Also we shouldn’t forget the fact that while saving $2,000,000 sounds like a lot TODAY, we are actually talking about $2,000,000 in 15 years, which won’t sound like quite that much. I may be doing the calculation wrong but if you invested $600,000 today in the stock market (and didn’t add anything) and got 8% annual return, you would have about $2,000,000 in 15 years.

One interesting point on this is the more you save, the less cash you’ll need in retirement to maintain your current spending level, even if you don’t take into account not having mortgages, kids to pay for, less income exposed to tax, etc. If you save 30% of your gross – and don’t expect to “live much larger” than you currently do – you’re living (or paying taxes with) 70% of it, so 70% is probably the upper bound of what you’ll need in retirement.

So what’s the assumption? That the retirement fund isn’t offering a return at all?

@samewriter – There is no certainty in the world of investing, though yes, I wish the tools available to the gen’l public were more sophisticated.

@tolak – I took a look at the Bernstein book – I basically subscribe to the asset allocation model he advocates.

Seriously, though, to me this highlights a general issue; there is no right answer for how to save enough for retirement, and financial advisors are full of bunk if they claim otherwise.

If the advice of a group of “experts” (and I use that term very generously) on something as fundamental as how much money you need to retire for a desired income can vary from $2M to $5M, then in my opinion one is better off taking the $500 he might have paid for the financial planner and putting it in porkbelly futures.

I realize that there can never be a “correct” answer for how much one needs to save. And personally I tend to err on the side of caution. But why bother consulting an expert if all the expert is going to do is make up some numbers about expected rate of return, ask you to make up some numbers about your risk aversion, and then give you a made up number about how much you need to save to get to where you want to be?

For someone in their 20s or 30s, here’s the reality: We’ll save what we think we need to save, and when we get to retirement age, we’ll look at what we’ve got and figure out if we can retire, if we just need to cut back, or if we must keep working. The story is different for someone closer to retirement. He may be able to get an accurate picture of where he’ll be financially, and what steps he needs to take to shore up shortfalls.

Those of us (and I am one) who come up with a savings plan at age 30 to have $X by retirement age are fooling ourselves if we think the models we’ve created in Excel will come close to resembling reality in 30 or 40 years.

If you leave your withdrawal rate at the same percentage every year, you will get a raise (inflation hedge) each year that the portfolio performs at least as well as the inflation rate (taxes aside). Of course, you will also get a reduction in the years that the portfolio doesn’t keep up with inflation.

Sorry about the rambling.