What you need to retire … maybe ignoring the experts.

Headlines like this mean very little. Some people say you need a million dollars. Others simply go for income replacement percentages starting at 70% and up. Still others say you need 25x your working income.

You actually need an amount that will allow you to maintain your planned standard of living less Social Security. During retirement how you use that amount in terms of earnings versus principal makes a big differences well. Build a sufficient income stream from interest and dividends and you are less likely to deplete the principal and you may sleep better as well.

Of course what matters most in determining your need for assets in retirement is your income at the time you retire which is the basis for the amount you will need to replace.

I’m conservative so I think you should begin retirement replacing 100% of pre-retirement income. And, for flexibility you should have savings both in and out of qualified retirement plans, taxable, tax deferred and tax-free investments.

Let’s assume you are retiring February 2019 and you now earn $55,000 a year. Your Social Security benefit will be about $18,780 per year leaving you to generate an additional $36,220 for full income replacement. If you are married your SS family benefit will typically be 50% higher.

If you had $1,000,000 invested, you would need to withdraw less than four percent each year for 100% income replacement. However, the required minimum distribution (RMD) would generate a larger withdrawal and will increase each year after age 70-1/2. After paying taxes you can reinvest any excess withdrawal you don’t need. I would (and do) put that money in a tax- free municipal bond fund where interest is reinvested until needed.

You may be in even better shape if your qualified plan investments were in tax-free vehicles such as a Roth IRA or Roth 401k. The Roth IRA is not subject to minimum distribution rules, the 401k Roth is, but you can roll your Roth 401k account into a Roth IRA while you are alive.

If you want to go the more conventional route and think you can live as you like on 70% income replacement, you need to save less. You only need to generate $19,720 above your SS benefit in our example and you could do that with assets of about $493,000.

So, here’s the point. You need a saving and investing and spending plan that you tailor to your needs. If, because of paying off a mortgage, moving to a lower cost area and/or changing your lifestyle, you need only 70% income replacement, go for it . . . but if you are years away from retirement, don’t count on it just yet . . . plan for more.

Whatever you decide, don’t forget about two things in your planning; inflation and survivor income needs if applicable.


  1. Your income is well known when you retire and presumably you have been living within that income (including saving)’ but your expenses are variable and will still be so in retirement. It would be very hard to save while working with a goal of replacing a percentage of retirement expenses. Your actual (predictable) expenses would be driven by your income would they not?


    1. While I agreed when you first start working, salary is a good target, and that must be adjusted as you earn more. Hopefully you are making more in your 50s than in your 20s. When I was in my late 40’s, I was living on 53% of my gross income. The fact of the matter is that my wife and I were putting 30% into a 401K, IRA, general savings and investments by our 50s. Another 23% was going to various taxes and benefits withholding (medical, SS, life insurance, etc). Once I stopped working, almost all of that goes away. I now pay 17% to taxes and medical from my pension but the amount I pay now is only 1/5 of my tax bill when I was working. As you get older, you can fine tune your retirement saving goal. You do not need several millions in today’s dollars if you have no debt at retirement. If you make $100K and were putting 10% into 401K, and paying into social security, medicare, etc, which all goes away, in your 50s you should have a good number of your real income needs, maybe it’s only $80K per year. These astronomical numbers scare some people into not saving.

      Your predictable expenses are your needs and wants which were driven by your income. If you are taking vacations now without going into debt, why would they stop? You basic needs (food, shelter, utilities) should already be fixed and known and be much less if your mortgage is paid off. But if you want to take on a mortgage for a beach house in retirement, then maybe you better save $2m or $4m. If you want to spoil your grandkids, then keep working, you will never save enough.

      The only wild card I have found is medical. Medical costs are still going up faster than inflation and the government keeps changing the rules. It is very hard to predict. This is why I say 110% of expenses to allow for inflation on your “needs” expenses. I plan on using Social Security as my hedge against inflation since I am not collecting now.

      Fair disclosure: I do get a pension so the headline that a millennial may need at least two million could be very correct in this day and age since most companies have gotten rid of defined pension plans. Telling somebody in their 20s that they will now need to save 20% instead of 10% probably will not happen as they start families.


  2. Here is another number that I found was just as important and very rarely even talked about. Zero Debt. Having 0 debt frees up so much of your income stream and removes the stress about having to making that mortgage, car, credit card payments. A $1000 mortgage payment and a $500 car payment could be up 2% or more (with taxes) of the withdraw from a million dollar 401K fund.

    I also think that you need 110% of your expenses not your income. You will always spend what you make but how much do you ready need. A wage based amount is a good goal in your 20s and 30s. But I think the real number becomes clear when you become empty nesters and see what your expenses really are. Also if you put 10% of your pay into a 401K or a Roth IRA then you already are living on 90% of your earnings.


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