Common Questions – How Much Do I Need to Save for Retirement?

The other day I asked the following questions in a “Question of the Day” post:

In your opinion, what’s the most confusing aspect of personal finance?

What area gives you the most trouble?

Several commenters stated that they had problems with trying to determine how much they needed to save for retirement.

That’s a tough question for a variety of reasons:

1. Retirement may be decades away. AS quickly as things change from one day to the next, it’s extremely difficult to imagine what the future will be like decades away.

2. Nobody knows what inflation will be like over the next few decades. A gallon of milk is around $4 today. At an inflation rate or 3%, that same gallon of milk will cost over $7 twenty years from now.

3. Expected rates of return are hard to determine. If you’re too conservative and use a lower expected rate of return, your calculations will tell you that you need to save lots more. On the other hand, if you’re too liberal and expect a rate of return that’s too high, your calculations will tell you need to save too little.

4. Nobody knows how long retirement will last. It could be five years or it could be forty years.

5. What will happen with Social Security? Although I’m not expecting Social Security to vanish, I do expect to have to wait longer to get a REDUCED benefit. It stinks, but I don’t see any way around it. That’s why I don’t include Social Security in my retirement analysis. If I get some, great. If not, I’ll be ticked, but I’m at least prepared.

6. Nobody knows what taxes will be like in the future. If I were a betting man, I would say that tax rates will be higher in the future.

7. It’s hard to balance today’s needs with the needs of the future. Let’s face it, we all want to enjoy life today without sacrificing the future.


So, where do we start?

Personally, I think the place to start is by looking at your current situation. Ask yourself these questions:

Do I make enough today to provide for all my needs?

Realistically, how much more do I need to make in order to put myself financially comfortable situation?

I use the word “realistically” because we would all like to make $1 million per year. However, for most of us that just isn’t realistic.

If the answer to the first question is yes, then take that number and project it into the future using an expected inflation rate. For example: say your current taxable income is $75,000 per year. We’ll assume that you are happy with that number and feel that you could have a comfortable retirement on $75,000 per year (in today’s dollars and excluding Social Security).

The next step is to then look at a range of possible inflation rates to get an idea of what amount will equal $75,000 in today’s dollars sometime in the future. For instance, let’s say you are 30 years from retirement and expect inflation to run between 3% – 4% over the next 30 years. Using the future value formula, we can calculate the future value of $75,000 at both 3% and 4% inflation rates like this:

At 3% inflation…

FV = $75,000 × (1 + .03)30

FV = $75,000 × (1.03)30

FV = $75,000 × 2.427262471

FV = $182,045

At 4% inflation…

FV = $75,000 × (1 + .04)30

FV = $75,000 × (1.04)30

FV = $75,000 × 3.24339751

FV = $243,255

It’s seems crazy to think that someday it will take $182,045 just to equal what $75,000 buys today. That’s inflation for ya! Anyway, according to those numbers, we are looking at a range of $182,045 and $243,255.


So, we have an idea of our future income needs. Now we need to figure how big of an account we need in order to generate that kind of income. There’s a couple of ways to do this. The first one assumes that you don’t want to touch your capital base so that it can hopefully grow each year, giving you a bigger base with which to withdraw from in the future. This is the most conservative method. It’s also going to require A LOT more money.

Here’s how it works. Let’s assume that you don’t want to withdraw no more than 4% to 5% per year. You simply divide your withdrawal rate into your income needs to get your capital base. Like this:

$182,045 ÷ .04 = $4,551,117

$182,045 ÷ .05 = $3,640,894

$243,255 ÷ .04 = $6,081,370

$243,255 ÷ .05 = $4,865,096

So we’re looking at needing a capital base of $4.5 million to $6 million if you don’t want to withdraw no more than 4% per year. Theoretically, as long as your portfolio returns more than 4% per year, you shouldn’t run out of money (assuming you don’t withdraw more than 4% of your portfolio’s value). It also means that you will have a pretty good chance of being able to leave an estate to your heirs if that’s important to you.

Retirement Savings Calculator

Another method is to use the retirement savings calculator I put together a couple of years ago. I had forgotten that I had created this calculator until I found it while looking through my Excel spreadsheets. This calculator is one of my favorites because it was one of the most challenging to create.

The calculator is composed of two parts: the input page and the print out page. Both pages work hand-in-hand. Using the numbers from above, we can input the following information:

Current Age: 35
Retirement Age: 65
Expected Length of Retirement: 25 (in other words, you expect to die at 90)
Current Income: 75000
Desired Assets to Leave to Relatives/Charity: 250000
Amount Currently Saved: 100000

All the other blanks should already be filled in for you. You can, however, make changes and run different scenarios. For instance, if you didn’t want to leave anything to charity, you could put 0 in that blank. I would recommend against this because the amount in that box could be your safety net in case you live longer than 25 years in retirement.

Anyway, this calculator tells you that you need a little over $3 million at age 65. Why is this amount so much smaller than amounts we found previously? Because this calculator assumes that you are spending down your principal during retirement. IMPORTANT NOTE: this calculator also assumes linear (or straightline) growth during both the accumulation phase and the distribution phase. We all know that we don’t live in a linear world. That said, it’s still a decent way to look at retirement planning.

So there you have two ways to help you determine how much you need at retirement. Yes, they both work off a lot of assumptions, but I’m afraid that’s the best I can do. There’s just too many variables to get it nailed down any harder than what we just looked at. One thing you can do is look at these numbers once a year to see how you are doing. If it looks like you are going to fall short or your needs change, you can make adjustments.

There’s more to this. Next time, I’ll talk about figuring out how much you need to save each month in order to reach your goal. Until then, please feel free to offer up any comments or suggestions about today’s post.

18 thoughts on “Common Questions – How Much Do I Need to Save for Retirement?”

  1. Dividing your expected retirement need by 4% is done to allow for room to increase your distributions with inflation throughout retirement. Most of the studies that support a 4% distribution rate include spending down principal, concluding a greater than 90% percent chance of not running out of money after 30 years of withdrawals based on 4% of your portfolio at the start of retirement and then adjusted annually for inflation. Greater than 30 years or a withdrawal greater than 4% of the starting value will cause the probability of success to shrink rather quickly.

    Also, consider your investing fees. If you have a 1% total expense on your investments, that comes out of the 4% sustainable withdrawal leaving you with 3%, essentially acting like an extra 25% income tax. Too many people ignore fees in retirement projections and place the sustainability of their distributions in jeopardy.

    The linear projections are seriously flawed because they completely ignore risk, which is the actual driver of higher returns. You could actually average a return higher than what you projected and still run out of money many years, even decades, sooner than expected because the timing of the higher and lower returns that make up the average has more influence on your portfolio balance than the average itself.

    A liner projection will typically have less than a 50% chance of actually producing an outcome that is equal to or greater than what was projected. This is why a liner projection will result in a lower portfolio size at the start of retirement. It is because you are comparing a less than 50% probability of a sustainable retirement with a greater than 90% probability of a sustainable retirement. Whether or not you invade principal in either case is a function of chance; the chance is much greater with a smaller starting balance.

    Actual probabilities will be influenced by chosen asset allocation and fees.

  2. What’s the FV on a currently crappy lifestyle? A future just-as-crappy lifestyle!

    That’s why I think it starts with the following:

    Your life is about what you DO not what you HAVE … the DO part is about legacy; what, if anything, do you want to be remembered for?

    The financial part of this is simply asking: how much will it COST (time and/or money) and by WHEN?

    THEN, we can follow on with the rest of STEP I and so on …

  3. The financial-planning industry recommends that you will need apprx. 75-85 percent of your pre-retirement income to live comfortably during retirement. I think this is entirely too high and considering the more they can get you to set-aside, the more they profit.

    The answer to how much you need really depends on what you want out of retirement. Hopefully, we all calculate correctly!

  4. Hi guys,
    This is a really good site to get sound advice on.

    You choose members from the community to follow… very interesting as it allows you to connect with people

    in your risk group and with your investment philosophy.
    Loved it. It’s at


  5. Dylan – how do you figure that investing expenses come out of the 4% withdrawal rate? I don’t believe they are relevant unless they are being charged on the withdrawals which doesn’t make sense.

    JLP – why do need the same income as you have now? Assuming all debts, mortgages etc are paid off then you should be able to retire on a lot less (as Milk suggests).

    I’d love to have the same high income in retirement that I have now but I also want to retire before I’m 80!


  6. JLP – Pretty much all retirement calculators have flaws, which is why I have tried to build my own in Excel. That way I can run various scenarios.

    But I like yours as a simple quick and dirty alternative. What I especially like is the feature that gives you the add’l lump sum needed NOW to meet goals item. This gives you some idea of where other sources of funding that may be uncertain at the moment, might help fill the gap (ex.home equity, inheritance, proceeds from business sale, etc.). I also like the fact that it lets you input how much you’d like to have left over.

  7. Mike,

    I only use today’s income as a starting place for someone who would like to know how much they will need when they retire. If you are comfortable now and like what you currently make, then I don’t see anything wrong with shooting for that number (adjusted for inflation).

    Sure, you may not need that much when you retire but there are uncertainties out there like healthcare that could really hurt a retiree’s plan.

  8. JLP – there is nothing wrong with having a high income as a retirement goal except that the trade-off is that you will have to work a lot longer and scrimp like crazy.

    Setting your retirement goals is the first step in planning, step 2 is doing the math/plan. Step three is revising the goals/math repeatedly until they fit!


  9. As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me.
    I found I need only up to $1,000,000 in 2007 dollars at the retirement age of 65 and die at 95.
    The problem is, if I invest most of my disposable income, I would probably have at least $6,000,000 at retirement, which is approximately what the Fidelity website suggested based on my yesteryear’s income.
    Finally I decided last year that I had to reduce my 401k contribution to a minimum level to capture the employer’s match. And I’d keep the rest for aggressive investment and moderate consumption, planning for a much earlier retirement.

  10. Mike,

    If you don’t account for your fees in the 4%, than you are depleting your portfolio by a greater amount. They are an annual expense just like food, utilities, and healthcare. Let’s say your total investing expenses are 1% and your other expenses (taxes, lifestyle, etc.) are 4%, the you will be spending 5%, which is significantly less sustainable.

  11. I think part of why this calculation scares people is that there are many unknowns, and no one wants to end up eating catfood in the dark. But people are making it seem like a bigger deal than it should be…if retirement is close than you have a good idea of what inflation is like in the next few years. If retirement is far away, just run a calculation like this every few years and re-adjust. When you’re driving, you point your car down the road towards your destination, but you are constantly moving the wheel a tiny bit to stay in your lane. So do the calculations now, start saving, and check every few years to see if you need to be saving more.

  12. I always recommend using real returns and present values. Knowing you will need a gazillion when you retire isn’t informative because you don’t know what everything else will be worth. Knowing you need $1M in today’s dollars allows you to compare it with the value of other assets and costs today. You might say, oh that’s 5 houses or 10 years annual income.

  13. As to Social Security, if nothing is done, the midcost estimate is that it can pay out 75% in perpetuity after trust fund exhaustion. Due to wage indexation this will amount to more than current benefits. Sounds like a plan, do nothing.
    Medical care is a far different story.

  14. “As a yogi in 30s, I have been healthy and financially well above average. I figure I need only 15% of my current income from my 401k to retire well, as health care cost will be minimal for me.”

    Living a “healthy” lifestyle doesn’t guarantee good health, especially when you get older. “Healthy” people may have lower risk of some conditions, but not that much lower, but lower risk doesn’t mean no risk. “Healthy” people can get heart desease, cancer, auto-immune conditions, arthritis, etc. just like everyone else. Just because you are healthy in your 30s, doesn’t mean you’ll be healthy when you are 70. Most people are healthy in their 30s. Most people have one or another problem in their 70s – some small problems some big ones. So you cannot predict that your healthcare costs would be minimal in retirement. Having good genes – most relatives who live into the 90s without needing any healthcare – increases your chance of lower health care costs (by a whole lot more than being a yogi or healthy at 30). But it still doesn’t guarantee you wouldn’t be the only one in your family to need healthcare.

  15. Dylan, I don’t quite agree with you that expenses have to come out of the 4% – for one thing, not everyone’s expenses will be 1% – some will be higher and others will be much lower.

    You raise a very interesting point however – I’m going to have to research and think about this. I don’t recall this being mentioned in any books I’ve read (Four Pillars, Random Walk etc) but then again, they advise to use low cost index funds.


  16. Mike,

    I was using 1% as an example. Yes, some will be higher and and some will be lower, and that is exactly why you need to account for the expense in your withdrawal rate. Should someone paying 3% annually for their investments be expected to sustain the same after fee withdrawal as someone with the same size portfolio but only paying 20 bps? Why should your annual investment expenses be any different from your housing expenses?

    Most of the accepted studies on sustainable withdrawal rates are based on overall asset class statistics and do not consider expenses, investment or otherwise. If you’re inclined think the added expenses will be made up by better performance and therefore washes out, it’s probably time to reread those books.

    This is the mutual fund and asset management industries’ dirty little secret. 2% may not seem like a large expense until you consider that it is half of the available 4% for a sustainable distribution.

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