How to Know if You Are Saving Enough for Retirement

by Neal Frankle, CFP ®

Do you know if you are saving enough for retirement? Most people don’t have a clue. And when they ask me, “How much money do I need to retire,” they don’t like my answer.

According to an ING survey, a third of the people over 55 think they need to save $250,000 in order to retire. Another third thinks they need $1 million. Most of the rest don’t know how much they need or when they should retire. By the time you finish reading this and doing the exercises, the good news is, you’ll know.

Let’s get started:

1. Get a personal budget plan by knowing what you spend.

Notice I didn’t say that you should monitor your expenses. You need to know what you will spend in retirement and there’s a huge difference between the two.

When I ask folks to tell me how much they spend, they often list their expenses. Unfortunately, most people spend about 30% more than they think they do.

Why? Because they spend money on things that aren’t included in their monthly expense list. I’ve written about this issue extensively, and I will tell you that unless and until you are willing to track your spending, you will have to depend on your luck in order to save for retirement because your luck will be the only thing you’ll have going for you.

Neal’s Notes:  Looking for a way to cut your retirement spending and bring in a few pesos on the side? Get  active in the right retirement hobbies now – before you retire and develop that past time into a little trickle of cash that just might become a steady stream of income.

2. Don’t make bad assumptions.

You know what happens when you assume, don’t you? You make an ASS out of U and ME!

Specifically, don’t kid yourself into thinking your expenses will drop when you retire. They won’t. I say this for three reasons:

a. When you retire, you’ll have more free time to spend money…so you will.

If you think about it, you probably spend more money on the weekends than during the week. Well…when you are retired, every day is a Saturday. You’ll have the time you always wanted to go bowling, travel the seven seas, take up skydiving and more. It costs money, baby. It all costs.

b. Inflation isn’t going to stop working just because you do.

Even if inflation doesn’t get out of control because of unfettered government spending, you should figure that inflation is going to continue. Let me illustrate the danger of inflation.

If you spent $50,000 a year in 1980 to get by, it would cost you $128,000 to pay for the same standard of living today. That’s an increase of 250% in 30 years. If you are 60 years old today, it probably makes sense to count on living another 30 years, so you do the math. You’re going to need more income during retirement than you think.

Hint:  A great way to pump up your retirement savings without the pain is to make a tax deductible retirement plan contribution.  Are you maximizing those opportunities?

c. Medical expenses.

Even after you qualify for Medicare at 65, you still have premiums, deductibles, co-pays and uncovered items such as glasses and dental.

d. You will probably live longer than you think you will.

Many people make the mistake of looking at actuary tables and assuming they’re only going to live into their seventies or eighties. The reality is that the longer you live, the longer you are likely to live. So a healthy 53-year-old man can expect to have a longer life than a newborn who hasn’t overcome childhood, diseases, etc. What I’m trying to say is that you can’t rely on actuary tables. If other people depend on you, look into term life regardless of your age.

3. Be realistic about your retirement income.

If you’re like me, you can’t count on collecting from a pension plan or an annuity payout. My retirement income is going to be generated from investments and Social Security. With that in mind, let’s take a stab at estimating both.

Social Security benefits and Social Security spousal benefits are pretty easy to estimate. You can get simply ask Social Security to send you a worksheet and you will have your number.

If you collect rent from real estate, adjust that rent for inflation. Not too hard either.

Estimating income from investments is another story.

If you own equities and mutual funds, you’ll have no choice but to make assumptions about what they will grow to be. There are a number of calculators you can find online that will tell you what your nest egg will grow to given an assumed growth rate and assumed contribution rate.

For argument’s sake, let’s say that you currently spend $8,000 a month. Let’s also say that when you retire (15 years from now), you’re going to need $10,000 a month to keep pace with inflation. Some of your expenses will drop off (like your mortgage, hopefully) but others will increase – like health care.

Let’s also assume your combined Social Security income will be $4,000 a month.

So in this case, you are $6,000 a month short.

Remember a few paragraphs ago when you estimated what your nest egg would be when you retire? We’ll need to use that number now.

I know I asked you not to assume earlier…but now I see we are going to have to make some assumptions in order to illustrate the point.

If we assume you can withdraw 4% of your nest egg every year to create the income you need, let’s determine how much more you need to save.

Assuming your nest egg will be $900,000 by the time you retire, that will generate $36,000 a year at 4% – or $3,000 a month. That means you are still $3,000 a month short. So this indicates you aren’t saving enough money.

How much more must you save for your retirement?

Well…you need an additional $3,000 a month – or $36,000 annually. You’ll need to generate that income in about 15 years, so you’ll need an additional $900,000 by the time you retire.

Using the calculators I mentioned above, you calculate that you need to save an additional $33,000 a year (approximately). Rather than look around for another calculator or use my fancy one in the office, I just plugged numbers in until I reached my goal of $900,000 using 6% as a growth rate.

Now of course for some of us, saving an additional $33,000 is an impossible task.

There are a number of solutions for this retirement problem but for this post, let’s set that problem aside.

You see, I think the reason more people don’t go through this exercise is because they are pretty certain the additional savings they’ll need is quite beyond their ability. As a result, they act like ostriches and stick their heads in the sand.


Look – for the time being, don’t worry about how you’re going to get there…all I want you to do is make sure you know what your number is.

I will guarantee that if you’re not willing to calculate the number, you’ll never be able to devise a good plan to reach your goal – or modify your goal so that you come up with one you actually can reach.

Have you calculated what you need to save for your retirement? Were you surprised with the result?



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Neal@WealthPilgrim March 2, 2010 at 8:19 AM

I think Erik’s advice is great. I can vouch for Justin….he has all the qualities of a very successful person and I KNOW he’s going to do fine.

Erik March 2, 2010 at 7:54 AM

Justin, maybe you should drop the freelance work for now and just pick up an extra job that pays ok and you find interesting enough to not be completely bored and/or hating it. When you’re young and debt free, an extra $100 – $200 a weeks isn’t too hard to earn. Maybe something that gets you involved with people, like a courier-for-hire or cooking meals for people who are too busy (if that’s a skill you have). Lots of service oriented self-employment opportunities since people are so busy these days.
If you could tuck away an extra $50 a week into an emergency fund and $50 a week into a growth-stock mutual fund account, you’d have a nice investment and a “rainy day” fund built in no time.
And do look for opportunities to expand your skills into a different job. Sometimes, though when you’re starting out, you have to pay your dues for a few years so that people will see what you are worth. Most mega-rich people started out sweeping floors or doing menial work. They learn the business, build a reputation, and keep going upward. You can too!

Erik March 2, 2010 at 12:52 PM

I see you’ve been trying very hard to make something happen, and I’m guessing that stiff competition in the job market may be part of the problem. There are people with Masters degrees doing the work of lowly interns just to get a break these days! If this career field is what you really want, I would suggest continuing your search while you concentrate on piling up cash. If you’re working full-time plus an extra 10 – 15 hours, that ought to set you up pretty well while you pursue the career you really want.

And what do you really want? I sense a little uncertainty in your answer “at least I think I want to get into hospitality”. What is it you hope to do eventually after you’ve worked your way up from front desk clerk? Finance, general management, accounting, real estate, etc? Many business fields need these skills, so perhaps you could gather experience in whichever field you want in another type of industry temporarily. While insider knowledge and connections are great, a good accountant is a good accountant whether he’s cut his teeth in manufacturing or hotel balance sheets. All of this to say is, can you find a way to “work your way up” and gain experience in the general skills of your profession without necessarily starting as an entry-level hotel employee? Neal has expressed his confidence in you, and from what I’m reading you sound like a person who will make it. Keep up the fight!

P.S. Next month, tell us about the FOURTY letters you sent out. Stamps are cheap.

LeanLifeCoach March 1, 2010 at 6:28 PM

Neal – By all means, Lean is fine. I am going to get to $3 million. I don’t know entirely how, but I am. If I don’t there is no point in retiring.

Justin – It’s tough when you don’t have a large income but it is always possible to save more. It’s not easy and not fun but if we are honest with ourselves, most of us live a lot more luxurious than we recognize. It’s all about determination and taking the time to have a long-term perspective. $100/mo will add up big over a lifetime, add in compounding interest and it is a small fortune. Add to that as your career progresses and before you know it you have a nice nest egg.

I didn’t begin my journey until the wife and I suffered a 50% cut in income and since we have gone from 5 digits in debt to the multi 6 digits in assets. It is doable!

Justin March 1, 2010 at 1:33 PM

I am 24, and nope, I am debt free. My only debt is my revolving monthly credit cards, which are all paid off in full every time. I work a 9-5 which I dont enjoy all that much, and have been looking for another 9-5. In the evenings I had been doing a good amount of freelance work, but found that I was doing lots of work for little pay…the opposite of how my freelance work should go.

I do internet marketing and graphic design, Currently working for a power sports dealership full time. I am not big into power sports, thus why I dont really love the job. I make enough money to pay all my bills, and thought I was saving some, but I learned quickly that the savings can disappear quickly with one medical incident, one home disaster, ect. And at the rate I was saving, if something were to happen again, I would be in trouble.

I think a large part of my problem is that I am in a position with little opportunity for growth, I am not really expanding my skillset in my current position, and am having a very tough time finding something else out there.

As for planning my financial future, at my age, one of the things I would like to look at is future income. If I am to stay at the company I am at, I don’t see my salary ever really going up enough to be able to save. That scares me when I am having such a hard time finding work elsewhere.

Erik March 1, 2010 at 1:23 PM

Yes, Karyn, that’s the issue I was getting at. I think probably most people in our generation (I’m 34) who read personal finance blogs are probably going to be ok. But many people in their 50s and 60s now grew up with the ‘government will provide for me’ or ‘my company pension will provide for me’ retirement plan. It’s sad to see where that is landing so many people. I don’t think it’s necessarily a bad thing. Think about the last 10,000 years or so of human history. Often times families share a house among 3 or 4 generations. Only recently have we converted to our modern ways of grandma’s house, parent’s house, kids house…everyone has a huge house. Well, maybe your house like mine is not huge, but I could put my parents up in the guest room downstairs if push came to shove.
Justin, how old are you and what are your time commitments like? Are you in debt up to your ears? Why are you ‘just getting’ by? Provide us some details and maybe we can think of some suggestions?

karyn March 1, 2010 at 10:51 AM

I agree with you Erik – they can start at community college and North Carolina has a program where they can earn college credits while in high school at no cost to the family. As for the boomerang baby boomer thing, I’m in my mid-thirties as well and my concern isn’t as much my husband and I having to moving in with our kids one day but that our parents will have to move in with us at the same time we’re trying to put the kids through college. I know for a fact my mom has very little saved for retirement even though she’s in her mid-50s.

Justin March 1, 2010 at 10:49 AM

How do I try and save when I make just enough to get by? How do I get myself on the right track for planning? Right now, I make very little, just enough to get by in fact, and while I am working full time, I am also looking for another job to hopefully help make more…none the less, what is the best approach towards savings when you dont make much, and where do you put your money these days when you dont have much to put away. Savings and Money Markets are not doing much for me.

Neal@Wealth Pilgrim March 1, 2010 at 1:50 PM


First thing, do you have any debt?

Is it possible to start on a plan where you just stick $100/month in an account for your future BEFORE YOU DO ANYTHING ELSE? Pay yourself first so to speak. Is this possible? If not, how about $50or $25. Something to get you started…

Justin March 1, 2010 at 1:56 PM

No debt, and yes, I could probably stick $100 per month in an account. Is putting away $100 a month now going to do anything for me in the long run? What account do i put it in? I don’t have enough to really qualify for any of the “upper tier” accounts, and at the interest rates of the lower tiers, such as my savings account i have right now, I am just as good putting the 100 bucks in a mattress.

Neal@Wealth Pilgrim March 1, 2010 at 8:59 PM

You are still a young man ( do you hear Tower of Power?) so I’d put the $100 in a growth mutual fund. You have a very long time horizon so low prices now are actually to your advantage. Start w/$100… it up to $200….etc etc. Start now….you’ll be building the right habits and it will pay off BIG time.

Erik March 1, 2010 at 10:35 AM

A very thought-provoking piece, Neal, and one that everyone (even retirees) can benefit from considering. I’m not comfortable using a number provided by the Social Security Administration to factor towards my retirement. I’m in my mid-30s, which according to everything I read is that either I’ll see a substantially reduced amount or nothing when I retire. Plus there’s no way I’ll get it until I’m around age 65-67. Getting the $1.8 million in your scenario may seem impossible for some, but it’s pretty much a requirement given that SSI is going to either get smaller or the government will raise taxes (which has the same net affect, less income after taxes). I don’t know who in their right mind thinks they can live from age 60 to mid-80s on a $250,000 nest egg. Maybe if your house is paid off and you own enough land to grow your own food, generate your own electricity from wind/water power and you don’t mind living a ‘homesteader’ lifestyle. But that’s not the majority of people I hear talking. They want to go to Disney Land (or Hawaii, or Cancun, etc) and visit grandkids.
Bottom line is I think one of two things will happen in about 10 -15 years. Either people are going to have to drastically scale back their retirement itineraries or they will have to work longer (or both). Neither one is a bad idea compared to living in poverty, but it’s not the “golden years” scenario you see on TV commercials. I think we’ll see a lot of the boomerang baby boomers moving back in with their kids and caring for grandchildren (again, not a bad thing necessarily). Maybe we’ll start looking more like the nuclear family of the early 1900s with 3 generations living under the same roof. Which would start making the idea of a McMansion not as silly as it once was. Just be sure you still get along with your parents. (grins!)
My goal as a wealth pilgrim is to finance my retirement through rents from income property and stock market investments. I’m building each approach to be sufficient to replace my work salary plus benefits and ensuring that all debt is paid off (just the house left to go!). That way if either approach fails, I have the other as a fall back. And if both succeed…we’ll maybe I’ll go to Disney land!

P.S. Karyn – send your kids to community college first — much cheaper and most of the jobs they’ll get trained for pay better. They can always earn their philosophy degrees later on their own dime. (a little tongue-in-cheek, but look into it!)

karyn March 1, 2010 at 9:37 AM

By the way, do you actually count Social Security in your calculations? I just keep hearing how it won’t be here (I’m thirty years away from retirement).

Neal@Wealth Pilgrim March 1, 2010 at 8:57 PM

Up to you…..I am closer to collecting that you are. I do think it will be here but I believe they’ll push the age at which you are able to collect. Stick it to the man by living a long time Karyn!

karyn March 1, 2010 at 9:35 AM

I have to admit I’m playing ostrich because I’m afraid to look at how much we have to save – I just can’t imagine where that money is going to come from. And I’m still trying to recover from looking at how much college is going to cost for our kids. But I’ll be a good wealth pilgrim and face the music!

Neal@Wealth Pilgrim March 1, 2010 at 8:03 AM

Lean…(may I call you Lean?),

I understand your reaction..but I applaud you for a. doing the calculation and b. doing the work.

You may or may not get to your number of $3 million but you’ll get a lot closer having taken the steps you did.

LeanLifeCoach March 1, 2010 at 4:56 AM

12 years ago I calculated my number and nearly passed out. To guarantee a decent standard of living for myself and my wife I figured at the time I needed 3 million (I’m not betting on SS or retirement to be there for me). That started me on the path to learning more about personal finance. The more I learn however the more I question whether that will even be enough.

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