How Much Money Do You Need To Retire?

by Neal Frankle, CFP ®

How much money do you need to retire? Of course, part of the answer depends on how you invest your money and how much income those investments generate. But you may be surprised to discover that a far more important determinant of retirement success is your spending.  In any case, we’ll handle both these subjects.

But let me give you some good news to start things off.  You can determine how much you need to retire without paying someone thousands of dollars to create a fancy financial plan that doesn’t make sense to you anyway. Go through the following steps to do your own calculations.  At the end of this exercise, you still may want to run some more sophisticated projections based on what-if scenarios, but at least you’ll know where you stand. And you’ll gain some insight into what you need to do in order to make your nest egg last longer.  Let’s get to work.

1. Spendinghow much to retire

If you ask me how much money you need to retire, I need to know what it costs you to live now. I realize that we’re talking about future spending and you will have to make an educated estimate of what you’ll be spending down the line. But you can’t do that without first knowing what you’re spending now. Then you can use what you spend now and adjust for inflation. Don’t kid yourself into thinking your spending will decline when you retire. It won’t.

Neal’s Notes – Looking for a way to slash your housing costs during retirement?  Consider a CCRC as a retirement residence.  This move can free up a ton of cash so you can spend and enjoy – and offload the problem of living assistance down the line.

When you retire, you have more time to spend money and that’s what you will do. You’ll travel more and if nothing else, you’ll shop out of boredom. That’s what happens (unless you develop retirement hobbies that don’t cost much but could possible make you a bit of extra cash.)

Also, as you get older, you may have to help your kids, grandchildren and you will probably spend more for medical expenses.

Most people don’t really know how much they spend now and they are intimidated by the prospect of tracking all their expenses.  If that describes you, don’t worry.  A simple method is to average your total bank withdrawals over the last 24 months and keep track of this number. You can use more detailed software programs but the bank statement method is very helpful and only takes about 5 minutes a month to do.

For our example, assume you’ll spend $80,000 a year when you retire – as adjusted for inflation. We’re ready for the next step.

Neal’s Notes:  Another crucial determinant is whether or not you take a lump sum from work or accept a monthly income payout.  This decision can make a huge difference in when you can retire – but think carefully.  You may be able to to retire sooner by accepting the monthly payout.  But because that monthly income has no inflation adjustment, you may be putting yourself at greater long-term risk by going this route.

2. Existing Income Sources

When you retire, you’ll have social security and possibly a pension. There are also many overlooked ways to bring in extra cash after you retire. How much income will you have?  (Keep in mind that while you calculate your retirement cash flow, you have to consider whether or not you rely on that income going forward.  That is a separate yet highly important topic on it’s own.)

For our example, let’s assume you’ll have social security and pension income of $30,000. You can see that this person needs to come up with an extra $50,000 in order to meet her annual income needs.

3. Do the Math

We know that this person will need an extra $50,000. Now we have to figure out how much to invest in order to create that $50,000. That answer is the amount needed to retire for this individual. This isn’t difficult to do at all.

Take your $50,000 short fall and divide it by the return you think you’ll earn on your investments over the remainder of your life. I use 5%.

Using 5% might seem like a high number right now. Rates are indeed much lower now but it’s not reasonable to expect that rates and returns will remain this low over the remainder of your life. That’s why I recommend using 5%.

So, if we take $50,000 and divide it by 5% – you get $1,000,000. That means you have to have accumulate $1,000,000 by the time you retire in order to create that missing $50,000.

4. What have you saved so far? How much will it be worth when you retire?

Let’s say your total savings (including your retirement accounts) is worth $300,000 and you need to get to $1,000,000 by the time you retire in 20 years. Of course you’ll need to make smart investments to reach your retirement goals. But let’s not worry about how to invest the money at this point.

You can use any number of financial calculators to determine what that $300,000 will be worth in 20 years. Let’s assume that you determine that the $300,000 will be worth $800,000. You now know you are $200,000 short.

Again, use any financial calculator to determine how much you’ll need to invest each year, over 20 years with an assumed rate of return, in order to reach your goal of $200,000.

This is not all that complicated if you take it one step at a time and break down the question into smaller questions.

This is an example of a very straight forward case. If your situation is more complex, don’t fret. Many people have various levels of complexity and are still able to run these calculations.  You are looking for a basic idea of where you need to be.  We’re not looking for perfection here Pilgrim.

Keep in mind that it’s a good idea to run these calculations once every year or two.  That’s because your situation is likely to change over time. One of my favorite clients in Arizona created a spreadsheet that ran 15 different scenarios and I was super impressed. He did this all himself with Excel and you can too.  But you don’t have to go crazy.  Use this simple step-by-step process to figure out how much you’ll need when you retire.  The only thing you have to do is ask the right questions.

How much do you need to retire? Have you done your calculations?


Subscribe & Get Your Free E-Book and E-Course as My Gift to You!

Investing Your Money Made SimpleOnce a week you'll get unique tips to make smarter money decisions about your investments, retirement, taxes, and career. You'll also get encouragement and ideas to help you get out of debt, earn more money, and generally stop worrying about your money.

Neal Frankle is a Certified Financial Planner™ with over 25 years experience. Subscribe today and tap into this wonderful, free resource!

Become a Fan! Follow @NealFrankle

{ 48 comments… read them below or add one }

Paula September 17, 2014 at 3:50 PM

In your example scenario you say to take $50,000 and divide it by 5% – you get $1,000,000 –
What do you mean by this? 5% of 50,000 is $2,500. My husband and I are reading your article with interest, but are lost when we get to this calculation.
Thank you.


Neal Frankle, CFP ® September 17, 2014 at 9:09 PM

Thanks Paula…and sorry for the confusion. If you want to figure out how much you need to invest in order to create $50k in income, you divide that $50k by 5%. The answer is $1 million. What you did was take 5% of $50k and come up with $2500 and that is correct but what you did was multiply $50k by 5% rather than divide it.

Just take out your calculator and input $50,000 and then divide it by .05. You’ll see what I mean. I hope this helps.


Jon Evans July 19, 2014 at 7:35 AM

Hi Neil,
It’s great to see how well you connect with your readers.
Have just submitted an email via your page. Please note, this site’s page redirects to a page that doesn’t exist:
Look forward to hearing from you.
Kind regards,


Neal Frankle, CFP ® July 29, 2014 at 12:43 AM

Thanks! Fixed it……. Much appreciated…..


Martin July 8, 2014 at 1:34 AM

Thanks for this article.
I see section “1. Spending” and section “3. Do the Math”, so I wonder where is “section 2”? I presume it should cover the topic “income”, so perhaps it is hidden in section 1?


Neal Frankle, CFP ® July 8, 2014 at 5:27 AM

Hey Martin! Thanks for the heads up. Not sure what happened to that header but it’s fixed. I would never hide any information from my fellow Pilgrims! Thank you!!!


ramesh June 15, 2014 at 7:22 AM

Want to down size, will sell the present house and get 60K in hand, have another 50K in 401, will get $2200 at age 67, working still part time making 2100 pm. do want to work past 67. no other debt.
Question. is is best to rent a place $1000 pm or buy a condo (90K)((Downpayment $30,000) payments $1100 pm mortage Hoa included.
Stretching as much as possible, help? Thinking of flordia no tax state.


Neal Frankle, CFP ® June 17, 2014 at 8:32 PM

Ramesh, It talks about the pros and cons of doing exactly what you propose. Let me know your thoughts/questions after you go thru the exercise there. Thanks. Neal


Susan October 13, 2013 at 2:16 AM

My husband played for MLB. We will receive approx 8K a month in 12 more years ( 62). His SS is approx 1600$/ a month and seems to be going down a lot since 2008. His pension will increase to about 9-10K by the time he collects. Does it keep going up as you are collecting into your 7’s and 80’s?
I feel with healthcare costs as an older person, if we should be adding to this amount by doing more investing etc.? My SS is only $500/ mo but Im only 43 currently and not working ( off and on business owner).
Thank you for your time.


Neal Frankle October 13, 2013 at 7:03 PM

So glad you reached out. Each pension plan is different. It depends on his plan. You also want to find out if you would continue receiving benefits if (Heaven Forbid) he would pass away.

As to investing more, it’s always better to have more squirreled away for the future. Here’s another post that might be useful. Let me know what other questions you have please. Thanks…


Single mom of 2 July 28, 2013 at 9:51 AM

I’m in my early 30’s a sinlge mom of 2 kids, I find it very hard for me to save any money for anything. I am currently in college soon to graduate with my Bachleors but I only make a little less than 19k a year. I rent our home and have a car that is paid for. I foind myself struggling on a day-to-day bases, its very hard to be a single mother but I am very lost on how to put money aside for myself and more important for my children college funds. Do you have any advise that can somehow help me.


Neal Frankle July 30, 2013 at 11:08 AM

Right now, you may not be able to put much aside. It sounds like you are doing your very best. The only idea is to possibly rent out a room of the house. Also, once you graduate, you should be able to make more money…right? It sounds like things are about to improve soon. Am I missing something?


Larry January 27, 2013 at 8:54 AM

I am 57 and work for NYC. My wife is 53. We currently live in Westchester and rent. We have no debt(but do not own). At 62 I can retire with a pension of about 50K and full medical benefits with my nyc pension . We currently have 520K in a 457 plan and about 500K in cash/stocks. My SS at 62 will be approx 14k a month and my wife about 8 K a month. Can I retire at 62?
I will also have about 80k of bonds when they mature in 8 years.
Thank You


Neal Frankle January 27, 2013 at 7:41 PM

What are your expenses? Did you run a financial plan?


JoeTaxpayer January 27, 2013 at 8:02 PM

By SS, do you mean Social Security? Someone turning 66 this year gets a maximum $2513. Did you mean $14K/year for you and $8K/year for the Mrs?


Phyllis June 12, 2012 at 6:29 AM

We are trying to decide if we can manage retirement in one year. I will be 60, my husband will be 63. We have 2,900,000 in investments and own three mortgage free properties worth another million dollars. We’d like to continue our lifestyle, spending approx. 130,000 a year. (this is high due to the expenses involved in two homes and two commercial buildings.) After losing approx. 1/3 of our investments during the 07-08 mess, we can’t stop worrying that this could happen again. If it does, our investments would not carry us the 30 years we plan on living. So much of the retirement advice given on line, does NOT address the fact that WE WILL STILL HAVE TAXES TO PAY. The calculators simply take your net worth and divide it by the years you expect to live, adding interest and inflation. Taxes will be a HUGE issue for retirees and we all know that taxes just go up….not down!! These calculators MUST start adding the increases in taxes. I feel that they do a disservice to people by not including that. ALSO, non of the calculators mention medical insurance which MUST be included in your planning. People must go into retirement with their eyes open and they must know ALL of the expenses they will have.


Neal Frankle June 12, 2012 at 7:13 AM

Sounds like you’ve done a great job. Yes you must consider taxes and increases in health care costs. These calculators won’t do that – you need to do something on your own through excel or have a financial planner do a plan for you.

But with a net worth of almost $4 million, you should be able to create the income you want. Do you have pensions? Will there by ssi?


Barbara October 8, 2011 at 12:53 PM

I need help trying to put myself back on track. I am a 59 year old single Mom with 2 kids still in the house (17 and 14). My husband left me almost 10 years ago and ran out on our mortgage and all other debt. He made almost 12x my salary. My attorney advised me to keep up with the mortgage on the house ($12k month + $4k month taxes) while we were trying to get divorced. I liquidated all my saving and retirement to do so. After spending 3 years and almost $350k in attorney fees, I finally just walked away. My ex was an attorney and told me that he would never give me anything and would just keep running legal bills up till I settled and he did. The house was sold in a short sale and by that time I had lost my job in CA. We lived on credit cards for more than a year before I found work again. Now I have really poor credit, no savings, no retirement, over $200k in credit card bill and owe the IRS over $30k in back taxes as a result of the short sale. I make a little over $200k, but have no money left after paying the credit card bills and IRS. I don’t own a home and am unable to save anything or put up any retirement. With the interest on most of the cards over 29% (and they have refused to lower them), I will be in this state for the next 15-20 years unless I can find a solution. Any suggestions to get me out of this quicker and give me a way to save for retirement?


MICHAEL AYZIN September 18, 2011 at 7:28 PM



Ronald Dodge September 19, 2011 at 6:01 AM

Without knowing your set of circumstances (I.e. Cost of living in your area compared to cost of living in other areas of the nation and the health condition of both you and your spouse), chances are, this will be enough to have a relatively comfortable retirement, though not with much extras. Now this is making the assumption that your pension plan will keep up with inflation and increased costs of increased standards of living put onto households by society and government over your retirement years.

Such example of increased costs of increased standards of living:

Look at the additional safety requirements put onto households, not only in the car, but also in the house, which cost extra money to pay for such things. While such things do help save lives and cuts down on injuries, it’s still an overall increased cost (especially initial start up costs).

Look at the additional things we about need to get, cell phones (put on by society), a computer at home with internet connection (put on by society for doing various things). Some people apply the argument that such items as these help save on total costs. If you get such items for business purposes, I can see such argument fitting, but for getting for within your personal home, in most cases, I don’t see such argument as being advantageous. That is, unless you have a substantial amount of money to manage which by managing such money, you either save or increase your investments by at least that amount of money as what it cost you to get the system and internet, then it won’t be of any real savings to you.

In my case, I do use the computer obviously, which I use Excel for my household’s finances, which in some respect did save me a lot of money early on. But then how I use Excel, most people wouldn’t even dare to attempt to set it up as most people only use computers like how they use a car where as I’m like the software mechanic with an Accounting education to the system as a mechanic is to a car at the shop. 90% to 95% of the software stuff including programming, databases, spreadsheets and what not, I learned on my own. Many say I’m gifted in that regards cause of how quick I pick up on the software side of computers. For me, I say it’s 50% gifted (me being think logically is the part gifted to me) and 50% earned. My learning disability primarily in language forced me to learn the art of memorization to conquer English, which how I ended up learning English via logics and memorization is how most people in programming end up learning programming languages. As a result of that, once I was introduced to computers in the 7th grade, I just took off like nothing.

Anyhow, just be sure you have your bases covered including covering for inflation and increased costs from increased standards of living over time.


Brenda August 17, 2011 at 6:40 PM

I’m 60, want to retire at 65, 66 if I have to! Will 400K, along with SS, and no bills be enough?


Neal Frankle August 17, 2011 at 7:33 PM

Brenda, if you invest the $400k correctly, you should be able to draw 4% – $16k/year. Take that, plus the ssi and compare it to what you spend now. Check out my post.


Tom Munson August 16, 2011 at 12:05 PM

I am 59 years old, do not own my home but still owe 130,000 on a and a second mortgage of 26,000. I could retire with a pension of 2975.00 /month plus at 62 a SS of 1437/ month for a total of 4167./month. In three years when I am 62 I will owe 107,000 on my house and possible have more debt on my second. I have 45,000 in my 401k. Options stay working to 66 and take a 80000 dollars buy out on my pension reducing my pension by 500/ month, putting this on my house. Sell my house which is worth 300,000 and downsize to a townhouse. Not a lot of options, looking for ideas!


Neal Frankle August 16, 2011 at 12:43 PM

Why is your second mortgage increasing? Are you spending too much? How much does it cost you to live?


Mike July 22, 2011 at 5:57 AM

My wife and I are both 56. We would like to retire now. We have $1.8 million between IRAs and regular savings. No debt. No pension. No employer provided healthcare after retirement. But SS at 62 if we need it. I can make around $25K a year (minimum) on my own when I retire from my own business. I’m still not sure I can retire now. We will need around $90,000 a year to retire comfortably. What do you think of our situation?


Neal Frankle July 22, 2011 at 9:10 AM


As a rule of thumb, you should count on a 4% to 5% withdrawal from your assets. So $1.8 million should generate $70k to $90k. That, plus the $25k and SSI looks good for “normal” retirement age. But is your goal to retire now? 56 is pretty young…lots of time for inflation to whack you pretty hard. What is your main goal?


Ronald Dodge July 22, 2011 at 10:26 AM

I hear of a lot of economists say 4% as a good rule of thumb for withdrawing. However, one thing I learned from when I did my self study on retirement and risk factors (both retirement years and employment years), just on account of retirement risk factors (given employment risk factors would not longer be at play once in retirement), I come to learn to have a multiple of 50 of annual wages saved up with only withdrawing 2% annually.

Why do I say 2% instead of 4%? First, what if you end up retiring when the market is at it’s peak, then it goes into a major bear market? Yes, it could lose 90% of the value as it did with the onslaught of the great depression, but more likely the case, it could very well lose 50% of the value. Now think about how much harder it will for that set of funds to go back up when you are withdrawing money at the low values. When it’s at the low values, you may end up having to withdraw 4%, but hopefully, that would only be mid term at most (no more than 5 years, though in most cases, maybe more like 2 or 3 years such as Oct 2000 – Oct 2002 bear market). Otherwise, once it’s no longer at the low post, then go back to the 2% withdrawal. This will do 2 things. First, it allows the funds to build up faster than spending down in most cases, so as you can keep up with inflation and not get held back by the income tax effect (if the money is pre-tax based). However, there is that RMD rule that make this objective harder to meet, but there is a way around it for most people. However, due to the nature of the rules and everything, it’s important to start planning for it long before you get to the higher income ranges.


Ronald Dodge July 22, 2011 at 10:49 AM


Sounds like you are well on your way there. By the looks of it, you should be able to retire within the next 10 years. I would just alert you to be careful on the assumption of that $25,000 per year income from your business as residual income. While the odds looks good, also look at it from a worst case scenario and what’s the odd of that happening over time.

You mentioning that you want to retire with a minimal of $90,000 (today’s money) annually is similar to what I want to be doing when I retire as well.

Based on my self study, I came to a net amount of retirement funds of about $4.5 million (After Tax Based) to retire on. Now that is taking into account of a lot of different retirement risk factors, which the big ones I took into account to get to this amount are:

Market Risk Factors (Could lose half the value early on depending on where in the market cycle it currently is at when one retires)

Inflation and Taxation (the drag effect of such funds as funds has to be able to keep up with inflation net of taxes, thus one such reason why I still say 80% in equity with 20% in Bonds and Money Market. One caveat to this rule. While you move funds from the equity to the Bonds/MM to get the Bonds/MM back up to the 20% mark, don’t move funds from the Bonds/MM to equity to get equity back up to the 80% mark. During the market down times, you withdraw from this Bonds/MM part as that serves as your protection in most cases. 20% can be for up to 10 years if you think about it with the withdrawal rate at 2% annually.)

Longevity (what if both of you end up living a very long time, like into your hundreds)

Health Factor (what if you both or just one of you end up getting a major medical issue to the point both or one of you end up living in a nursing home for a period of 10 years like what happened with my grandmother with her having Alzheimer’s Disease prior to her passing away. As such, this will cause a jump in the retirement funds needed to cover such expense).

and to be able to withdraw just 2% of your retirement funds per year while meeting the RMD rules, I came to conclusion 60% of the funds needs to be in a ROTH IRA type fund at the time of retirement and only withdraw from tax deferred retirement funds. Of course if you have other ROTH accounts like ROTH 401(k) plan, then you have take those values into account in regards to the RMD rules while ROTH IRAs are exempt from RMD rules as far as the owner itself having to withdraw from the account. The only time when RMD rules come into play with ROTH IRAs is when it goes through inheritances.


Ronald Dodge December 31, 2010 at 2:38 AM

What do I count as countable savings?

Net Retirement Contributions (Contributions into retirement plans rather if it’s by self or employer minus any permanent withdrawals from such retirement plans). Most preferred option

Net Debt Reduction (Total Reduction to debt minus any pick up in debt). The only type of debt not counted in this is current debt meaning those debts that’s incurred, but paid off in full by the due date of the next billing cycle. Examples are utility bills paid in full by the due date (given you aren’t charged for the usage until you used the units unless other services tend to charge you for future usage such as telephone and/or internet usage), credit card usage (as long as you pay the full new balance amount by the due date every single month, it’s only current debt and doesn’t become countable debt in my eyes). Given debt is such a drag on your other financial goals, this is generally the second preferred route, but not always.

Net Contributions into Emergency Fund/Investments (Total Contributions minus Total Withdrawals). Why do I combine EF and Investments into one category? First, the EF is a type of investment for starters. For some, EF means putting into cash account only such as via Dave Ramsey with saving account, but for how I use the EF, I don’t agree with that philosophy given a portion of the EF is dealing with long-term assets which means such portion needs to be matched to something that’s going to be able to keep up with inflation and taxation in order to have the same spending power (if not better) as time progress, so as when it does come time to repair/replace those long-term assets, I’m not having to throw more money to the long-term asset than what I would have had to do before once you factor in the power of the mighty dollar. A savings account doesn’t keep up with inflation obviously in most cases. Once you factor in income taxes, interest earned on that money has to be about 30% higher than actual inflation in order to have the same real spending power. Considering *REAL* cost of living (including increased demands onto households by government and society over time) tends to double every 10 years or 7.2% annually, that means such investments needs to have an annual earning rate of about 9.36%. Granted, that 7.2% may not be the case right now, but the ultra low rates lately is only relative to the part of the current economic cycle. I do think we are going to come out of it soon and could very well see a major jump in inflation during the recovery part of this economic cycle given all of the different things that has take place over the last few years witin our own nation.

Anyhow, the net contributions into the EF/Investments is the least preferred route in most cases, but if such fund is really low, you need to think about increasing this to a sensible level provided you aren’t in such financial dire straits that you can’t do this part of the financial security just yet (Yes, I have been in that boat and it’s no fun). The only thing I would suggest, one have at least $2,000 put away for such emergency use minimal regardless of which your financial situation is. Yeah, Dave Ramsey says $1,000, but that’s only cause his numbers are too far out of date (going back to the figures prior to the 2001 tax code changes). Another thing to think about though, how much do you need to put into it to avoid having to take another debt out for when such a time come up. That’s one such reason why I use depreciation schedules to help with that part of the financial planning process.


JoeTaxpayer December 24, 2010 at 8:26 PM

A wife and 5 kids = 7 exemptions = $25,550 plus the standard deduction, $11,400 (or more if itemizing) tot = $36,950. The 15% bracket ends at $68,000, so unless the brackets change dramatically, you are good to gross $105K and still be at 15%. You are well below $65K, you say. Roth is for you. No doubt. Pay the 15% now and until you creep out of the 15% bracket, with pay increases or your little tax deduction graduating school, I’d not suggest any pre tax savings. If you have any now, I’d use Roth conversion over the next few years to stay at 15% but convert before you approach 25%.

I think we’re in agreement, Ron, no?


Ronald Dodge December 31, 2010 at 2:37 AM

Now you starting to see where I’m coming from. Currently, I get to take a lot of the advantages of the tax stuff that I won’t be able to take advantage of in retirement years (hence why prior to the FICA tax holiday year, my overall average payroll taxes after taking into account of tax refunds [Only cause of how the tax codes are setup, thus why I can’t play the break even game with the taxes] has been between 2.5% and 3.0%) Come to retirement years, I don’t expect my average total payroll tax rate to be 10% or less. As you said, I currently have $36,950, but come retirement years under current tax codes, I will only have $18,700 total as tax free per year. Currently, I get the Child Tax Credit, but I won’t have that in retirement years. I currently get a small amount of the Life Time Learning Credit, which I won’t get in retirement years. I currently get the Retirement Saver’s Credit, which I won’t get in retirement years. About the only credit I don’t get now related to the kids is the Earned Income Credit as I never once did qualify for that. The one time I did qualify for it by way of income, I didn’t cause of age.

As for converting the 401(k) plan over to the ROTH IRA, I would love to be able to do that any time now for 2 big reasons:

1) The ROTH IRAs I have for both myself and my wife has been out performing the 401(k) plan (even when looking only at trends as opposed to currently, which currently, the ROTH IRAs has well outperformed the 401(k) plan by a rather large percent).

2) It still wouldn’t be too big of a tax bite for me here and now as opposed to down the road in retirement years.

Then what’s preventing me from doing it?

For as long as I work for the company, I’m not allowed to roll over that money into an IRA or anything else for that matter.

So why put money into the 401(k) plan?

Currently, it still pays off to max out the employer’s matching policy. However, anything over and above that currently would not make financial sense to do, at least not until I max out the ROTH IRA contributions (which ROTH IRAs has a larger base for the same dollar contribution than Traditional IRAs given the after tax basis vs before tax basis). Currently, this 401(k) contribution between my own contributions and the employer’s contributions makes up about 8.33% of actual gross income, which leaves 16.67% of actual gross income left to go to countable savings. Currently, the savings into ROTH IRAs makes up about 3.33%, which still leaves about 13.33% of actual gross income to have to countable savings in order to meet that 25% of actual gross income must go to countable savings goal I have put into place back in 2001. For 2011, it’s looking like debt elimination by schedule is expected to be 8.67%, which will still leave 4.67% or so left to meet. Early on, I wasn’t able to do that, but I still had to work towards that goal. Of late, I been doing that. This year, it looks as though I will have about 29% of actual gross income going to countable savings, but I won’t know the exact number for sure until some time next week.


Ronald Dodge December 24, 2010 at 1:18 PM

Yes, the 27.4, but read on down the actuary table. As you get older, that number gets more and more severe.

That 27.4 is for when you are 70 meaning total assets divide by 27.4 is what you need to take out. If you are 80, you must take out the total assets divide by 18.7 as the RMD. So you see, that 27.4 isn’t constant throughout your retirement years.

Yes, I am fully aware of your point with regards to not converting everything to ROTH IRAs. However, I also suspect I will also have enough in annually taxable investment accounts to the point that won’t be too big of an issue either. You definitely raise a good point as to why to be tax diversed, which I will grant you that as I already had that in my plans. I’m just saying not enough in ROTH IRAs is also a good way of running out of resources as I did my homework dealing with all of the different factors combined (earnings, taxation and inflation all factored into each other). As such, that’s why I plan on having a larger chunk in ROTH IRAs than in other retirement accounts. Of course, if things don’t pan out that way, then so be it, but given how vigilent I been about savings while working (25% of actual gross income must go to countable savings as one of my financial hard rules), I highly doubt I will fall into the boat of not having to use ROTH IRAs as a tax strategy. One such reason why I have a such rule, I have literally lived in survival mode for a period of 9 years (First 3 of them on Child SSDI only, which then when I earned income via the College Work Study program while in college, they kicked me off of Child SSDI even though I was told prior, I wouldn’t be for as long as I was in college. Some statement that was). I want no part of that situation again, thus why I did the major self study and put in various rules into place in attempt to avoid such a situation ever happening again (at least for my household).

As to you using the 83 year old lady, it’s good you looking at what’s best for her set of circumstances when it comes to taxes as it’s all relative to how much one has in one’s accounts and type of accounts. one more thing to your point, I had setup some formulas so as to take into account of taxation and attempt to have the least amount of taxes taken out *OVER ONE’S LIFETIME*, which that requires careful tax planning and diversification.

Maybe you were thinking one would *ONLY* have retirement income, but that’s not my plan at all cause of the fact of annually taxable investment accounts (granted, still not earned income, but yet, it’s not exactly retirement income either by the standard definition) will still come into play quite a bit.

As for the exact percentage of the money between the 3 main types of of accounts, obviously, there’s a lot of different variables involved, so only doing the math at the appropriate times will make sense. but if things goes generally as I expect them to go (expected retirement to be 30 years down the road for me), the Tax Deferred Retirement Accounts will probably be the one with the least amount of money in it. It might start out as the most, but the math at that time will tell me what it should be for 2 types of retirement accounts as well as how much to convert so as not to have too much converted in one year and end up paying a higher tax bill than it would be if converted on a more gradual basis.

As for ROTH 401(k) plans, that’s a no brainer, once no longer working, convert them into ROTH IRAs to get away from the RMD rules.


JoeTaxpayer December 24, 2010 at 2:04 PM

I did read further down. And I said 18.7 = 5.35%.
I was specifically answering your point that a 90 yr old’s RMDs would deplete his account.

I may be playing loose with terminology, but to me retirement income = all income one gets at retirement, regardless of source.

When my 84 yr old was working, she and hubby were in 28% bracket, so even if Roth were available then, it would have cost her some money.

When it comes to this discussion, there are no rules of thumb that I agree with. For some, 100% pre tax plan works, for others, 100% Roth. (The guy who has a generous pension, replacing 90-100% of his income, may benefit from 100% Roth while still working.) So, I’m open minded until I see specifics. The last thing I worry about is RMDs, I think people cite the withdrawals as though all the money were lost, which isn’t the case. For most people, the first $10K+ dollars are tax free, and most people aren’t saving enough to even think of joining this conversation. Try to find the average sum people have saved going into retirement. Pretty pathetic. Last I saw, median net worth was less than $250K for 65yr old or older. This includes home equity.


Ronald Dodge December 24, 2010 at 3:01 PM

Yes, you are right, it shouldn’t necessarily be a set rule of thumb to say for all circumstances as that wouldn’t work too well either. However, if you are the type to be saving majorly for retirement years, then tax strategizes must be thought of quite more carefully while those that barely even save have a much different issue facing them.

Yes, it’s quite sad as various reports say only 1 in 4 will retire relatively comfortable, thus the other 75% won’t even be close to the the 35% federal tax bracket.

I’m just saying for our household’s particular situation, I am planning for the higher income tax bracket as I’m so much more disciplined about saving for retirement as I don’t want to be in that boat as 3 of 4 retired households are in. But then for me having lived in such survivalship mode for years, it definitely got me going in the opposite direction, which many people have not had a such experience, so they don’t have any idea what they may be facing cause of them not saving enough.

Last I saw, median total investable assets worked out to be about $50,000 at the time of retirement, which that’s very sad. I am already well past that point even though my income is still significantly below the area’s median annual gross income of $64,500.


JoeTaxpayer December 24, 2010 at 11:44 AM

I’m okay with precision, Ron, 70-1/2 it is, and the RMD divisor is 27.4 if using table 3. So 3.65% the first RMD.
I don’t know why you’d think that the RMD wipes out one’s balance by 90. At 80, the divisor is 18.7, a 5.35% withdrawal. 1% CDs will certainly kill the account over time, but I imagine you are not projecting the next 50 years to average a 1% return.
I council a woman now 83 whose IRA balance continues to rise. For her, the Roth does come into play, we convert enough to top off her current bracket (15%) so over time, the RMD will not push her into 25%.

Back to my first point, if you are Rothing along the way, just be aware of maintaining enough pretax money so you don’t actually retire in a low bracket and not take advantage of it. I read people who want to retire “tax free.” Fair enough, but the STS deduction and exemptions ARE tax free money. A shame to have literally no income to take advantage of those.


Jeff December 17, 2010 at 8:32 AM

Excellent advice that I can personally recommend. I’m 63, retired at the beginning of this year and am in same situation as Mike above, carried forward 3 years. I’ve been using the Quicken financial software to keep track and categorize our family’s savings and expenditures. Each year at tax time I summarize the previous year by category – insurance, auto, grocery, home repair, recreation, etc. I have over 15 years of history and can figure our average needs and even estimate a personal inflation rate of 1.5%. Our return on investment has been over 6% so that leaves 4 to 5% real income adjusted for inflation. These are my calculations, but YMMV. Keep your financial history, it is really valuable information.

To our average expenditures, I bumped up the recreation category by a good vacation and added the cost of medical insurance since my wife and I are not medicare eligible yet. I don’t expect our other costs to change much. Income from savings is subject to income tax. I’ve been using the 4% rate of return to estimate the size of needed investment savings and we reached that with the stock market recovery last year. That recovery has continued this year so hopefully we’ll be in good shape to weather the next recession when it occurs. I’ll continue keeping our financial history and use it to adjust things if necessary.


JoeTaxpayer December 14, 2010 at 3:01 PM

Many articles suggest once you know spending, 4% is the draw rate. So, if I need $100K/yr, I first subtract social security and pensions if any, then multiply by 25.
The retirement budget is the tough thing to figure. With free time who knows how much we’ll want to spend? Work keeps us busy.


Ronald Dodge December 2, 2010 at 5:49 PM

I am 40 years old with a wife (married 12 years) and 5 girls (between 3 and 11 in ages). But then I seem to have been married into basically an all female family as my wife has a sister with no brothers and her sister has 2 girls and no boys just like we have no boys. The only other male in the family is also married into it, and that being my wife’s sister’s husband.

As for retirement, yes, that’s still at a low level relatively speaking, but after removing income taxes from the figure (and this is assuming 43.1% of tax deferred retirement accounts goes to income taxes), I have about $65,500 in total investable assets. I still have another 30 years until retirement.

As for total debt, that’s also been coming down a lot. When I first bought the house, yes, it went up a lot but only cause of the mortgage. Other than that, it’s been steadily coming down since about July of 2001 (when I had converted my budgeting from paper to Excel as paper route got to be too tedious and time consuming). But it wasn’t really so much it was cause I had switched from paper to Excel, but more so it was only in February of 2001 income had finally went to a point to be able to cover necessary living expenses. It took those few months to get things in line before debt started to go down.

This year alone, debt has went down by $12,000 with more to come this month. Long-Term Networth Value went up by $23,800 so far YTD using Accrual basis of Accounting. I refuse to use the Cash basis of Accounting for determining networth values.

Like your Arizona client, I also use Excel quite extensively for our financial stuff. Though while I haven’t created 13 different scenarios, I have built into it all of the different aspects of our financial picture and have them all linked into each other. Even my Cash Management worksheet is primarily formula driven so as when I make adjustments, it’s pretty easy to do and takes up very little time to do it. For the few items I have to do manually (such as formula adjustments), I can use the Advanced Filters to select only certain Dates (rows) so as to even make those adjustments pretty quickly. Currently, this cash flow management worksheet goes out to the end of the year of 2020. Even a lot of my conditional formatting stuff are formula driven, so as I don’t have to make the changes as needed, but rather they happen automatically. Idea behind this is so as I don’t have to spend too much time with the file, but yet, I get the information I need and see where I stand at.

While I don’t have it setup to do numerous scenarios, I can make adjustments in other ways and it will show me instantly the impact it has on the Cash Flow Management worksheet.


JoeTaxpayer December 23, 2010 at 10:14 AM

Ron – 43%??
My friend, you need to first understand that in today’s dollars, MFJ (joint) you have a $11,400 STD deduction, along with $7300 for the two exemptions, you and the mrs. So the first $18,700 is federal tax free. If you plan to withdraw at 5%/yr, it will take $374,000 in pre tax accounts to produce that amount.
By the time you save that $374K, the STD deduction and exemption will have risen with inflation.

And for the love of Mike, don’t get talked into Roth, you may have zero taxes at retirement, 10% if you keep saving. 43%? Who are you talking to?


Ronald Dodge December 23, 2010 at 2:15 PM

Yes, as currently between federal and state, top marginal rates are 35% and 8.1% respectively. Yes, I realize those are only marginal, not average, but still. If you as your income continue to go up, your average income taxes will move closer and closer to that rate.

While we may know roughly the break points of the various tax brackets for the next 5 years, not really the case for the next 20 to 30 years.

Given I expect significantly higher income in retirement years than now, that’s another reason for me making such assumptions. Yes, currently, my average total payroll taxes is only 2.5% to 3.0% (Including FICA), but that is highly unrealistic to expect in retirement years.

Why is it that I plan for 43% though?

Income is expected to be significantly higher so certain deductions isn’t afforded once there such as personal exemptions via the AMT.

Certain deductions and credits I get now, I won’t get in retirement years such as the ones related to my kids, hence another way how I will have higher tax bills in retirement years.

As such, I would rather plan on the conservative side and plan too much for income taxes than not plan enough for it and get caught with not enough income for our retirement expenditures.

As for SSA benefits, while I do expect it to be there still, I don’t expect the level of benefits to be there, but rather more like at 50% of what they are now. Yes, I know the SSA office say it’s more like 73%, but knowing human behavior and people not realizing how big of an issue until it’s too late, I’m assuming 50% instead. As for retirement planning, I don’t even include SSA benefits into it.

As for withdrawal rate, I assume 2% to take into account of various other risks though the big one being market and economy risk factors. That’s cause you have to have enough in equity to help cover for the longevity risk factor.


JoeTaxpayer December 23, 2010 at 3:05 PM

With no idea how much you are now able to save, or will save in the years to come, I don’t know your final bracket. All I know is that a retiree today can have nearly $2M pretax and still stay in the 15% bracket.
I wish you enough wealth to be in that 35% bracket on retiring. FWIW – at age 70 you’d have to withdraw nearly 4% as an RMD, what you spend of it is up to you.


Mike October 1, 2010 at 11:26 AM

Well I am 59 years old, married and plan on retiring in full at 63 years old. Wife will be 62. We are figuring both making over $40,000 with both Social Security and pensions. We only need about $70k per year to start in retirement to maintain our quality of living. We will have $1.2M in our 401/savings. We have no debt and own our home. Hard work and extensive savings in additions stayed out of debt got us to this point. Keep in mind my wife and I have been married 40 years.


Neal October 1, 2010 at 11:52 AM

Mike….you are officially a Wealth Pilgrim! Congratulations man! 40 years married, great saving, no debt…….not many people can match your accomplishments.



Financial Samurai August 1, 2010 at 10:02 PM

I don’t think 5% is a reasonable rate of return. 4% perhaps.. and most likely 3.5% now. 5%, noway. I’d invest EVERYTHING i have if someone can give me a 5% rate of return!


Neal@Wealth Pilgrim August 2, 2010 at 8:19 PM


I agree with you that 5% is tough to get RIGHT NOW. But I’m saying 5% over the next 20 or 30 years. Does that make more sense now?


Mark July 21, 2010 at 10:31 AM

Most people have no clue as to whether or not they are on pace for retirement. Very useful tips.


Denise July 20, 2010 at 11:59 AM

Very interesting. If you haven’t started saving for retirement, you’re behind. Sad but true


Neal@Wealth Pilgrim July 20, 2010 at 11:51 AM

Hey Penny…

Not sure it would have to be so dismal. I think — wait…I KNOW that if one plans ahead, retirement could be outrageously great – even with less money. It takes mindfulness…..

What gets people upset is when reality is thrust upon them. Anyway…thanks,


Leave a Comment

Previous post:

Next post: