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Rule#1: Goal-based investment planning | Retirement planning example | Investing for beginners - YouTube
Channel: FinancingLife
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in this video I'm going to tell you the
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four steps to goal based investment
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pointing and then illustrate with an
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example our example will focus on
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retirement planning because it is the
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one thing you are all guaranteed to have
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in common and it pays to start early
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this is important for everyone perhaps
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particularly for women because many
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women live longer than men earn less
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than men spend years out of the
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workforce caring for children and
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accumulate less retirement savings I'm
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Rick van Ness you're watching the ten
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rules of common sense investing a video
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series about saving and investing to
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maximize lifelong happiness these rules
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help you answer two questions how much
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to save and how much risk to take some
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of our dreams need a little money this
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list is where we begin we need to have
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some idea of how much we need to save
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and how we will save that there may be
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part of you rebelling already relaxed of
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course you don't know the future but it
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will serve you to imagine one scenario
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the enemy of a good plan is the search
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for a perfect plan
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so make assumptions and then change them
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when you get better ideas or better
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information our goal is to enable these
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possibilities step one is to start with
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simple goals dates and costs expect your
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plan to change every year that's okay
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keep it simple or you won't remember it
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write it down now improve it later your
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goals are dreams with deadlines think in
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terms of how old you will be that's the
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same as a date but you're imagining it
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it's more personal
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make a quick wild guess and how much
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money each goal will need I promise you
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that turns on your radar and
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subconsciously you'll begin gathering
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information that will improve your
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initial guess so don't worry about being
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way off you know just doing this simple
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exercise is the hardest part it's not a
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workable plan yet but it is a direction
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and you may eventually get to where you
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want just by going in that direction
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step two is to improve the cost
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estimates whether your goal is to buy a
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house remodel your kitchen or plan a
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comfortable retirement the place where
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all these planning steps differ the most
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is how to improve the dollar estimates
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you probably don't need as much help
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with your other goals which is another
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reason I've chosen our example to focus
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on retirement planning considerations
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for retiring include figuring out how
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much savings you'll require when to
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start Social Security and whether to use
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CDs a lifetime annuity stock index
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mutual funds or combination of these
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kind of things step three is to
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prioritize by needs wants and wishes the
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idea here is to match safe investments
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for your essential needs and consider
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investment risk only for the wants and
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wishes that you could live without if
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risk rears its ugly head step four is to
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match each goal with investment risk
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this will be the grand finale and
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easiest for me to show by our example
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the challenge here is to turn retirement
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savings into monthly income for however
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long you might live and avoid some of
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the other big financial risks ahead big
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risks are not saving enough inflation
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stock market volatility
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outliving your money and common
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investing mistakes because we're human
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let's dive in we'll use an
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easy-to-follow example his name is Edie
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he was single his whole life and is now
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retiring at age 66 every year since he
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was 25 he wrote this same goal and kept
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adjusting it every year for inflation
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back in 1980 it looked like this now it
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takes three times as much money to
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retire with the same standard of living
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always keep your plan updated in today's
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dollars the total savings dollar goal is
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important to choose it's often called
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your nest egg goal based investment
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planning for retirement starts with an S
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of annual living expenses most people
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want to keep their lifestyle in
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retirement to be the same as they had
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just before retirement and they can do
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that by replacing only a portion of
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their pre-retirement income this
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replacement income is lower because you
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no longer need to save for retirement
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your tax rate might be lower you may
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have paid off your mortgage the kids may
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have moved out you spend less related to
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your career and you have more time to
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shop around for a good deal and more
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time to cook at home I'll show you two
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methods to estimate the total savings
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that will be required the primary
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sources for retirement income are Social
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Security pension benefits and
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accumulated savings we need to estimate
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the amount of retirement living expenses
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that will need to come out of your
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savings in the United States your Social
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Security benefit is often most
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significant for low earners for high
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earners a larger portion will have to
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come from savings a simple method for
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those with modest lifestyles is to
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multiply replacement income by 12 the
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idea here is to assume your Social
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Security benefit will cover about half
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of your retirement income needs in our
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example Edie used this approach because
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it was simple later in this video you'll
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see how well it works out for him he
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recently decides his replacement income
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should be about $65,000 a year and then
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grow with inflation so his total savings
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in his nest egg needs to be 12 times
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that or seven hundred and eighty
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thousand dollars remember that number
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for our example because he'll have to
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draw from that to supplement his Social
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Security income and there are some
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important decisions ahead in steps three
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and four now some of you are going to
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need to save more well who might that be
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if you choose a higher standard of
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living or if your Social Security
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benefit might be lower or if you need to
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buffer stock market volatility moreover
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some of you have other sources of income
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like a pension so
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another very popular method to figure
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out what your nest egg needs to be is
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the 4% rule you'll start with your
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replacement income subtract income
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you'll get from Social Security and
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pensions and come up with your annual
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draw from your savings your total
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savings nest egg should be 25 times your
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annual draw to finance 30 years of
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retirement you get those extra years
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because it assumes you're invested 50%
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stocks and 50% bonds this method might
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suggest you need a bigger nest egg it
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would forehead is one method better than
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the other it depends you'll get some
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insights as we keep working our example
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let's recap initially we made our best
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guess at the dollar cost step two looked
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at two easy guidelines to improve it
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we're not after precision here just to
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get in the ballpark the next two steps
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we'll look at how I should invest this
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money step three is to separate needs
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wants and wishes IDI has met his
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retirement savings goal and would like
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to retire this year at age 66 to achieve
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a worry-free retirement he now expands
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his one goal into three his essential
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needs his wants and his wishes here's a
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closer look at how his annual living
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expenses might break down his essential
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needs are not optional they add up to
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$40,000 a year his wants are
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discretionary he could live without
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these but they're important to his
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quality of life there are another
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$25,000 a year if he had enough money he
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has additional wishes as well for step
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four we'll compare three strategies to
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match investment assets with each goal
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most important is to establish safe
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guaranteed income sources for your
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essential needs that will need to last
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your lifetime
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that's the needs below this red line
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since there is uncertainty about how
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long you will live social security
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pensions and some commercial annuities
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are well suited for matching with this
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goal this is the role of
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nobody's people that live short lies
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subsidize people that live long lives
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society comes out ahead because everyone
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is not over saving for long life
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contingency this frees up money for
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people to take trips or other spending
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that increases happiness my example will
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illustrate this next it considers three
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different ways to match investments with
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his goals first hedging inflation with
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Social Security and tips bonds second
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delaying Social Security and buying a
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lifetime annuity last using low-cost
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index funds instead of an annuity just
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for fun you want to take a guess at
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which of these three strategies will be
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best for it to evaluate these strategies
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and must consider them as generating
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streams of income for each year of his
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retirement with income for his essential
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needs coming from one source an income
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matched with his wants coming from
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perhaps another source detaching this
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income from the stock market enables a
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worry-free in retirement its goal is to
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create inflation protected retirement
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income of $65,000 a year using Social
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Security and his savings its first
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potential strategy is to hedge inflation
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using both his Social Security benefit
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plus use inflation index bonds called
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tips bonds he starts by looking up his
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Social Security benefit my social
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security.gov it shows your monthly
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benefit for different start ages
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starting at age 66 its benefit will be
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about 12 times this monthly amount or
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about $30,000 this year with an annual
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inflation and adjustment he receives the
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Social Security benefit for as long as
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he is alive but so far he's $10,000 shy
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of the red line his annual bear
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essential deeds which are $40,000 a year
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his savings could give him an additional
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twenty two thousand dollars till he's
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aged a hundred but that doesn't cover
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half of
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once so he sees that as an unhappy
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retirement alternatively he could fully
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fund his budget for once but then he
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would run out at age 87 and he would
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have to hope to get into a desirable
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Medicaid facility which he's not at all
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excited about it thinks that Social
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Security benefit is looking better than
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ever there's a huge benefit from
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delaying Social Security until age 70 in
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this example it's an additional ten
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thousand dollars a year he'd get $40,000
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for the rest of his life and it includes
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a cost-of-living adjustment for most
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people this is an exceptionally good
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deal in the second strategy it still
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retires at age 66 and uses maturing
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bonds to fund the four years before his
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Social Security benefit starts at age 70
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which will now be $40,000 and fully
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covered his essential needs with the
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balance of his money he plans to
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purchase an immediate income annuity
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also at age 70 he looks up a free quote
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for an immediate income annuity to fully
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fund his wants for as long as he lives
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keeping up with inflation with a 2%
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cost-of-living adjustment
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looks good again he retires at age 66
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uses his savings for four years to get
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to higher Social Security benefit and
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will buy an annuity with a
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cost-of-living adjustment when he
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reaches 70 to cover all of his wants in
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fact he'll have fifty eight thousand
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dollars left over to use for and wishes
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he's eliminated longevity risk inflation
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risk and market risk looks pretty good
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all of his needs are covered and he'll
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sleep well never having to worry about
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stock or bond markets again but he
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wishes he could be more generous which
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maybe he could be if he didn't purchase
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the annuity so for completeness he
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considers whether he might rather be in
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stock mutual funds he could allocate
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money to get his essential needs then
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using the 4% rule for the rest of his
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nest egg would suggest that he could
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safely me
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his wants for 30 years with a portfolio
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of stock and bond index funds this would
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give him the best chance of additional
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funds if the market is strong but also
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the greatest risk of shortfall if the
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market does badly he'd especially be in
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a jam if the retirement years start with
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a sequence of bad returns this isn't a
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good strategy for edy but everyone is
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different somebody very frugal with very
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few wants might prefer this or somebody
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wealthy enough that they could bear the
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market risk in this video I've shown
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that it is easy to make a plan and
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improve it each year it starts by
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putting your goals in writing for our
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retirement planning example we use
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guidelines to estimate annual living
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expenses and then calculate the total
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savings nest egg required for that
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retirement income we prioritize to
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separate essential needs from those
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which we could live without
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and finally match investment risk with
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each goal don't worry if you don't feel
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like you can do all this yet there's
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more to learn and you'll become
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comfortable I'm showing you the kind of
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thinking you'll be able to do keep
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watching this video series learn how to
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take control of your finances and live
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the life you want to live the next video
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we'll look at saving how do people save
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that much money what important tricks
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make it easier after that learn about
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your most important decision investment
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risk see you in the next video
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