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How Much Do I Need for Retirement?
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How Much Do I Need for Retirement?

Heather Phillips
March 18, 2017

This is a great question. If you’re managing your money in a spreadsheet, there are many ways to model this out. The simplest way is to use the 4% rule.

Imagine you have $100,000 and you invest it in just two funds. Put most of it (75%) in a low-cost, broad-market ETF, like the Vanguard 500 ETF which has a terrific 0.05% expense ratio. Put the rest (25%) in bonds, such as a broad corporate bond fund with a similarly low expense ratio.

Use this rule so you don’t run out

Now, how much can you withdraw from this retirement account without running out of money? The answer is 4%. At the end of the first year, your $100,000 might have grown or shrunk, but you can pull out 4% (which will probably be about $4,000 in your first year) without breaking a sweat.

What if it’s a boom year, and my portfolio is generating double digit returns? Can I dip in to pull out 10%? Nope. The answer is still 4%.

Ok, but what if the market crashes and I want to put my money under the mattress? Don’t touch that mattress, and know you can still pull out 4%.

A number of finance professors (Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz) at Trinity University in Texas have stress tested this simple rule of thumb. It’s since been tested by many others as well across more than 100 years of stock market returns, including the Great Depression that started in 1929, and the Great Recession that began in 2007.

Retire with money left over?

Across any 10, 20, or 30 year period, this rule will allow you to retire with money left over. Stretch your retirement out to 40 or more years, and there’s still a better than 90% chance that you’ll be left with money, and likely a lot of money, in your account.

I use this for planning our family finances. To my wife’s occasional chagrin I don’t actually plan to retire, since I find work meaningful, but I want to know when I don’t NEED to work.

For the last several years I’ve been a trustee with oversight for a $200m educational non-profit endowment. We use roughly the same rule there. We know that if we pull out 4% per year, we’re not going to deplete endowment, and in fact we’re going to grow it over the long term so it generates even greater funds to support our organization’s mission.

The determining factor is how much you spend

So back to the question, how much is needed to retire? The only uncertainty is how much you need to spend. If you’re the average US household and you’re spending about $50k this year, then you’ll want to save $1.25m in order to withdraw 4% per year safely with little risk of running out of money.

Adjust that $1.25m number down if you’re spending less, or know you’ll spend less in retirement. Adjust it down further if retirement means earning less, but still working. That handy spreadsheet of yours can model all these scenarios, but the math is the same: you can safely withdraw 4% from your retirement account and you’ll likely never run out of cash.

(Final tip: knowing you’ll die with money, and likely a lot of money, don’t forget your estate plan. Your estate is part of your legacy. Where do you want to give your money so it keeps paying dividends long after you’re gone?)


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