have felt the allure of the golden handcuffs drawing me back to education at points, that emotional home, even though logically speaking in my conversations with you, Kyle, in the scenarios you've helped me walk through and my own financial planning team, they have said, "Matt, you are so much better off being a full-time realtor with the income potential layer and the investment portfolio you could build for yourself." I am drawn back to that certainty of what teachers enjoy and it's been such a absolute mind-bending exercise where I have just pounded these ideas into pulverized these ideas, trying to really think this through. It's been a fascinating 17 years of teaching, mid-career going like I have this other pathway, this other trajectory. I am in the midst of all of this thinking. So this is going to be a really great episode and I'm just so grateful to have the two of you guiding us through the numerical parts of it.
Kyle Pearce: I love it. I love it. And for me, we've chatted a bunch and I think what sort of got us down this line of thinking, we'll include the link in the show notes, but I'm going to pull it up here. It was an article, I think you referenced it in our last episode there, Matt, briefly, about the how much do you need in order to retire? And I think we've all seen it here. I think we've all seen these articles or maybe seen it on the news. It definitely attracts people's attention about how much do you need to have in order to earn or to be able to sustain a certain lifestyle. So we will talk a little bit about this some more, but in particular, this episode or this article, I should say, basically comes to this conclusion about $75,000 in retirement income, which seems pretty good, right?
That's better than our defined Ontario educator or teachers pension plan. So that's more than that, which is great, but now also keeping in mind if you're a couple, you're probably thinking like 75,000 between the two of you, right? For your family. We're talking for that household. So something to keep in mind. So they're saying, hey, they're looking to generate $75,000 of annual income, including their CPP Canada pension plan or their social security, old age security, any of those things that you would have, government assistance sort of plans, for retirement, you're going to need, they're saying an RRSP, Registered Retirement Savings Plan, should be kind of like your Roth IRA in the US, of just under half a million if they stop working at 65 and all the way to 1.5 million if they want to retire at 55 and we want to...
And they're also stating a few other things. They're saying your CPP pension, it depends whether you start that earlier or wait till 70 and so on and so forth. So this got us thinking, because you look at this chart and basically what they did is we're looking at the chart and they're saying, "You know what? If you retire at 55," they're just showing these bars going down. To me it feels abstract because they don't really say, they just say with an average rate of return and they say you're going to live to 93, but I don't know about you guys. I'm thinking, these articles sort of feel like a bit of a black box to me. So that's where you and I anyway, Jon, are sort of like a-
Jon Orr: Yeah, we did some number crunching here.
Kyle Pearce: Let's look at this and actually try to get a sense of what that looks like.
Jon Orr: Yeah, we actually took some numbers here and tossed them in a spreadsheet and I think we found their numbers that they used to build their conclusion here onto 75,000 and what rate they might be using, a return rate, and also what you might need to start with. That's a bigger question I think a lot of people might need to know, right? Okay, if I want to have 75,000 a year, per year, 'til I'm 93. Yeah, I get that I need to have 1.5 million if I want to retire at 55, but-
Kyle Pearce: How do I get there?
Jon Orr: Yeah, the more important question is, what do I need to do today to build that so that I have enough at 1.5 million? Is my pension supposed to get me there? We talked about that last time. Our pensions roughly being about $60,000 now, by the time we retire it'll be a little bit different because of cost of living allowance and-
Matt Biggley: Inflation.
Jon Orr: Yes, thank you Matt.
Matt Biggley: We're talking about inflation inaudible.
Jon Orr: Thank you, Matt.
Kyle Pearce: Inflation. The non-math guy.
Jon Orr: Yeah, yeah, exactly. It's like my mind goes blank. I think that's the more important question. So if I have this much now, what could I do to get there? And I think we'll definitely talk about that, especially in the second example. In the first example here, Kyle, we kind of say, "I know that by the time I retire, if I have that defined pension, that I'll have the $62,000 or $60,000 when I go to retire at 55." But then it's like, "Well, what happens if I do something different?" And I know that if you've been listening to all of the episodes or even just a couple other episodes of our podcast, we are talking about building our wealth in extra ways on top of what you already may have been doing to plan for this retirement.
So often we've been talking about purchasing an investment property, but it also could be put some money into save strategy on the stock market. We've been talking a lot about how to build that wealth and that's partly what's in our blueprint. If you went to invested teacher.com/blueprint, we give you ways to get started on that pathway so that you can start to build that extra amount and use it to generate your wealth. So I think in this particular example, we're looking at, "Okay, I have this 55, I might get $60,000, but if I have a certain amount now, what could I do now and what does that look like by the time I retire and how does that pad my $60,000?"
Kyle Pearce: Yeah, I love it. Now a lot of these articles too, we should also mention that they're sort of just assuming you're putting your money into some sort of stock bond portfolio, maybe it's managed, maybe it's self-managed. I think for a lot of people, either it's like black boxy where you hand it to someone else and hope that they do something good with it and you probably have your annual review and so forth, or you're doing it yourself and you may be going, "I'm not sure what to put in it." So we're going to use real estate as this lens. And up on the screen right now, we come back to our example from the technicals, our real estate hurdles technical session, and we have an example of a home that was $200,000. Again, you can scale these numbers however you choose. If you're in a market that's way too low, you can scale them up, you decide what makes sense for you.
But just for as an example, one easy way that you can go about this, especially if you are younger and you're getting into real estate investing, this is something, guys, we didn't talk about before we hit record, but it came to me as we were chatting. If you're younger and you have time to work while paying off the mortgage of your rental property, you could potentially set yourself up for a position where when you retire, the mortgage from that property is gone, hopefully your home mortgage is gone as well. So not only do you not have your home mortgage payment, but now your mortgage payment is now going into your bank account, your cash flow has now increased. So that's like an easy thing for you to calculate. So that $200,000 home, I brought this up just to show, the mortgage payment we had calculated based on the interest rate now and so forth was about just over a $1,000.
So that would be $1,000 going directly into your bank account and all of a sudden, boom, you've got essentially $12,000 of cash flow with a fully paid off, meaning you no longer have leverage on that property. Now that's not the most beneficial way to maximize that particular investment because again, now you're still getting appreciation on the property, which is great, but you have all that dead equity that's now built in there. So what we chose to do today was to look at, let's say, a $200,000 house and we figured, hey, if you're doing this as an investment property, you're probably going to have to put 20% down, plus closing costs and other things. So we took about a fourth of that amount as the amount you're actually investing. So about 25% of that amount, which is $50,000 and that is what you're putting out of pocket.
And we're going to play with some numbers here. So we want to just preface this with, you have to do this on your own and play with numbers so that you are feeling confident in what comes out here. Because what we're going to do here is, we're actually going to look at a return on your invested capital. So if we think about this for a second, let's just look at appreciation alone. People tend to use around two or 3% per year appreciation, but that is on the total value of the home. So that would be on $200,000, not on $50,000. So if we think about this, even if you picked a conservative 2% appreciation rate, we are talking about a fourth of that value. So I'd have to quadruple it, I'd have to multiply that by four. So 2%, four times bigger is 8%. That is just appreciation that we're looking at with this 8% number.
So I want people to think about this. What are we not including here, in this assumption? We are not including principle paydown or cash flow. Now if the property was fully paid off, you're talking about $200,000 sitting there. That's your invested amount that you have. But because we have a mortgage on this property, we're really looking at 8%, is what we would consider to be a pretty conservative long-term return on a property. The numbers we usually have from our spreadsheet when we're buying a property, especially when we're doing joint venture opportunities with different investors is much larger and it just leaves room for, again, there's the ebb and flow of capital expenditures are sometimes high, sometimes they're low, vacancy and all of those things. So we're looking at 8% being a pretty conservative number where we're essentially just building off the back on equity.
Jon Orr: Also, I just want to bring up, if real estate is not your chosen method of building your wealth, maybe you're looking at, say, doing dividend stock investing or index stock investing, and you're looking at, say, I've got a strategy over here, and you're wondering again, "Do I have enough here to pad my retirement and how can I look at it so that when I go to retire, will I have enough money in that, say, account to start pulling money out?" You've got to look at it in a similar way because Kyle is saying, we got a $200,000 house that appreciation, $50,000 is our capital or equity in that home and it's going to grow at 8%. So you could still look at this as let's say I have $50,000 in my tax-free savings account, or maybe it's in my RRSP account and it's growing at 8%.
Kyle, we looked it up the other day that if you just did S&P 500 or you just did index funds, they on average are growing at I think, what did we say? 11%? That's on average over the course of I think 20 to 30 years. So don't think you're every year you're going to get 11%, but it means if you were in that length of time, you spread it out because you're going to have down years and up years, you're on average getting 11%. So we're going with 8% here just because of the numbers on real estate that we've mentioned in past episodes. But you can look at it the same way. If I had $50,000 sitting in an RRSP account and it's growing at 8%, when we talk about this growth, I want you to think about it the same way.
Kyle Pearce: I love it, I love it. And that's a great thing for people to think about. Noting that again, for us, this 8% I think for real estate, typically, is a really low number, super conservative. If I'm doing this just in an RRS or in stock and bonds portfolio, you're probably going to want that number to come down even further to be more conservative. So that's kind of a disclaimer. Again, not advice here. We're playing with numbers and giving you some ideas as to how you can calculate based on the path that you are taking. So that's what we've done here, at least in this particular example, because real estate tends to be our favorite model. Now you're going to notice on the spreadsheet here, we're talking about eventually taking equity out through either a home equity line on the investment property or it might look a little different.
It might be just actually doing a refinance of the property. And there's a very specific reason why we, in our world, Jon and Matt and I, when we are projecting for ourselves that is our intent, is that we keep our properties, we try to limit selling properties unless there's a real reason to rotate the capital and we feel like there's an opportunity here to shift the equity around. But the reason we do that is because when you take a mortgage out on an investment property, you get access to all of that money completely tax free. Whereas on the other hand, if I sell that property and that property has appreciated, like let's say we hold on until retirement, we hold on until, let's say it's 55 when you want to aim to retire. So that pension starts coming in, you can see on the spreadsheet it's about 62,000 from our defined pension if we are teaching until the end of our career.
And then we start to pull some equity out of this particular investment property, we're going to start with 25,000 as the number we're going to do, that's going to increase our income each year to 87,000. But here's this hidden fact, that 25,000 we are not going to pay income tax on because the reality is I have to pay it back at some point, I have to pay the bank back. Now, ideally, it's going to be the renter that does that for me. We've been doing principle pay down this whole time, which that number we're not really including in our rate of return that we're using here, we're trying to be ultra-conservative with this idea. But as that principle is getting paid down, it's opening up more debt equity that I can then access tax free, tax deferred I should say, right? Because eventually if I sell that property, there will be tax, but it's better to sell the property with a loan out against it, than to sell it when it's fully paid off, and then there's this big capital gain on it.
Jon Orr: So if you're following what Kyle's doing here on the spreadsheet, and just to reiterate, so let's say we invested at age 40, you bought the $200,000 property or you have a $50,000 equity in that, or if you're doing another investment idea, it's the same idea about this $50,000 worth of a value, it's growing at 8%. So by the time we retire at 55, by the time we start taking money out at age today, 56, that money has grown to $171,000. So Kyle is saying that there's equity sitting there in that property at $171,000 if it grew at that rate.
So there's this idea that he's saying you could take a borrow against that, so you're not selling the property to get this value. There is this loan, home equity line of credit, saying, "I could take a loan against that as collateral of $25,000 and I could just take that. I have to pay it back because it's a loan, but I'm going to take it now because I know that that property is still going to grow in value. I know that I can pay it back." And you're saying, Kyle, that it's tax free, or in a sense, because later on when you go to sell that property, you're going to get more than what you owe on that property and you could pay it off with the amount that you've gained from the property and then you only have to pay tax on the difference, right, Kyle? Is that why you're thinking it's kind of a tax free situation?
Kyle Pearce: Yeah, definitely. And there's something I should say, and it may have been interpreted, I thought of what I said. So I don't want people to think that if you just keep borrowing against, borrowing against that the capital gain will change, because you're still going to have to pay capital gains taxes when you sell or when you die. That is going to happen. But one thing that you are introducing, is you're introducing some expenses in the interest through the property which the tenant is going to continue to pay.
So the upside you're still going to be plus or positive on that transaction or on that experience. And the goal there would be that you're essentially deferring that tax to way down the line. And in a future episode, we're going to talk about some ways that you can avoid that even further, but we can't get into it here. It would be too much of a rabbit hole. Matt, we're bean counting. We're like geeking out. I feel like I can hear it in Jon's voice. He's enjoying it. I'm feeling great. I'm just wondering for you and anyone else who's there going like, "Ooh, I'm not feeling the Jon and Kyle conversation here." Where's your heads at and are there any questions that either you have in mind or you're anticipating someone might have in mind?
Jon Orr: We haven't gone past this first year of retirement yet. We're kind of saying, "Hey, we could take us $25,000 loan against this property and that pads our pension, an extra 25,000 that we can use to benefit our lifestyle." So that's kind of where we are right now. We haven't gone past that in this example.
Matt Biggley: So the listeners can hear you guys are total nerds and they can also hear why I'm so lucky to have you both as partners and co-hosts on this podcast. So if I get this correct, and I have the spreadsheet up in front of me because it makes it really concrete, so we're assuming we start investing at the age of 40, we retire at the age of 56, which is around when most teachers retire and we get that pension, we get that defined benefit pension. So that's the 62,000 that we're anticipating via our pension. So we go back to this investment that we took out at the age of 40, bought a house, whatever it might be, and we're assuming this 8%, and you said this, Kyle, you said the 8% on real estate would be pretty conservative in terms of how we would typically, for our own personal investing, how we would typically got it. Can you clarify that for me? Where does that 8% come from?
Kyle Pearce: Yeah, so going back and when you think about you use, let's say, 2% as an appreciation number on average per year, that's 2% on the whole value of the property, which is 200,000 here. But we only have 50,000 invested. So if you think about that, I don't want to just take 2% on 50,000 because that's only a quarter of the value of the property. So the reality is, it's like you're getting an 8% return on that 50,000 because you get, there's four 50s in 200, so there's four twos in eight, and that gives us that 8% idea. Now that is just on appreciation. That is just appreciation. We haven't even accounted for principle paydown, which again, assuming you have this mortgage, it's going down each year, you're now 15 years into paying down that mortgage, which I'm going to guess is maybe a 25 year mortgage.
I know in the US 30 years is pretty common, but you're more than the halfway paid off point of the, or at least-
Jon Orr: So you have way more equity.
Kyle Pearce: ... halfway through the amortization. So yeah, so the number is, what you have available to access is actually a lot better than what we're seeing here with these particular numbers. So that's that conservative piece that we're kind of referencing. So we're trying to keep it conservative from a real estate point of view, but again, I'm going to argue that it might be a little bit more aggressive on the equity bonds, financial planner, manager side of things. So be cautious there if you're not thinking real estate for you. But for us with real estate, this is a pretty conservative way to think about this, because again, we're hoping that our return is going to be in the high teens sometimes in the 20% ranges, but again, we don't want to bank on it because, again, you just don't know.
There's always unexpected expenses. There might be situations that you run into. But the one assumption that we should make sure everyone's clear on here is that when we buy this investment property in this scenario, I'm not saying you have to do this, but in this scenario we are assuming that all of that money that's generated goes back into the machine. We call it the investment machine. We want it to compound. We're not taking it and taking it as income now when we're 40 to go on a trip or do any of that stuff, we're trying to live by our regular salary or whatever businesses that you have, and we're trying to make this about later so that when you get there, things are a little more predictable and that you know that you're going to have that financial freedom that we had been discussing on that last episode.
Matt Biggley: So that's good, Kyle, thanks for clarifying. And it makes me think of a couple of principles that we've talked about before. So I guess this, so this 8% is just one of the three ways we can make money in real estate. So that's just the appreciation. That's not the mortgage pay down, that's not the cash flow. So that's really interesting to me. That reminds me of, well, we talked about the three silver bullets. Now you're only actually spending $50,000 of the $200,000. So that's that principle of leverage. So you don't have to spend the whole $200,000. So this $50,000 then reminds me of this third principle of the magic of compound interest. So you're taking that $50,000 and the interest on that is compounding. So that's how we end up getting those big numbers when we start to look at that age 56. So I guess to summarize for the non-mathletes out there, we've got our $62,000 of retirement income and we're then able to supplement that because of those principles we've just talked about.
So we've got something that was worth $50,000 at age 40, that's now worth $171,000 at age 56, and we can borrow, take some of that increase in equity out of that, in order to supplement our lifestyle. So effectively our $62,000 can become $87,000. Or, if I'm really understanding this right, it can become any number or it can stay there and continue to compound and can be that safety net for you so that in retirement, if you needed it, maybe you don't take 25 out one year, but you plan a anniversary trip to Hawaii the next year and it ends up being expensive or your, probably more realistically, our kids will be coming asking us for money to help buy a house or whatever it might be. So this is really fascinating to me that we've incorporated all these principles we've talked about before, to take what seems like an okay number on paper that's $62,000 and really, exponentially ramp it up according to what we want our retirement to look like.
Jon Orr: Yeah, and that's a good point. You've built your equity alone up on that house if it appreciated at that value up to 171,000, so it could be any number. So you could have a really great year, Matt, at 56. You could say, "You know what? I'm going to sell that house." Theoretically I should be able to retain $171,000 from that house if everything went as planned with that being my equity in the home and I could have a really great year and spend that money or take that and do something else. But what we're suggesting here is, you're right, you could not take any money out of that. Nice thing about the spreadsheet is you can play with how much you want to take out that year, but what we've got so far is, let's say we take out $25,000 per year for the next few years and see what happens to that equity over time, because you could change it to $10,000.
Let's say, "Hey, remember one of my goals of retirement was I wanted to go on a vacation every year or maybe I want to take $10,000 a year and I want to live in a condo in Florida for one month every year. And this one purchase when I was 40 could also supplement that for a number of years." So it's like that one purchase way back then is now allowing me to have this one month vacation in Florida for a long time. So what we haven't done yet is extended this amount past this first year right now. So we dive back into the spreadsheet, that one purchase allowed us to have 171,000 of equity if we would take out $25,000 right now to supplement our income. So now we have $87,000. I have $146,000 left of equity in that home. So think of it, there's an account sitting over there that says, "Hey, I took out 25,000, I have to owe that back to that account and I have 146,000 left into going into next year."
So next year that money grows because it's going to grow at 8% and let's say I take another 25,000 out, that still pads my pension to the same amount. So I'm now still accessing $87,000 to spend. Yes, I just increased my loan amount to $50,000 back to that property, but I have equity of 131,000. If I keep doing that over the course of a few years, it looks like that pathway will run out. I'm not going to make it that far by following this plan right now, by the time I'm 64, it looks like I'm going to run out of money on that situation. I'm going to exhaust the equity in that property if I continue this path, even if it's growing at 8%, by me taking out 25,000 every year, it's going to run out. We're safe in the sense that the loan amount could be paid off of I sold the property, we talked about that before.
So I got access to using that $25,000 a year personally, to spend or do what I need to do or maybe buy other properties or use it the way you want, for about, looks like from 56 to 63 and then it runs out. So that means that if you're thinking long term, this might not be the best scenario if I want this one purchase when I was 40 to extend into last me forever into my retirement. So it might be like, "You know what? Maybe I should go back and adjust this." Maybe I should say let's adjust it, Kyle, to $10,000. So if I was like, "You know what? I thought 10,000 would be great for my Florida trip, for that one month." I don't even know, I'm just ballparking, that might not even be right. It could be 15,000.
But let's go with, let's take 10,000 to pad my income. I was making 62. So let's go back to my age at 56, I'm taking 62 from my pension, I'm going to take $10,000 out of the property, that pad's my new income to $72,000. My spreadsheet's going to automatically change and remember that I'm going to take 10,000 out. That reduces my equity by 10,000. But you can see in our spreadsheet, if I had $171,000 in equity, I take out 10,000, I have 161,000 left, and then the next year that's going to grow by 8%. So now I have 163,000 left to take out and it's going to keep going up. And then now if I look long-term, I actually never run out of money. It's not going to go down, because now my annual average interest rate of 8%, or my growth rate, is higher than the actual amount that I'm taking out.
Kyle Pearce: Yeah, totally. And the reality is my friends, again, these are the hard part about this process is there's no way for us to guarantee anything. So you want to be conservative. Being conservative provides the opportunity for you to be pleasantly surprised. And I think the numbers, you and I and Matt, we use numbers that are even more conservative than this when we're planning ourselves, but we want to give people a sense of where they are, because keeping in mind this is assuming that you're doing this at, I put age 40 just because I'm turning 40 next week, sadly, for everyone happy, I don't know, whatever. So maybe you're younger and you're in a different position or maybe you're older. So you have to really adjust here for your own situation. And I would say going on a more conservative side is always better.
So me personally, I would rather cut my rate down to something that is a little bit more, I guess super conservative, and it might mean that I want to commit more of my income now to investing. So another thing you could do is you could go, "Okay, well if I buy a property now and I plan to buy another property every two years," you can start editing and adjusting your spreadsheet so that now you're giving it that bump. Because remember, your working years... I shouldn't say your working years, because Matt, you're always going to be working, but I'm going to say the ones that are most financially beneficial, where you're really getting this good income, maybe saying yes to more things than you're saying no to because that's the stage of life that you're in, you want to be building this machine so that you can grow it from there.
Now here's something that's probably worth mentioning. So I made a small adjustment here to 5%, so that changes things significantly. You can see. So doing that and making sure that you're comfortable with where you are at, will be really helpful. But the thing I want you to think about as well is that there's opportunities all along the way to leverage that equity to do something else with. So what I mean by that, so what about the cash flow on the property? Well, if I'm cash flow positive, and let's say there is cash flow each year from the properties that you're purchasing, because you're doing it in a very diligent way, you might think about opening something like a whole life policy and we'll talk more about that in a future episode, but that could be a great place to start another system. And the beauty with a system like that, they call it infinite banking, is you can actually borrow back from it later, no tax issues, nothing like that, which is great.
So again, we're showing one scenario, but we want you thinking about how do you grow this without being risky? The one thing you have to be cautious of is you don't want to turn this into a get-rich-quick scheme, right? I'm 15, 16 years away from that number, 55, 56. I should not try to push that cart too far down the path or too quickly down the path because then you might start maybe making some mistakes. And by mistakes, I mean you might go into things that are too risky or are actually veering from what we're trying to do here, which is thinking a little more conservatively, investing in real estate is not risky. What's risky is trying to get into deals that are maybe well above what other people are experiencing because there's obviously got to be some additional risk there. So what are you comfortable with so that you know you're feeling like you're setting yourself up to be in a position where you're going to see some of these things through in the future.
Jon Orr: Yeah, good points there, Kyle, for sure. So you could see in this example that we've looked at playing with some numbers to change what growth might look like, but it gives us a sense of what we can expect in the future just as a general, "Hey, this might work." I like your example, Kyle, that in two years you might want to say, look, I might have enough to put this money somewhere else, and all of a sudden I've bought a different property. If you're viewing the screen right now, we are looking at, let's say I had a certain amount already and I had 125,000 to invest and I bought a $500,000 property, and then that changes things significantly on that same amount. I could play around with the spreadsheet as my idea here in what we can be doing.
So we're going to put the link to the spreadsheet in the show notes so that you can play around with it. And then remember, this is an example of I have an existing pension and what happens if I make this one investment here now and what does that look like going forward? But Kyle, let's take this now time to look over into the second example. And the second example is, let's start with the same age, but let's look at it as if we've been managing our own portfolio or maybe we haven't managed, but we don't have a pension to work with. We've been contributing ourself to our retirement plans, and this goes to probably the idea that we brought up at the beginning of the episode, about how much we have to have in our retirement account to retire at 55 or 65. I need that 1.5 million if I want to retire at 55 so that I can have 75,000 every year. That's what this example outlines, so not a pension. So Kyle, let's jump into that example.
Kyle Pearce: I love it. I love it. So here we're looking at an example as if you had, and we're starting with $350,000 for a person at 40 years old in some sort of investment, I say vehicle, because it could be a retirement account or it could be just like an unregistered account. It doesn't matter what it's in, I shouldn't say it doesn't matter. You should probably be thinking about that strategically where you have your money. But what we're doing is we're just looking and saying, if I've been working since I was let's say 25, full-time, and I know that I have to contribute to my own retirement, hopefully that's been on your radar and you have been saving some funds each year and those funds have amounted to, or amassed to, let's say $350,000 currently. If we look at conservative 6% amount, you can see that by the time you're at that 55, 56 mark, you're getting close to that 850, $900,000 goal.
Jon Orr: That not 1.5 million though.
Kyle Pearce: Not 1.5 million. So now that's at 6%. Now if I change that to 8%, right, then we're at that million or 1.1, 1.2 mark. So you could see how the interest rate really has an impact. Now, the scary part, when it's outside of something like real estate, the only thing in the equity market or in the stock market that operates somewhat like real estate, would be dividend paying stocks. Where the value of the stock hopefully, over time, is going up in value. That's where a lot of the return comes from in the stock market. But then there's also a dividend, which is the cash flow coming in. So depending on what that looks like or sounds like, it can be, I'm going to say, it's going to be a little bit scarier in that market because your account value will literally flip-flop very quickly if, let's say, we have a down year.
Like right now, it's 2023, and a lot of people are probably looking, if they have their own investment accounts, they're looking back and saying, "Wow, the S&P 500 is down 20% or 25%. The challenge with an average rate of return is that an average is just that. What we're saying is that it's more likely positive than it is negative. But the problem with that type of investment is the negative years really kill you. Now, this can happen in real estate too. If real estate market goes down as much as the stock market tends to at times, then that can still be problematic from an appreciation standpoint. But here we're looking and going, if let's say the stock market went down 50%, imagine a $100,000 in an account, it immediately, I say immediately, over that time span goes down to now being worth $50,000 and of course it's going to come back, but you now need a 100% return in order to get back to break-even.
So I'm going to say it again because it took me many years before this dawned on me. I heard it on a podcast, I was like, "Oh my gosh, I didn't even think of that, and I'm a math teacher." If I have a 100,000 and it gets chopped in half, we take a 50% loss that year, it's now worth $50,000. In order to get back up, a lot of people assume you just need a 50% gain because it lost 50%, but in reality, you need a 100% gain, and that is kind of mind-blowing. And the number on the average you might see over 10, 15, 50 years is still going to say positive, because most years it's positive, but on those negative years, some years are really, really big drops. So there's a little more risk there. So putting 8%, I don't know how comfortable I personally would be there, even though the S&P has an average rate of return of 11% since its inception, including dividend payments.
Jon Orr: Yeah. So in this example, I think if we've got that amount of money that is growing at, let's say, what you're using here, Kyle, 8%, which we're saying also can be quite aggressive, by the time we're 55, we have, looks like in this example, about $1.1 million. And so it goes back to this question that we started at the beginning. Most people want to know, do I have enough now so that I have this retirement later? So right now we're answering that question. If I want to have 1.5 million by the time I go to retire at 55 and I want to withdraw $75,000 a year, I don't have enough right now if I have 350,000. So we would have to change that or pad it. We would have to have something else that could help me get there. That's an important aspect to understand.
But let's say we go with this and we have 1.1 million at 55, in age 56 let's say I take out $75,000, that's my income, that reduces my account. My account now has decreased in value. This is something to bring up, Kyle, compared to what we were talking about with real estate investing on the other side of things. If this is sitting in a managed fund or it's in the stock market over here, and I've grown this on that side of things, when I actually take this money out, then the compounding effect has changed. So back in the home example, we were using a home equity line of credit to borrow against the compounding effect. So for example, the house was growing at 8%.
Kyle Pearce: Well, we were saying 2%-
Jon Orr: The equity. Right, right, right, right. Yeah.
Kyle Pearce: Yeah. 2% on the entire home, which on our invested amount was 8%.
Jon Orr: So our equity was growing at 8%. But what happens is when we started taking that money out at 55, we took out, say, borrowed against the home value. The home value was still growing unaffected, so the home value was still growing at 8% per year unaffected. It continues to add on. That's different than this example over here. This example over here is saying, I've grown this value in an account and this account had, say, 1.1 million, but now I have 75,000. In order for me to get that 75,000, I actually have to subtract it from the account. I have to withdraw that money from the account, which that now account decreased in value and now the 8% will grow on the new value. That's different than the home example, 'cause we borrowed against it. It didn't affect the actual growth of that account.
We have to owe money on that, borrowing inaudible, we had talked about how that made sense in the other example. So now it's not growing exactly the same way. But if I take $75,000 out per year, that gets me to, let's see, I'm scrolling down in the spreadsheet here and it looks like it gets me to about 40 or 81. Kyle, I would only last my money until about 81, which means if I want to go to 93 like in that example in the article, I'm going to need a little bit more money to start or I'm going to take out less now.
Kyle Pearce: I love it. Exactly. And again, we're using this 8% number, so if I'm not achieving 8%, there's going to be less there for me. Not to mention also, if it's not in certain protected investment accounts, you're going to be paying taxes on that money as well. So you have to also compensate there as well. When we're borrowing against our property, we're not paying income tax on that money that you're borrowing. So there's a lot to think about here, and this is not meant to be one of these scenarios where it's like, "Oh my gosh, these guys have figured out my retirement all for me." It's to empower you. It's to enable you to look at things a little bit differently. And I want you to think about this as well. When you look at right now, if you're 40 like I am, I'm approaching 40 literally next week as I mentioned. So it's getting really close. It's getting really close.
But if you're 40 and you're thinking to yourself, you're like, "Whoa, I don't have $350,000," or maybe you have more or whatever that number is, it's worth it to just get a handle on where you're at now and what you're currently doing now in order to project out a little bit and sort of see what that looks like or sounds like. Are the numbers you're using, are they too aggressive for you? So if you're going, "Actually, my investment account's supposed to be safer according to my investment advisor. So the numbers tend to be lower." These are all things you want to be thinking about, but what I hope it's doing is it's inspiring you to do some more learning with us, whether it's through the podcast or maybe with some of the books that we have on our investedteacher.com book list.
So you can head there at investedteacher.com/books. We've got all kinds that can be super helpful for you. But what we'd like you to do is think about what you're doing now and maybe, are there things that you could tweak? If you're thinking real estate, are you starting to see why so many of the wealthiest people in the world, oftentimes, most often, they've actually generated their wealth through real estate in some way, shape or form? There are other people who have done it through big businesses like Amazon and so forth, but there's much fewer people who have created generational wealth than through real estate. And this is why we are such huge advocates of real estate. We feel confident in it. Maybe you don't yet, but what we'd like you to do is start thinking about what are you you going to do, whether you have a defined benefit plan or whether you're all alone and you're on that island, I would encourage you to make sure that you start playing.
And if you don't understand Excel, it's not that hard to figure out. There's great videos out there, reach out to us, we'll point you in the right direction. But I find that this helps us to at least give ourselves more confidence that we're heading in the right direction. When we say that trajectory, right? And Matt, you mentioned in the last episode about changing your trajectory, your financial future. We can't follow it like a perfect straight line, but imagine if it's kind of like a squiggly line, but it's heading in the same general direction. You're setting yourself up to be more successful and more enabled to live the life that you want, where you want and how you want.
Matt Biggley: This makes me think of, we talked earlier about part of this is emotional, part of this is logical. I think when we're fearful of our retirement or we're anxious about our retirement, that's the emotional side, and I think getting into the numbers, even for someone who's not numbers based like me, helps with the logical side of things and helps you make sense of it. So that's really my big takeaway for today. Don't be anxious, don't be fearful, be excited, because even if the numbers part isn't your strength, we can help you unpack that through these episodes so that you can remove the emotion or the fear from retirement and replace it with some logic and a plan of action.
Jon Orr: Yeah, that's a big takeaway for me too, Matt, is diving into the numbers is a helpful starting place to see whether you're on track, whether you're not on track, how you can change and create that wealth building strategy, but also set the stage so that you are living that life you want to live. You are going to create this asset that can generate any extra money that helps you get to where you want to go.
Kyle Pearce: Well, my friends, if you have not yet, do us a huge favor, leave us a rating and review on Apple Podcasts or whatever platform you are listening or watching on. If you're over on YouTube because you want to check out that spreadsheet and you wanted to walk through with us here. Remember we're at youtube.com/investedteacher, and you can check out that video there. Remember show notes, links, resources and transcripts can be found on the website, including a link to this spreadsheet, which, you saw it, it's raw. We just made it right before we came in here. That's the best way to start, is build it yourself so that you can play with the numbers and you know what's happening when those numbers are changing. If we can lend a hand with that, don't hesitate to reach out for us. That's over at investedteacher.com/episode14. That's investedteacher.com/episode14.
Jon Orr: And also, if you are looking at how to get started in thinking about how to put some money away to create that first investment so that you can start building towards that retirement future, you can head on over to investedteacher.com/blueprint. We give you five different ideas on how to maximize and build your wealth. Also, if you are interested in partnering with us, we often partner with others, folks just like you, who are looking to build their wealth and get invested into real estate and are not sure exactly how to get started and would love a partner to do that with who's experienced, has that knowledge, has that expertise in what to do when, you can reach out to us over at investedteacher.com/jv, fill in a little form, and you get on our list so that when we have a new deal coming out, you can get some access to that deal.
Matt Biggley: All right, invested students, class dismissed.
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