Saturday, December 12, 2020

How Much Money Will You Need to Retire?

This post uses the 4% withdrawal approach to estimate the savings that you will need in order to supplement your Social Security retirement income; the amount needed is expressed as a simple multiple of your salary. In doing so, it assumes that you will retire with full Social Security benefits. Just find your salary on the horizontal/”x” axis, and then look up the savings required on the vertical/”y” axis. For example, at a salary of $50,000/year you would need a bit more than 8 times your salary in order to generate enough income to supplement your Social Security income during a 30-year retirement. 

This post paints the big picture, using some simplifying assumptions. A companion post, my interactive retirement calculator, allows you to tailor the assumptions to arrive at a more individualized estimate of the retirement savings needed (for example, if you do not qualify for Social Security). That post will also help you calculate the yearly savings needed to accumulate the desired amount by your retirement date. (For more on this approach and my assumptions, see later in the post.). 

How Much Will You Need to Retire?

Retirement savings needed on retirement date with full Social Security benefits
How Much Money Will You Need to Retire?

With an Average Salary, You'll Need Over 8 Times Your Ending Salary to Retire Comfortably! 

If you follow the 4% withdrawal guidelines, it's easy to estimate how much money you will need when you retire. Basically, you will need (100%/4%=) 25 times the amount you expect to withdraw from your savings in your first year of retirement. To facilitate the computation, I have assumed that your total yearly spending in retirement will equal 75% of your ending salary – and that, adjusted for inflation, your ending salary is the same as your current salary. 

However, as you can see from the graph above (click to expand), at $62,500 -- around the average salary in 2020 -- the target is only about 8.5 times your salary. Why isn’t it 25 times salary? For two reasons: a) we are only replacing 75% of the salary, and b) because of the impact of Social Security benefits. 

 The Effect of Social Security: The Larger Your Salary, the Higher the Multiple You Will Need to Retire 

Using the 4% withdrawal strategy, the savings target for those who will not receive Social Security is (100%/4%=) 25 times their expenses. Assuming their expenses are 75% of their salary, that target is therefore (25 x 75%=) 18.75 times their salary -- regardless of salary level. The reason the line of the graph is not at 18.75 is because of Social Security. If you will receive Social Security, you will need less than 18.75 times your salary to fund your retirement. 

In the graph notice how steep this curve is at the lower salaries, and how flat it is at higher salaries. The percentage of your salary that Social Security will replace decreases as your salary increases. Whereas Social Security will replace 90% of the salary of the lowest income workers, Social Security will replace only 14% of salary for a person making $250,000, and 7% for those earning $500,000. In fact, the more millions you earn, the closer the percentage gets to zero; we should all have such problems.... 

The bottom line is that as your salary increases, the amount that will not be replaced by Social Security increases; therefore, the retirement spending that must be funded by your retirement savings increases -- and, the salary multiple on the graph increases. 

Some Key Assumptions 

The 4% withdrawal approach was developed assuming that you will spend about 30 years in retirement, and that your retirement savings will be in a diversified (stock and bond) portfolio. To simplify the calculations, I've further assumed that:
  • Social Security benefits and your salary will both keep pace with inflation
  • You will retire at the Social Security full retirement age, receive full retirement payments, and have expenses of 75% of your current annual income (inflation-adjusted) in your first year of retirement
  • You will follow the "4% Withdrawal" guidelines, starting by withdrawing 4% of your assets your first year in retirement and increasing with inflation each year thereafter.
  • Your retirement portfolio will earn a real (i.e., after inflation) return of 5%/year

Be aware that, because I have assumed zero inflation, if the chart says that you will need 8 times your salary and that comes out to $400,000 that is $400,000 in current dollars. If your retirement date is, say, 25 years from now and inflation actually averages 3%/year, by then your salary will likely be around $100,000, and 8 times your salary will be $800,000 – which is equivalent to $400,000 in today’s dollars. 

The interactive retirement calculator will let you change those assumptions to better reflect your specific circumstances if needed. It will also estimate the annual savings needed to achieve the desired savings goal. For a more detailed discussion of the 4% withdrawal approach and my assumptions, see Assumptions for the 4% Withdrawal Retirement Graphs.        

Related Posts

Social Security Income Estimator : the official site.  For an approximation, see this site, or my graph.
Start Retirement With a 4% Withdrawal Rate A discussion of the 4% withdrawal concept, from Time Magazine. For a more detailed discussion, see Wikipedia.
Inflation Calculator if you want to translate the required savings from current dollars to the equivalent amount on your retirement date
How Long Will You Live? A look at one of the most vexing issues in retirement planning.
Do You Need a Personal Strategic Plan?: a process for establishing life priorities

For lists of other posts, by category, see the drop-down list (mobile viewers) or tabs (computer viewers) just below the blog header at the top of the page. There are additional links in the sidebar if your device supports sidebars.
Copyright © 2020 Last modified: n/a

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Saturday, November 28, 2020

Back-of-the-Envelope Retirement Savings Calculator

This is my really simple "back-of-the-envelope" retirement calculator. It reduces retirement planning calculations to the bare minimum.

Accounting for all of the variables in retirement planning requires a complicated model. In this post, I've made some simplifying assumptions. I've tried to develop a "bare bones" model so that we can focus better on the big picture, and still get results that are useful.

The Observations Back-of-the-Envelope Retirement Savings Calculator

Notes: Enter data only in the peach cells. You can use the arrows and sliders on the side and bottom of the calculator to scroll. On some phones you may need to double click to enter data; it may also be helpful to switch to landscape mode. On some computers, you may have to enter some fields more than once for it to "take." 
Please leave a comment if you are having problems.

How Much Money Will You Need to Retire?

The key simplifying assumption was to estimate the savings you will need at retirement using

Wednesday, August 26, 2020

Do All Black Lives Matter?

Too many people are now suggesting that while there are huge outcries within the Black community when a Black man or woman is killed by a white person – especially a policeman – the community seems not to care about Black on Black murder victims. “Why is that?”, they ask. Shouldn’t all Black lives matter? Spoiler alert; they do.

One reason some crimes result in smaller outcries within the Black community is because all communities find some homicides more outrageous than others – it’s human nature. However, being “less outraged” by a particular person’s death does not mean that you think that person’s life is less valuable – that his or her life matters less. The extent of one’s reaction is usually more a reflection on the how and why of the death than on the “worth” of the deceased. So, for example, we are saddened when a baby drowns; we are outraged if it drowns at the hands of its own mother. Clearly neither baby’s life is less valuable than the other; it’s the same baby.

Some factors affecting the decibel level

There are many reasons why some homicides are mourned or protested more loudly, or broadly, than others– for example…. 

Wednesday, July 29, 2020


As some of you may have noticed, I have been on an extended vacation from blogging. During that time, I had fun doing all kinds of things that it is no longer safe to do…. So, what is one to do when just going outside can put your life at risk? Stay inside and blog, of course! The current plan is to tidy up some of the existing posts, and broaden the topic areas covered in future posts; that could change.


Over the next month or so I plan to tidy things up a bit. I hope to fix the broken links to web pages of years past. In addition, Google, Blogger, and others have made some technical changes that have negatively impacted the blog. I’ll try to clean that up too.

Some other posts are technically fine, but the data needs to be updated. A prime example is the calculator that computes inflation from any year in the past (beginning in 1900) to “now.” It uses the CPI-U at the beginning of each year to do the computation. I need to add recent years. Unfortunately, I suspect some legacy posts may prove too difficult to bring up-to-date to be worth the effort that it would take to do so. We’ll have to see.

{October update: This is waaay more work than I ever imagined. It will take at least six to twelve months to get everything updated! If you want to be kept up-to-date on new and updated posts, follow me on Twitter at @Obsandnotes } 

Broader Focus

Finally, I intend to begin posting about topics outside the realm of finance; I’ll include things which are more related to current events. In the past, I have almost always attempted to be as objective as possible in my posts and avoid expressing my opinion. In future posts, not so much.

As always, thanks for reading!

Copyright © 2020 Last modified: 10/19/2020

Thursday, April 18, 2013

What Will $1 be Worth in the Future? (calculator)

This calculator:

  • Converts current prices to equivalent prices any number of years in the future
  • Compares purchasing power today to purchasing power in the future
Enter an amount, how far into the future you want to compute, and the inflation rate you want to assume.  Below we see that at 5% inflation for 20 years, an item that costs $100,000 now will cost over $265,000.  That means that 20 years from now the purchasing power of $100,000 will have been reduced by over 62%; $100,000 then will only be able to buy what we can buy now for about $37,000. Be sure to enter inflation percentages as decimal amounts -- that is, 0.05 for 5%, 0.025 for 2.5%, etc. 

Notes: Enter data only in the tan cells. On some phones you may need to double click to enter data. On some computers, you may have to enter some fields more than once for it to "take." Please leave a comment if you are having problems.