# Saving for retirement: How much is enough?

How to save
I'm in my late twenties and am trying to get started off on the right foot saving for retirement. I have learned that retirement savings should usually be placed in retirement accounts in the following order:

1. Roth 401(k) - Just enough to get the maximum company match. (if available)
2. Roth IRA - Up to the annual max. ($5k per person for 2010/2011) 3. Spouse's Roth IRA - Up to the annual max. ($5k per person for 2010/2011)
4. Roth 401(k) - The rest of the way up to the annual max. ($16.5k per person for 2010) (Please let me know if you disagree.) My understanding is that the 401(k) and IRA limits are independent, so I can put$5k into my Roth IRA, $5k into my wife's,$16.5k into my Roth 401(k), and $16.5k into my wife's Roth 401(k) if she had one. I can't imagine wanting to save more for retirement than that. How to calculate "the number" But that brings me to my real question: How much do I need to save for retirement? I have other financial goals like saving for a house down payment that need attention. So I tried to sit down and calculate "my number" ... how much money I will need to retire "comfortably." I'm pretty handy with a spreadsheet for this kind of stuff, but there are just so many factors that by the time I'm done with my calculation I'm not even sure if it's accurate. So here is what I did. Please help me understand how I can tweak the calculation and/or where there is a good online tool. My strategy was to first calculate how much money I would have at retirement if I contributed$5000 to a Roth IRA every year until retirement. I assumed a 10-11% average yield. Of course it varies greatly depending on how long I wait to retire. This is where the first problem comes in, because when I retire might depend on how much money is in my retirement accounts. That's no biggie because my spreadsheet lets me see the estimated balance for every year, so I can evaluate my options. The second problem so far is that I haven't factored for inflation: How will contribution limits rise? How much will my money be worth in today's dollars?

My next step was to calculate how long that money will last. For this I assumed an investment yield of 3-5%. (Lower yield since I will invest conservatively during retirement.) I gave myself a salary and subtracted the salary every year until all the money was gone. I also assumed a 3% inflation rate, so I gave myself a 3% raise every year.

Questions
So for example, if I start investing at 27, get a 10% yield, and retire at 65 I will have $2,116,952. Then if I get a 3% yield and give myself a 3% raise with a$70k starting salary, my money will last until I am 96. Not bad.

Based on this it sounds like if my wife and I max out our Roth IRAs and put enough into our 401(k)s to get the company match then we'll be more than fine. But what about inflation? Is $70k enough of a salary? (Of course it would be$140k if my wife did the same.)

Should I increase the annual contribution somehow? Should I use different estimated yields? Am I just way off?

• This answer of mine answers "how much". The short answer is you need 25x of your annual spending in order to sustain your lifestyle without working. The blog post I've linked to answers what savings rates are necessary to achieve 25x of annual spending. – Jay Jan 5 '15 at 4:31
• @Jay - one thing your comment ignores is Social Security. Since the OP plans to work until retirement age, he and his wife would expect to collect SS. It's typical to get 40% of pre-retirement earnings as a benefit, which for most is half of their needed retirement income. This reduces the 25X to more like 12-13X. (I've seen articles by Fidelity suggesting 8-10X, but in my opinion, that's too low.) I retired at 50, with about 20X as saved, and have my wife and I have an average 12 years till maximum SS benefit now so the 5% spend rate doesn't really scare us. – JoeTaxpayer Jul 14 '17 at 15:37
• @JoeTaxpayer True taking SS into account changes the numbers. I didn't consider it because the blog post I based my answer also does not. Also general fears about the long-term viability of SS (unfounded or not) makes me feel that people in the 25-40 age bracket should treat SS income as a nice little bonus but not necessarily count on it. – Jay Jul 15 '17 at 6:57
• @Jay - I wrote about The Number a few years ago. In that article, I offer a spreadsheet which shows that a 15% saving rate (that can be 10% from saving, 5% from company match) and annual return of 8% can give 20X one's income at 62 or so. I mention SS in the article, but ignore it for purposes of the math in the sheet. The last 12 years of work take the savings from 10X to 20X, hopefully, at age 50, OP will have a better idea if SS will be there. – JoeTaxpayer Jul 15 '17 at 13:49

I'd encourage you to use rules of thumb and back-of-the-envelope. Here are some ideas that could be useful:

• save at least 10% of your income, but 15% is better. Your savings rate will need to cover everything (retirement, emergencies, houses, cars, kids) and 10% probably isn't good enough for that.
• you might withdraw 4% per year in retirement, which implies you might want to reach 25x of whatever you would live on in your 50s... if you save half your income, you don't need to plan to spend 80% of your income in retirement, right? (be sure to keep pretax/post-tax equivalent when calculating this, i.e. either gross or net income on both ends) (also, 4% assumes "spending down" a bit rather than living only on principal, I believe)
• save an emergency fund first, before anything else
• retirement or home downpayment first is sort of a personal call, in my opinion. how soon do you want to own a house?
• you can always stop saving in retirement-restricted accounts if you get "enough" in there, and the earlier you save the more you benefit from compounding
• 6-7% is a much safer investment return expectation than 10% (10% might be OK if you're talking nominal and not real, but I think it's easier to just use real returns instead of picking a nominal and an inflation assumption separately)
• when you get a raise, divert at least part of it to auto-deposited savings so you don't inflate your lifestyle
• for most of us, our time is almost certainly better spent thinking about our income and career than in detailed investment planning - if you do the math, assuming you save 10-15% of whatever you make, then boosting your income 20k is worth a whole lot of money over the years. Of course if you save 0% or something close to it, then you can make a million a year and still be screwed.

The problem with any kind of detailed calculations is the number of unknowns:

• emergencies you will face, whether lawsuits or ill health or children
• future government policy, for example will you get Medicare / Social Security and how much, tax rates, etc.
• real investment returns
• "glide path" of your investment returns (depression right before retirement or bubble right before retirement, for example)
• if you panic in a downturn and "go to cash" even once, or speculate in a bubble even once, you can completely destroy any calculations and assumptions you might have had...

There are some really complex calculators out there, for example see ESPlanner (http://www.esplanner.com/) (caution: horrible user interface, but seemed to work), that will include all kinds of factors and run monte carlo and the whole thing. But in my opinion, it's just as good or better to say save at least 15% of income until you have 25x what you spend, or some other such rule of thumb.

Here's my little blog post on savings and investing fwiw: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/

Another note, there's sort of an "ideology of how to live" embedded in any retirement recommendation, and you might want to take the time to reflect on that and consciously choose. A book on this topic is Your Money or Your Life by Robin & Dominguez, http://www.amazon.com/Your-Money-Life-Transforming-Relationship/dp/0143115766 which is a sort of radical "you should save everything possible to achieve financial independence as early as possible" argument. I didn't go for their plan, but I think it's thought-provoking. A newer book that may be more appealing is called The Number and it's about your question exactly. It's more designed to get you thinking, while Your Money or Your Life has a particular answer in mind. Both have some math and some rules of thumb, though they aren't focused on that.

A kind of general takeaway from these books might be: first think about your expenses. What are you trying to accomplish in life, how would you like to spend your time? And then ask how much money you absolutely need to accomplish that, and focus on accomplishing your goals, spending your time (as much as you can) on what you'd like to spend it on.

I'm contrasting this with a generic recommendation to save enough to spend 80% of your income in retirement, which embeds this idea that you should spend as much as possible every year, before and after you retire. Lots of people do like that idea, but it's not a law of the universe or something, it's just one popular approach.

• Excellent answer, very comprehensive. I'd emphasize: "it's easier to just use real returns instead of picking a nominal and an inflation assumption separately" -- this specifically answers the part of the question about factoring for inflation. – bstpierre Apr 12 '11 at 2:05
• I think you've argued that it's tough to do a good job with a detailed calculation, but I don't see why that automatically entails that it makes sense to just give up and use rules of thumb instead. Those suffer from the same sorts of uncertainties. – Michael McGowan Apr 17 '11 at 22:57
• The advantages of rules of thumb are: 1) they save time and 2) you can't "wishfully manipulate" them. Because of the math of compound returns and the long timeframes involved, you can make detailed calculations basically come out however you want, with tweaks that seem small. And the detailed calculation is no more accurate than a rule of thumb; doing a bunch of work on top of a bunch of wild-swag assumptions is an illusion of precision, not real precision. Calculations can be useful to explore scenarios, but if you decide on a plan that isn't supported by rules of thumb, I'd be suspicious. – Havoc P Apr 18 '11 at 14:02
• Precision bias is one of the worries here: en.wikipedia.org/wiki/Precision_bias Because you did a bunch of complex stuff and got a lot of numbers and graphs, you might feel more confident. Anyway, I would not use calculations anytime you make them say "oh, I can save less than the rule of thumb!" - but I do think a monte carlo type thing used as a "stress test" to be sure you're saving enough can be useful, for example. (I guess maybe: I like calculations more as a way to visualize the range/variance of outcomes, than I do as a way to find a "predicted" outcome.) – Havoc P Apr 18 '11 at 14:04
• +1 for "use rules of thumb and focus on other stuff." Rules of thumb get a bad rap, but a good one fits the Pareto Principle - 90% of the benefit for 10% of the effort. – stannius Feb 15 '13 at 21:30

I'm concerned about your extreme focus on Roth. In today's dollars it would take nearly $2 million to produce enough of an annual withdrawal to fill the 15% bracket. If you are able to fund both 401(k)s and 2 IRAs (total$43K) you're clearly in the 25% bracket or higher. If you retire 100% with Roth savings, and little to no pretax money, you miss the opportunity to receive withdrawals at zero(1), 10, and 15% brackets. Missing this isn't much better than having too much pretax and being in a higher bracket at retirement. One factor often overlooked is that few people manage a working life with no gaps. During times when income is lower for whatever reason, it's a great time to convert a bit to Roth.

(1)by zero bracket, I mean the combined standard deduction and exemptions. For two people this is currently (for 2018) $24,000 total. And it goes up a bit most years. • Great points. I knew I didn't want all my money in Roth by the time I retired, so I could pull out at least$20k / year practically tax free. But I hadn't realized the added incentive when you hit the 25% tax bracket. (Not an issue for me yet.) – Stainsor May 12 '11 at 13:05
• Just to beat a dead horse here - people fail to consider what "taxes are rising" really means. If you believe the 'zero rate' and 10% bracket will somehow go away, that's one thing. But many who cite rising rates don't understand how tax brackets work, that 401(k)/trad IRA comes off the top, but your withdrawals start at the bottom. – JoeTaxpayer May 12 '11 at 13:18
• Yeah, that's huge. I'm still thinking about this. Like I said, I knew I wanted some money in trad 401(k)/IRA, but I didn't realize it should be that much. But I am in the 15% bracket now with a strong chance to enter the 25% bracket, especially if my wife returns to work. So I think I will focus on Roth while I am still in the 15% tax bracket and switch to traditional the second I smell the 25% tax bracket. – Stainsor May 12 '11 at 13:27
• You got it. By paying attention to your taxable income, you should be able to straddle that line. In 2011, taxable over $69K is where 25% kicks in. Add the$19K above, and you have $88K. You can earn$43K (or more, really) and stay in the 15% bracket. That's the goal. – JoeTaxpayer May 12 '11 at 17:02

How will contribution limits rise?

Contribution limits are raised based on COLA. COLA (Cost of Living Adjustment) is a number based on CPI (Consumer Price Index) which is published by the Bureau of Labor Statistics. The IRS publishes these limits annually and a simple search term to find them each year is "415 limits" because section 415 lists how much the various qualified plans can set aside each year. CPI is a heavily managed and very political number. It is the number that is cited when the media talks about "inflation." Since it drives increases in salaries, deductions, Social Security and pension payments, there is very heavy pressure to keep the number smaller than it really is.

My next step was to calculate how long that money will last

One traditional rule-of-thumb is to withdraw 4% of your balance each year. Another alternative is to purchase annuities. While younger people think that annuities are horrible investments, they appeal to older people because they protect the annuitant from excessive risk of losing your capital. When you are 30, and another 2008 comes along wiping out half your savings, you have time to re-earn that money. When you are 60, and another 2008 comes along wiping out half your savings, you have very few years to recover that money. So an annuity pushes that risk onto insurance companies. If you think you will die in your 90s, then an annuity is going to be a good investment (the insurance company will be betting that you won't be living that long).

I have a simple spreadsheet that I use to calculate estimated projected balances and compare them to actual performance. Don't forget that when you reach 50, the amount you can contribute goes up due to "catch up contributions."

There are 2 views of the same tab in this picture. There are 3 growth rates: pessimistic, nominal and optimistic. You can change the numbers to suit your own projections of future growth. Other tabs on this spreadsheet include measurements of actual performance by my 401k and IRA accounts. At the end of the year, I replace the numbers in columns F, G & H with the actual end-of-year dollar amounts. This way, future estimates do not get too far unhinged from reality.

If you need more sophisticated planning, such as Monte Carlo analysis to attempt to cope with inflation, I recommend the book Engineering Your Retirement. The book is aimed at younger engineers, so there is a bit more math than the average person would want.

## protected by Chris W. ReaFeb 15 '12 at 14:43

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