Traditional advice is wrong: Here’s how much you actually need to save for retirement

I'm generally an even-keeled guy. I don't get worked up about much. I understand that different people have different perspectives, so I try to be respectful when others disagree with me. Having said that, there are indeed certain things that piss me off. Here are a couple that are centered around the idea of planning your retirement based on how much of your paycheck you should save.

Myth #1: You Need to Have 70% of Your Income

For instance, I get mad-dog lathered up at traditional advice about how much to save for retirement, such as this article at Business Insider (echoed here at The Wall Street Journal):

So how much are you supposed to be saving in order to finance 20 to 30 years post-work? The commonly accepted rule of thumb is that you'll want about 70% of your former annual income — at least — to continue living at or near the style to which you've been accustomed.

Let me be blunt: This rule of thumb is asinine.

This “rule” (which is used by most retirement calculators, both on the web and from financial planners) estimates how much money you'll need by using your income as a starting point. The 70% ratio is commonly used, but plenty of places use 80% or 90%. Regardless the percentage, estimating your retirement spending from your current income is ludicrous. It's like trying to guess how much fuel you'll use on a trip to grandmother's house based on the size of your vehicle's gas tank!

  • Say you make $50,000 a year but spend $60,000. In this case, your income understates your lifestyle by $10,000 a year. If you based your retirement needs on your income, you'd be screwed.
  • On the other hand, if you're a money boss who saves half what she earns, you'd only spend $25,000 of a $50,000 salary. Basing your retirement needs on your income would cause you to save much more than you need. You'd be working long after the point at which you could retire safely.

Predicting how much much to save for retirement based on income makes zero sense. (Zero!) It's one of those pervasive financial rules of thumb — such as “buy as much home as you can afford” — that does more harm than good. There's a real danger that if you heed this advice you won't have enough saved in retirement. If you're proactive like many Get Rich Slowly readers are, you run the risk of saving too much, meaning you'll miss out on using money to enjoy life when you're younger.

Instead of estimating how much to save for retirement based on your income, it makes far more sense to plan your retirement needs around your spending. Your spending reflects your lifestyle; your income doesn't.

So, how much do you need to save for retirement? How much will you spend? It depends.

For many people, expenses drop when they stop working. They drive less. The kids are out of the house. The mortgage is gone. And, ironically, they no longer have to save for retirement. Meanwhile, other expenses increase. (Most notably, health care costs tend to balloon as we age.)

That said, it is possible to get a general idea of how much you'll need in the future. According to the 2016 Retirement Confidence Survey: about 38% spend more in retirement than when they're working. 21% spend less, and 38% spend the same. Past iterations of this survey have shown that roughly two-thirds of Americans spend the same (or only slightly different amounts) during retirement as they did while working.

Translation: In general, your pre-retirement expenses are an excellent predictor of your post-retirement expenses. That's why I prefer this rule of thumb: When estimating how much you need to save for retirement, assume you'll spend about as much in the future as you do now.

Forget the “70% of your income” bullshit when planning for retirement. Use 100% of your current expenses instead.

Financial planner Michael Kitces — who has an awesome blog — sent me a note to explain why advisors use the “70% of your income” rule. The answer? “Because it works.”

Generally speaking, the 70% of income replacement ratio works because once you subtract taxes and work-related expenses (plus savings), it's close to 100% of expenses in most cases. I still think this is a crazy way to come at it — why not just use 100% of expenses? — and that it's completely off-base for folks with high saving rates. For more on this subject, check out Michael's article in defense of the 70% replacement ratio.

Myth #2: You Need to Save 10% of Your Income

GRS reader Carla dropped me a line because she's puzzled where the standard “save 10% of your income for retirement” advice originated. She's afraid that ten percent isn't nearly enough. Carla writes:

The financial experts always say to save 10% for retirement (for example, in your review of The 1-2-3 Money Plan). Buy why 10%? It doesn't make sense to me.

I'm 25. If I retire at the normal age of 65, that will give me about 40 years of full-time wage earning. Let's say I plan to die at 85. That's 20 years of retirement. I'm assuming that I'll be fully funding my own retirement (not counting on any sort of pension or social security).

How on earth would saving 10% for 40 years cover your expenses for 20 years? I know that expenses should be a bit lower in retirement, and I know that the money will make some gains due to being invested, but really? How the heck could that ever add up?

The short answer to Carla's question is that, in general, if you start saving early, and if you invest aggressively, 10% can often be enough. But there are a lot of things that could go wrong, too. The stock market could drop nearly 40% in the year you choose to retire (as it did in 2008). You might suffer a catastrophic illness. The country might experience hyperinflation.

Each of these things are unlikely, but they are possibilities. Because of this, many people save more than the 10% commonly recommended by experts.

Why 10%?

I think that the experts urge 10% because it's a target people can understand, one that doesn't seem too intimidating. It's a convenient financial rule of thumb. My own opinion — and I'm sure the experts would agree — is that you should save as much as possible for retirement. Columnist Liz Weston has a great suggestion:

Save 10% for basics, 15% for comfort, 20% to escape. This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won't be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you'll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.

Tonight I asked my wife how much she's setting aside for retirement. Her salary is nearly $60,000 a year. She's setting aside $18,000 herself, and her employer is contributing $3,600. In other words, Kris is saving nearly a third of her gross income. But Kris hasn't always saved this much. She didn't save much at first, but has increased the amount she saves as her income has increased.

When you're 25 like Carla, you're probably near the low point of your earning potential. This is a huge reason that I'm advocate of banking your raises into savings accounts. In general, people earn more as they get older. Don't use salary increases to fund lifestyle inflation, but instead use that money to save. It may take a few years, but eventually you can set aside 25% or more, just like my wife.

Figuring Out How Much to Save

Because you can't see the future, there's no way to know exactly how much you'll need to save for retirement. All you can do is make your best guess, taking these variables into account:

  • When will you retire?
  • How long will you live? (You can get an estimate at Living to 100.)
  • How much will you spend?
  • What will your health be like?
  • How much will you save and how aggressively will you invest?
  • What will the inflation rate be between now and the time you retire?

Because there's so much uncertainty, financial planners use Monte Carlo simulations, which analyze tons of historical data to estimate, based on your current savings and planned retirement date, how likely you are to run out of money in retirement. The results can help you plan how much money to save.

Monte Carlo simulations are great but complicated; you'll probably need to consult a financial planner if you want one run for you. But you can get started by making some rough estimates by hand — and with the help of web-based retirement calculators.

Tip: Delaying retirement can only help your financial situation. The longer you work, contribute to your retirement savings, and go without tapping Social Security and retirement accounts, the more money you'll have later.

A Better Way

If you're going to base your savings goals on how much you'll spend in retirement, you've got to have a way to gauge your future spending. Will your expenses increase or decrease? That depends in large part on your health and your plans. If you get sick or travel a lot in retirement, for example, your expenses may go up. In general, though, your expenses will likely stay about the same. According to the Employee Benefit Research Institute's Retirement Confidence Survey:

  • 49% of retirees spend less in retirement than before (26% spend much less)
  • 35% spend about the same as before retirement
  • 14% spend more in retirement (though 7% say their expenses are only “a little higher”)

Overall, 65% of Americans spend about the same or only slightly more or less in retirement. That means their pre-retirement expenses are a good predictor of their post-retirement expenses.

Expenses often drop in retirement because your kids are out of the house; your mortgage is gone—or nearly so (one of the surest steps toward retirement security is to pay off your mortgage); you have no commuting costs or other work-related expenses; and, ironically enough, you no longer have to save for retirement. Sure, you'll have other expenses — especially health care — but if you've been smart and planned ahead, you should be in good shape.

Make no mistake: You will need a sizable nest egg for retirement — especially if you have ambitions to travel or want to golf every day. In fact, you should save as much as you can. But don't be snookered by the constant refrain that you need 70% of your pre-retirement income. That's nonsense—base your savings goals on your projected expenses instead.

The moral here? Don't panic — you can save enough for retirement. In Retire Well on Less Than You Think, Fred Brock writes:

Most people can retire from wage slavery sooner than they think if they are willing to pay a relatively painless price for their freedom: a simpler, downsized life and, perhaps, a move to a less expensive part of the country — and it doesn't have to be remote or far away.

The key is to live within your means now, which lets you boost your cash flow so you can accumulate savings for later in life.

The Power of Compounding

Even if you set aside 25% of your income, though, how can that possibly be enough to cover your needs during retirement? If you're worried about how much your investments can actually earn over time, take a look at two past articles:

Briefly, compounding can (and does) supply huge returns. These returns are magnified the longer your money generates the returns. That is, $1000 invested at 10% for twenty years doesn't just earn double the amount you would earn if the money were invested for ten years.

Playing with this compound interest calculator, the first scenario generates $2593.74 while the second produces $6727.50. (And leaving the money there for 40 years would produce $45,259.26!) There's a reason financial advisers urge people to begin investing early. Returns are magnified with time.

Are 10% returns realistic? Perhaps. Although even the best CD rates aren't returning rates that high now, as the article above demonstrates, the average long-term return on U.S. stocks is roughly 10%. This is what stocks have returned in the past.

Making the Most of Your Money

Having said that, there are some important things to remember.

First, as mutual fund advertisements are eager to tell you, “Past returns are no guarantee of future results”. Just because the stock market has returned about 10% in the past doesn't mean it will do so in the future. (Warren Buffett has said that he expects stocks to offer much more modest returns over the next century.)

Second, average is not normal. Yes, it's true that the U.S. stock market has an average annual return of about 10%. But that doesn't mean that it returns 10% every year. Some years — like 2008 — the market drops by 39%. Some years — like 2009 — the market grows by 18%.

Here are a few keys to obtaining steady returns from your investments.

  • Have a plan. Develop an investment plan built around your age, your goals, and your circumstances. Ask yourself how much risk you're willing to take. Some people are willing to take on greater risk in order to have a chance at higher rewards. Whatever the case, take the time to draft a plan that makes sense. Refer to this plan whenever things become confusing. Reminding yourself of your plan can keep you from overreacting — in good times and in bad.
  • Don't be an emotional investor. I've heard from a lot of people who invested near the top of the stock market in 2007 — and then sold last winter. This is buying high and selling low. It's a sure way to lose your shirt. When the market tanks, don't panic. When it's riding high, don't get caught up in the euphoria. Have a plan. Keep making your contributions. Thing long term and ignore the short-term noise — no matter how loud the noise might be.
  • Don't raid your retirement. It can be very tempting to raid your retirement account to buy a new home or to take a trip to Europe — or even to put food on the table when you're out of work. This is usually a bad idea. When you tap into retirement early, you're subject to taxes and penalties — and you're robbing from your future self. You're robbing not just the money you take, but also the returns it might have generated over the years.
  • Make regular contributions. Get in the habit of saving for retirement by investing regularly. Make it automatic, if you can. The best way to do this is to enroll in an employer-sponsored program and have the money taken from your paycheck. This way the process is invisible to you. Regular contributions to a retirement plan allow you to take advantage of dollar-cost averaging.
  • Take advantage of free money. If you have access to an employer-sponsored retirement plan, use it. When your employer matches your retirement contributions, it's like getting free money. There are few better deals in the financial world. (Are there any better deals?)

Each of these actions can help you obtain better long-term results from your retirement savings. But the real key is to start now. The sooner you begin, the more time you have to accomplish your goals.

Running the Numbers

Not every retirement calculator derives its numbers from pre-retirement income. During my research, I found several tools that let users project retirement needs based on other factors, including expenses. Some of these calculators are simple; others are more complex:

My favorite calculator, however, combines simplicity and complexity. FIRECalc 3.0 may seem overwhelming at first (there's a lot of text to read there), but it's actually fairly elegant. It asks for how much you have saved, how much you'll spend every year, and how many years you expect to live. Then, using historical data, it produces a graph to show you how likely your planning is to succeed:

FIRECalc shows you the results of every starting point, since 1871. You can get a sense of just how safe or risky your retirement plan is, based on how it would have withstood every market condition we have ever faced.

If you want to make the FIRECalc model more complex, you can. But it's possible to have fun with it — and to learn a lot — by just using the basic data fields on the main page.

“How much should I save for retirement?” is a complex question. There's no magic answer because nobody can see the future. All you can do is make your best guess while taking into account historical rates of inflation and investment returns, future health-care costs, and your estimated life expectancy.

Have you attempted to calculate your retirement number? What method did you use and why? If you're close to (or actually in) retirement, I'd love to hear your advice. How should those of us in the planning stages proceed?

How Much Should You Save?

Retirement planning is a complicated subject, and I've only scratched the surface here. There are a lot of variables I haven't covered (taxes, inflation, etc.). Carla is way ahead of the game by asking these questions now.

So, how much of your income do you save for retirement? Do you save 10% like Carla? Do you save 25% like my wife? How have you arrived at this amount? Do you plan to save more in the future? I'm especially interested to hear from those who are in or near retirement. Do you wish you had saved more when you were younger? What would you do differently? What advice can you offer folks like Carla who are just starting out?

More about...Retirement

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Writer's Coin
Writer's Coin
11 years ago

My goal is to just try to save as much as I can now that I’m young in as many different ways as possible (401k, Roth, etc.).

Once I get older (maybe in my mid 30s or 40s) I’ll start to really break down the math. The way I see, too much can change between now and my retirement for me to make assumptions.

Carmen
Carmen
11 years ago

USAA has an EXCELLENT retirement planner, but I think you have to be a member to use it. It asks you what kind of lifestyle you want as a retiree as a starting point and breaks it into categories (with questions such as I want to travel several times a year and such)… The other assumption that really changes the equation is how long you expect to live!

Jim Z
Jim Z
11 years ago

The most likely reason that most calculators base their assumptions on income and not spending is because they want to further propagate the ideal that it is normal and acceptable for most people’s spending to equal their income. It’s a disservice IMO. Thanks for the article and links.

Frugal Bachelor
Frugal Bachelor
11 years ago

How much you spend depends on what you plan to do. I plan to spend a few decades riding around the planet on a motorcycle. This has a different cost structure than for example, staying inside your subdivision and eating boiled hot dogs. The FIRECalc seems useful because you put your spending amount and horizon.

P.S. FIRECalc says I have a 34.9% chance of success retiring today.

the weakonomist
the weakonomist
11 years ago

I try not to worry about getting to a certain magical number. Instead I’m interested in just stashing away as much as possible. When I reach an amount that makes me feel comfortable I’ll retire.

Michele
Michele
11 years ago

I’ve used the calculator at choosetosave.org It is a program of the Employee Benefit Research Institute. It gives you a “ballpark” figure of what you need in retirement by taking into consideration what you’ve saved, what plans you have (pension/no pension), whether you plan to work in retirement, etc. Here is the link: http://www.choosetosave.org/ballpark/ For me, it said I need to save $10,000 annually based on what I have already saved, which seems a bit low to me, even though I have saved a lot. It does take into account Social Security Benefits, which you can input “$0” if you… Read more »

Mr. GoTo
Mr. GoTo
11 years ago

I am a baby boomer not yet retired but in the home stretch. I agree that using current income as a baseline metric for estimating retirement income needs is a mistake. In addition to the calculators you listed, I recommend that readers take a look at “Financial Fate” (currently a free download) and “Financial Engines” (requires a subscription but well worth it.) These take more time and effort to use but provide a superior output for real world retirement scenarios.

ABCs of Investing
ABCs of Investing
11 years ago

I look strictly at future expenses when determining how much I need. Basically I look at my current expenses – subtract some obvious temporary costs such as mortgage, kid costs etc and then add in some travel costs. The actual process is fairly involved but my suggestion is that unless you are pretty close to retirement – don’t sweat the details. If you are 30 years old then your assumed rate of inflation will have a far greater impact on your retirement predictions than a small error on your Social Security payment prediction. Alternatively – if you are fairly young… Read more »

EscapeVelocity
EscapeVelocity
11 years ago

I don’t have a number. I did go to a financial planner once for a look-over and they said things looked fine. What I’d really like to do is to take some time off to travel BEFORE I get old and have to worry about falling down and pay someone to carry my bags for me and all that. I did one round in grad school, so if worst comes to worst I have that, but I’d like to do some more. I don’t think I’d really mind working when I’m actually old, just for the social contact, although preferably… Read more »

Ray
Ray
11 years ago

Many don’t know what their retirement will look like (or want it to look like)till they are about 40 years old and by than if you havent saved chances are you will not reach your “dream retirement”
As couple others said I just save up as much as I can right now and in about 20 years I will have to start looking at the details of my retirement. Right now I have no idea what I will do or if I even want to retire.

sandy
sandy
11 years ago

Stash as much as you can away when you are young and single and healthy. life does come fast, and you will be forever grateful that you have that cushion in your life, no matter if you use it for retirement, healthcare, or fertility treatments. You never really know how you’ll need cash, but at some point, most of us do.

Adam @ Checkbook Diaries
Adam @ Checkbook Diaries
11 years ago

When I think about how much I will need for retirement, I base it on how much money I currently spend, and think I will spend in the future. I’m just about to hit 30, so I’m sure my number will change, but right now I figure I’ll be able to live on roughly $40k a year (holding no debt) and would like to “retire” by 55. If I plan to live to 85, my total number needed would be $1.2 million. That doesn’t take into account inflation or interest earned on investments, but it also doesn’t take into account… Read more »

Anthony F
Anthony F
11 years ago

As a fee-only financial planner I do these calculations frequently. Over the years I’ve tried to simplify the process so people can understand it. Typically I use 100% of what people make now as a starting point. Although determining a spending amount is preferable most people do not have a handle on how much they WILL spend in the future. You simply need to save approximately 25 times your required income (this equates to a 4% withdrawal rate in retirement, which is a safe withdrawal rate through most economic cycles and patterns of returns). You must also adjust for any… Read more »

Beyond Paycheck to Paycheck
Beyond Paycheck to Paycheck
11 years ago

An additional benefit of spending less than you make when contemplating your retirement needs is that any money you’re saving while you work immediately comes off of your cash-flow needs during retirement. After all, there’s no reason to save for retirement when you’ve already reached retirement!

As you’re probably aware, there’s a whole book, “The Number” by Lee Eisenberg, devoted to this very topic. A good read.

Kent @ The Financial Philosopher
Kent @ The Financial Philosopher
11 years ago

I like your unconventional approach. Let’s get even more unconventional: Create your own definition of retirement before quantifying it with monetary measures! If one’s definition of retirement is simple and based upon contentment, then the anxiety and processes to reach a seemingly unobtainable financial goal may be obtained… NOW! Why would someone want to base retirement solely on monetary measures? Is money really what provides our “freedom?” Well-being and true freedom can not be quantified or obtained by monetary means. What’s more, it does not always require money to do what you want to do. Define terms, such as retirement,… Read more »

RJ Weiss
RJ Weiss
11 years ago

Agreed that expenses is the way to go.

Another good calculator I use is, Vanguard’s Managed Payout Fund Calculator…https://personal.vanguard.com/us/funds/vanguard/ManagedPayoutList

These funds are managed just like a pension fund, they’re not your typical retirement income fund. Your payout can change dramatically from year to year.

They help me decide how much portfolio income I would have if I put all my after-tax savings into one of these funds.

Marie
Marie
11 years ago

What infuriates me is that with everyone harping on you to start saving early, you’d think the calculators would start younger. So many of the ones I’ve tried don’t even let you use them younger than 35 or 30.

brad
brad
11 years ago

Frugal Bachelor’s point is on the money. For most people, it’s a mistake to assume that you’re going to maintain your current spending habits and lifestyle when you retire. It’s a lot more useful to spend some time thinking about what you want to do when you retire, and then figure out how much money you need (factoring in inflation) to sustain that lifestyle. Retirement is all about changing the way you live now. It’s not about living the same life you live now without working. What are you going to do for the 8 or more hours a day… Read more »

Ann
Ann
11 years ago

Goal: $750k in real estate and $1 MM in cash*. Even if I live to 90, I should be okay. So far: $400k in real estate and $100k in cash. (Cash will increase dramatically when the primary residence is paid off on Dec 15, 2009.) Years to go: 25 (Freedom 55, baby! It was Freedom 45 until I realized I will be supplementing my parents’ retirement. Now I just have to convince them to let me help…) * Note: Cash amount is cash from savings, not investment growth. I don’t need double digit investment returns, just to beat inflation. ETA:… Read more »

Baker @ ManVsDebt
Baker @ ManVsDebt
11 years ago

Before this post I had never heard of FIRECalc, but I am starting to see what you like about it. I’ve only had a chance to mess around with it a little, however it seems like a well-rounded tool. I’m glad you able to shed some light on using expenses as a basis for retirement. A lot of financially successful people I know have spent year living on a fraction of their income and are perfectly fine retiring earlier and simply maintaining their current lifestyle. Of course if they used income in the projections they would have many, many more… Read more »

simplesimon
simplesimon
11 years ago

Remember that when you’re looking at your spending dollars that these are after-tax dollars. When you figure out your annual spending, you’ll need to figure out what your pre-tax dollars will be if you’re withdrawing from traditional IRAs.

Jason
Jason
11 years ago

If you are making $50,000 a year and spending $75,000 a year you’ve likely got some bigger immediate issues to take care of before even thinking about retirement planning.

Justin Philips
Justin Philips
11 years ago

The idea of multiplying by 25 seems great. I should sit and work the numbers.

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

FIRECalc looks like an excellent tool. I think using any CAGR calculator can be a helpful planning tool, even though it’s much simpler and more basic than many of the tools mentioned. I would suggest being very conservative when entering the interest rate you expect to get on your money over the long haul. I would go with around 5%. Plan conservatively so your money will last. Best of luck to anyone close to retirement.

Elizabeth
Elizabeth
11 years ago

What worries me is that people are planning their retirement based on today’s lifespan. For example, if you are 30 years old right now, chances are you’re not planning on living past 100. But at the rate medical science is going, what do you think is going to happen in the next thirty years before you retire? If you read any of the research from experts like Michael Rose or Aubrey de Grey, you’ll see that there are technologies coming in the next couple of decades that will greatly extend not only our lifespans but the years of good health… Read more »

ab
ab
11 years ago

Appreciate your thoughts on using future spending as a better measure than current income. While I agree this makes sense in theory, I think the reason most calculators use income is because it’s a much more objective number. Most people (unfortunately) don’t have a good understanding of how much they spend each year. More importantly, most people drastically underestimate this amount (it’s easy to plan to save money in future and the nobody ever factors in the inevitable emergencies that come up). So I wouldn’t be too hard on the conventional wisdom, at least as a starting point for the… Read more »

Glenn
Glenn
11 years ago

Since I’m relatively young (24), I haven’t started thinking about a specific retirement number. Instead I’m socking away whatever I can until I can knock out the last $1500 on my credit card (looking at June or July for that, since my 0% interest deal ends in August); once that’s done I’ll start looking at starting an IRA and, if the gods love me and my company hires me on full-time, a 401k.

Chris
Chris
11 years ago

@ #19 ANN:

You are 30 and own 400k in real estate and have 100K in cash? Would you mind expounding on that a bit?

My goals are in line with yours and we are the same age and I’m nowhere near those numbers. I’d love to get a fresh perspective.

Cheers,

Chris

ldk
ldk
11 years ago

Great post and comments! Would love to hear others thoughts on whether the value of your primary residence should be considered when making this projection? Does assuming a 4% withdrawal rate from your portfolio in retirement also assume you ‘cash out’ your home equity at some point and invest it? Our home currently represents about 1/3 of our net worth.

Thanks!!

Paul in cAshburn
Paul in cAshburn
11 years ago

Thank you to all who have provided calculator sites, I intend to make the search for the best software my quest over the next few years. Any other pointers to calculators – even those you have to buy or subscribe to – will be appreciated. Now if only I could find a NAPFA advisor who has also been trained by Ed Slott…

The Math Guy
The Math Guy
11 years ago

I think the question of how much you need for retirement is linked to how well your retirement investments perform over the long term. I’m particularly interested in this since (as luck has it) I JUST finished uploading my new e-book onto Lulu titled “Investing for the Long Term,” and it focuses on getting you the best return for retirement with low yearly contributions. In more detail, the book is about how to outperform all these money managers, financial advisers, and other “professionals” by using simple math (moving averages and other simple concepts) and in it I discuss the rolling… Read more »

Jordan
Jordan
11 years ago

I agree with using expenses to calculate retirement needs, especially in this current economy. My husband and I are in our late 30s, a couple of years ago we worked with a financial advisor to come up with a plan for our financial future and retirement – using then current due income as basis of course. A year later I was laid-off so all calculations went out the window. Fortunately I am a firm believer in saving portions of my income, I started with $200 and later on $1000 a month, I just stash them in a local bank that… Read more »

Steve
Steve
11 years ago

The more you save, the less you are spending. The less you are spending, the smaller nest egg you need to retire. So saving more both increases the size of your nest egg faster and decreases the size it needs to get to – a double whammy!

As a very (very) rough rule of thumb, shifting one percent of your net income from spending to saving could let you retire almost a year earlier.

Gene
Gene
11 years ago

For us Canadians there’s an excellent book titled “Smoke and Mirrors” by David Trahair. It points out many of the fallacies in the “You need $X for retirement” wherein the $X is north of $1M. At least in Canada he points out you can have a very comfortable retirement with $400k – $500k in the bank plus the pension plans provided by the Federal Government. He also provides spreadsheets to use to calculate how much you’ll actually need. A friend of mine put me onto the book. He was in in his 50s and watching TV and worrying about his… Read more »

Brian
Brian
11 years ago

@Elizabeth (#25):

While life spans may be increasing, I think the most conservative way to plan for retirement is to save up an amount that will never be depleted when you’re withdrawing 4% or less — if you maintain a relatively aggressive investment mix into retirement and can survive with somewhat less income in some years (And/or re-invest some of your excess in good years), this should be very doable, even with relatively conservative presumptions about future market returns.

Elizabeth
Elizabeth
11 years ago

@ Brian — thanks! I think I understand what you mean — So plan to withdraw an amount that will be replenished as you go along?

Paul in cAshburn
Paul in cAshburn
11 years ago

@Brian #33 I like the idea that in retirement you spend x% of your INCOME (interest from savings, income from pensions, social security, etc.) where x = total income minus the CPIx2. The CPI woefully understates actual inflation (to avoid paying true COLAs on social security) so you have to double inflation in your calculations. And, if you spend only what you take in, minus double inflation, then your future income will last forever! Yes I know that means you’ll have to save a lot, and yes I’ve heard that many people begin spending less around age 70 or so… Read more »

Kevin
Kevin
11 years ago

I’ve posted my method before, but here it is again. It’s based entirely off your expenses, not your income, like JD recommended. Start with your current total monthly expenses. Subtract expenses that you’ll no longer have upon retirement (mortgage, saving for retirement, life/disability insurance, saving for kids’ college funds, maybe only need one car instead of two, that sort of thing). Add expenses you’ll have in retirement that you don’t currently have. This would be things like a travel fund (if you hope to travel once or twice a year), golf club membership, private health care, etc. Use current dollars,… Read more »

Beth
Beth
11 years ago

Gene, thanks for mentioning that book — I’ll be sure to look that up! I do beg to differ about health care costs being completely covered! I currently see an alternative healthcare practitioner, and until integrative medicine takes off up here, those are significant costs I bear myself. (I see a regular doctor too, and I use the therapies that work for me). My company health plan, which I pay into, doesn’t completely cover costs for eye, dental, physio, etc. Also, I’ve seen what my grandparents went through in the years and months before they passed away, so I’ve seen… Read more »

David Safar
David Safar
11 years ago

J.D., Thank you for drawing attention to the difference between income and outgo! This is an important one, and one that I think tends to get glossed over by a lot of people, both average folks and the supposed “experts”. I think the default assumption is that most people will spend as much as they make, in which case the distinction is moot, but the truth is, a lot of financial advice works differently if your expenses are noticeably lower than your income. I’ll be writing a post soon about why I find it more beneficial to pay myself LAST,… Read more »

Ruth
Ruth
11 years ago

$400,000 is my target. I plan to live on $16,000 or less a year, as I have for many years quite happily. The only big possible problem with my plan will be if there is no fix to our health care system within the next 15 years, but I’m betting there will be, and if there isn’t I’ll move to Mexico. BTW, I’m not saying I will never work for money again after hitting my target, just that I won’t have to. All my basic budget expenses will be met. For those who are unhappy calculating the millions they believe… Read more »

Holly
Holly
11 years ago

@ Gene: I believe you have made very valid points…and I used to think the exact same way. But, the game has changed. I saw my own parents struggle when they had hopes of ‘downsizing’, only to find that the home prices had skyrocketed. And of course, here in the U.S., we are simply not able to depend on a SS check since the gov’t can’t sustain it for too much longer. My husband is vested in a gov’t pension, but now we’ve been seeing pensions disappear- how any company or gov’t can justify taking away something that has been… Read more »

Chris Johnson
Chris Johnson
11 years ago

@ #25, 35, 36 Elizabeth and Brian:

That’s excellent thinking–I’m an estate planning/probate attorney, and see plenty of people living into their 90s and low 100s now, which can only be more common in the next few decades. Planning to live to 100 if you’re in your 30s to 50s now makes sense, especially because costs of outside care when you’re older, like assisted living or home health care, can get pricey.

Mathias Stearn
Mathias Stearn
11 years ago

I’m going to have to disagree. I think income is a good measure because it is the pool from which you are allocating your funds. If you are currently spending only 50% of your (after-tax) income you are putting the other 50% away for retirement. In that case you will have significantly better lifestyle after you retire than before. On the other hand, if you were to base your retirement needs on your current (low) spending you will need to save less now and can therefore spend more creating an odd feedback loop. I think the percent of income calculations… Read more »

al
al
11 years ago

i agree with other young commenters (i’m 23) that it’s hard to know what we’ll need lifestyle-wise 40-50 years from now. i don’t think i want to live like a 23-year-old after i retire 🙂 so at the moment i’m saving as much as i can and will try to work out the numbers a little later. i have no mortgage, i’m not paying for life insurance, my medical expenses are really low, and i have no kids…but all of that will change!

Marie
Marie
11 years ago

I have to admit I envy commenters planning into their 90s and 100s. Nice problem to have! My husband’s family is lucky to hit 60. Unfortunately, we are planning for a long widowhood for me.

jtimberman
jtimberman
11 years ago

Financial Peace University, lesson 9 “Of Mice and Mutual Funds” has a chart that shows how monthly debt payments rob retirement. Last I heard (couple months ago), the average car payment in America according to the National Auto Dealers Association was $484 per month over 84 months. Lets round that up to $500 just for sake of using the chart. Invested in a good growth stock mutual fund, over 40 years (working life time) that car payment could instead be $5.8 million dollars. Hope you like the car. Free up your income by getting out of debt. Stop playing the… Read more »

Stephen
Stephen
11 years ago

If you ignore the status quo and cut expenses way back, you can retire extremely early:

http://earlyretirementextreme.com/2008/08/how-much-do-i-need-to-save-for-extreme-early-retiremen.html

This is one of the main ideas in “Your Money or Your Life” by Dominguez and Robin.

Tyler Karaszewski
Tyler Karaszewski
11 years ago

I understand why people try to do this calculation, because it would be a really useful number to know, but there is *so* much guesswork involved, that I’ve just given up. I am 27 years old. The soonest I could retire and use my 401K is 32 years from now. My entire lifespan so far is still shorter than the time I have left until retirement, even if I retire early at 59.5. Given the number of changes that have happened in my life over even the past five years, trying to predict my salary or expenses over 30 years… Read more »

Casey
Casey
11 years ago

I have an overdue thank you for you. I’ve been reading your blog for about two years now. You were the impetus for me to take charge of my finances. My husband and I have now paid off $12,000 of debt that we accumulated over eight years. We have over $5000 in our savings account. Once we reach six months worth of expenses in savings, we will switch to saving for retirement and college for our kids (I already have a great retirement plan through work). I’m in the best financial shape of my life now. It was arduous and… Read more »

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