Ask the grumpies: Retirement planning

Bogart asks:

how much do you need to retire? I’m not interested in dollar amounts (well, not mostly), more in % of current income or some other generalizeable formulaic approach.

Quick and dirty answer:  If you’re young, at least 10% of your income.  If you’re older and haven’t been saving much, then more like 20% of your income (unless you’re really close to retirement… in which case you should be saving as much as possible to avoid eating catfood!).  If your company gives you a 100% match, you should contribute up to that match because in general even if you take the penalty for taking that money out early you will still be ahead.  (And of course you shouldn’t be taking the money out early.)

Of course, that’s just the quick and dirty answer.  In truth, there are a lot of retirement calculators out there on the internet that will help you get a better answer.  Personally I like the ones that give you a range of scenarios… the ones that say, “You have a 70% chance of outliving your income under this scenario” rather than the ones that say “You will need $2.5 million dollars saved.”

All of these calculators are wrong in some way.  They all ask for different inputs and all have different assumptions.  In reality, the future is uncertain.  Things will change.  Our salaries and health will increase or decrease with whatever life throws at us.  Tax rates will increase, laws will change, public programs will become less generous… It’s hard to know how much money we will really need.  (And often we will make do with what we have, so long it’s above a subsistence minimum.)

So if I were to give general advice, I’d say to play around with those retirement calculators.  Put in money up to your employer match, and more if you can.  Max out your IRAs if you can.  Save at least 20% of your income in retirement accounts if you make a middle-class salary.  Max out your tax-deferred savings if you’re a member of the 5% (or 1%), even if that is more than 20%– that will give you more freedom later if your options change.  If you’re poor, government contributions replace more of your income, so feeding your kids a healthy diet today may be more important than being able to eat fancier food in retirement… in that scenario you would want to do your best to hit the employer match if you are lucky enough to have one.

Who has better advice for Bogart?


45 Responses to “Ask the grumpies: Retirement planning”

  1. feMOMhist (@feMOMhist) Says:

    this is so on my to do list including using the catch up provisions etc. It is just shameful how lax I’ve been (hanging head)

  2. First Gen American Says:

    Like you say, lots of variables..another being being a public sector vs private sector employee..public sector people have pretty sweet pension plans, so you don’t need as much for retirement but they get paid on average less, so I guess it balances out.

    My goal is to be able to survive on a minimum wage income once all my debts are paid. (house paid off, kids through college, etc). Theoretically, if I didn’t have kid expenses, I could do that now. That way, if all hell breaks loose, I can still work a menial job and still get by. Plus, I may want to work at some fun hobby store or something just for fun. For me, that means keeping fixed expenses low. So, being able to do that assumes that come retirement you don’t live in a super high cost of living area with big time property tax expenses. Property taxes can be a killer for a retiree. For now I’m saving some of every paycheck and have insurance up the ying yang in case the unforeseen tragedy occurs with health issues, being sued or death. My goal is not to live like that, just to have my fixed expenses low, so if poop hits the fan, I can buckle down my spending and still survive without going the cat food route. Having said that, I guess a lot depends on where you want to retire. If you want to be near your grandkids and they live in san fransisco or hawaii you need a whole lot more money.

  3. Linda Says:

    “Max out your tax-deferred savings if you’re a member of the 5% (or 1%), even if that is more than 20%…” Not sure I understand that statement since if one is making a higher salary then the tax-deferred portion of retirement savings will be less than 20% of income. (Not to brag, but I know this because 20% of my pre-tax income is more than the 401(k) cap on contributions.)

    I think FGA has a good plan: minimize your fixed expenses as much as possible. Expect that taxes and utility rates will rise (our water rates just jumped 25%, ouch!) and try to plan for that.

    One other thing I’ll add that has nothing to do with saving money: build social capital in your community. I have a wonderful elderly neighbor and she gets a bit of help here and there from those of us who live around her. We help shovel her walk in the winter and also give her food/groceries. I’ve also helped her with paperwork for benefits. Essentially we’re helping her stretch her budget a bit which has some impact on her ability to survive on the small income she has.

    • nicoleandmaggie Says:

      That’s the point. If you’re making a ton of money, then you should max out your tax-advantaged portion of your income, even if it is more than 10% of your income (or in some cases, depending on your options through work, 20%– the match counts towards your savings, but often not towards 401k limits). Additionally, not everybody is limited by the 401(k)/403(b) plus IRA accounts. There’s also 457, SEPA, SIMPLE, and if you plan on additional schooling 529 etc. For example, my partner and I could be putting away 72K/year just through work and IRA retirement accounts.

  4. Cloud Says:

    To me, the first step is to figure out what your goals for your retirement years are, so that you can think more clearly about how much money you need to save to get there, and then think about what sorts of trade offs you are willing to make now to make it possible.

    The whole thing is really complicated- I don’t have the best formula for myself figured out. I have been meaning to write a post to help get some of my thoughts on the subject in order for ages, and I keep not doing it. I suspect I am avoiding the topic!

    • nicoleandmaggie Says:

      Satisficing is often the best solution– action based on heuristics beats inaction waiting for the perfect formula!

      • Cloud Says:

        Oh yeah, I’m totally doing the “normal” thing for someone in my situation while I think about these things. Saving into my 401k, paying down the mortgage, etc, etc. But I would like to optimize a bit more.

    • nicoleandmaggie Says:

      Those are also unpredictable… what is your job situation going to be like when you’re in your 60s? Your health? Your opportunities? Your taxes? It’s hard to know.

  5. Well Heeled Blog Says:

    I say – save as much as you can, and then save a little more. If you are in your 20s like I am, all those calculators are kind of useless, in a way. Who knows what’s going to happen or what’s laws are going to change or what returns are really realistic. All you can do is to control what you can control, which is your savings rate and your income. This year I am saving 25% of my income into 401K, maxing out the Roth IRA, and my fiance is doing the same except his 401K contribution with employer match is 20%. It’s better to err on the side of saving too much than saving too little, as one is far easier to remedy than the other.

    My long-term goal is for us to each make enough money that we can comfortably max out all our tax-advantaged savings vehicles, in addition to saving for down payment / mortgage pay-off, and an international trip a year.

  6. Funny about Money Says:

    Well, consider: if you need a $40,000 income to survive in modest comfort and you plan to draw down 4% per annum, you’ll need one million dollah in savings.

    Forty grand plus about $1200 to $1500 a month from Social Security will give you a total retirement income, pre-tax, of around $54,400 to $58,000 a year. Some people regard that as modest, especially those who live in the coastal cities that have a cultural scene. And unless you’re already in your dotage, don’t count on having SS at all when retirement age comes.

    • nicoleandmaggie Says:

      Of course, that’s not taking into account variations in inflation, differences in investment outcomes with that million, etc.

      • pfblogwatchdog Says:

        Actually, the basis for the “4% rule” does take all that into account. Well, it doesn’t take into account inflation during accumulation (so maybe your $40k today is $50k in a couple of decades), so it is a bit of a moving target, but once you start draw down, it is suppose to account for inflation based on historical (rolling avg) market returns. You’ll have to forgive, I forget exactly what equity/bond allocation was used, but it was a healthy mix of both.

        That’s what was published anyways. Whether we believe it or not, that is for each of us to decide.

      • nicoleandmaggie Says:

        We’re retired for a long time and there will be different rates of return in retirement… short term stock fluctations become more important once you start drawing down… rates of returns to bonds become more important as well. The 4% “rule” doesn’t really do a good job accounting for these short-term changes, and actually requires refiguring every year once the draw-down starts (and yes, there are papers on this topic!)

      • pfblogwatchdog Says:

        I guess I don’t understand. The original 4% rule, as done by Bengen in ’94, was built using stock and bond returns dating all the way back to 1926. So historical stock/bond fluctuations were modeled. It aimed to answer the question, at what constant withdrawal rate can one have for a 30 year period keeping pace with inflation with a low probability of failure? The answer was a 4% WR and ~4% probability of failure (If we remember correctly). So, over time as the rule goes, if one had $1mil and needed $40k, the spending power of that $40k was preserved (constant, regardless of market ups and downs), year after year for 30 years, with 1 out 25 failures.

        Does that not account for market fluctuations?

      • nicoleandmaggie Says:

        In the average, but not in the individual. I’m too busy to look up the stuff on it, but there’s a literature.

      • pfblogwatchdog Says:

        I’d appreciate if you could send either here or via email what you have. even if it is a list of books or articles off the top of your head.


      • nicoleandmaggie Says:

        I don’t have anything off the top of my head and I’m swamped at work. I suggest google or google scholar as a place to start.

        The key point is that if you have fixed expenses, 4% isn’t necessarily going to be enough in the event of a negative shock. When times are doing well, 4% may provide excess income that you will wish you had when there’s a negative shock. The 4% rule doesn’t consumption smooth so it is suboptimal.

      • bogart Says:

        @Bichon, here’s what looks like a plausible starting point for a list of publications examining the research establishing and challenging the 4% rule — .

        Personally it’s not one I’m comfortable with based on my admittedly limited knowledge. I’ve only moved past it in the sense that I figure it’s too optimistic … I haven’t replaced it since I’m mostly just in “must … save … more” (or work longer, etc.) mode.

      • pfblogwatchdog Says:

        We weren’t suggesting that 4% is the be all and end all of retirement drawdown rates, rather the principals of which the 4% rule was built on are valid and extremely helpful in retirement planning. And they shouldn’t be dismissed as not accounting for market fluctuations or inflation, as these are accounted for. So, pick a withdrawal rate – 2%, 3%, 4%, 5%, none of which we say is best for EVERYONE.


  7. bethh Says:

    Retirement talk makes me angsty. I’m doing okay (decent salary and saving 22% pre-tax with my match (which fully vests this summer)) but my big concern is that I am a renter. I’m fine with that on a day-to-day basis, and live in one of the stupidly expensive coastal areas anyway. I’m not willing to have a terrible commute/boring neighborhood/double the housing expenses in order to be an owner BUT I know that retirement will be a lot easier with a paid-for home. (assuming property taxes + insurance + upkeep will be less than rent)

    Right now I’m hoping/planning on leaving this area before I retire – I have 20+ years to go – and ideally will buy a place with a hefty down payment and a 15-year mortgage when I’m in my late 40s or early 50s. Still, it leaves me rather anxious. At least I’m thinking about it.. right?

    • nicoleandmaggie Says:

      It makes a lot of people angsty– that’s why we like the Target Date Index funds and heuristics!

      It is true that home equity is one of the largest savings vehicles that people use for retirement (we think because it is forced savings) and if you don’t have that paid off home, then additional saving is a good idea. The ability to arbitrage a lifetime of high-cost of living salaries in a low-cost of living retirement setting is also a great one. (Sadly for us we would want to retire someplace more expensive than we live now!)

  8. You only need between 0.1% and 200% of your current income to retire « pfblogwatchdog Says:

    […] But the question of “how much money do you need based on current income” is an interesting and very complex question.  More specifically, a reader on one of our favorite blogs, Grumpy rumblings of the untenured, asked how much moolah does one need (and they wanted to know based on % of income)? […]

  9. bogart Says:

    Thank you.

    Were I inclined to rumbling grumpily, I’d complain that your advice still — oh the horror — treats me as an individual. The calculator doesn’t, to be fair; it allows me to plug in some basic information about my spouse. It does not, however, allow him to be retired (his current age exceeds the age at which he left the workforce, which that calculator won’t tolerate. Moreover, when I allow him to retire next year (the closest it allows me to get to reality), as far as I can tell it then pegs me as retiring the same year (?)). In contrast, the AARP calculator the NYT recently linked to does allow my spouse to be retired but does not (?!) allow him to get a pension. So I have to jimmy that one by pretending that his pension income (state government plan) is generated by withdrawing from his 401K (i.e. report it as having a higher balance than it really does), which allows me to approximate his contribution to our household, but of course ignores the key value of the pension, namely, that it will (knock wood) never go away. Though the COLAs provided pensioners (in this particular system) are less than, you know, the reality.

    All of which on the one hand is simply the obvious observation — and I intend no offense in saying this — that free stuff is worth what I pay for it. Or, more thoughtfully (and I really am saying the prior in the spirit of grumpy rumbling and do NOT mean offense) that my particular situation actually *is* (perhaps) complex enough that I should pay someone with the relevant expertise to give me specific advice. But although I am not complaining about your free Grumpy advice, I do think it’s a little silly that organizations that take the time to put together (even) free online calculators don’t think through some basic realities of common contemporary situations — different retirement ages for spouses, the existence of pensions, to name two.

    As for me, I do and pretty much have (with the exception of a couple of years) save(d) the legal max in my own accounts since I became employed at the age of 28 after grad school (back when the legal max — then a mere $10K — was 30% of my income). My current employer contributes 10% of my salary, and that is not a match, it’s just what they do (yes, that is wonderful, I do know it). I try to max our Roths but will miss DH’s this year (er, 2011) because of the large tax bill my converting a traditional IRA in 2010 generated (plus DH believes — wrongly, obviously given our larger circumstances and his early retirement — that since he is retired he doesn’t need to save for retirement. So getting him to contribute unless I could just hand over $6K *and* buy the man a nice weekend at Pebble Beach is a battle and not one I can win this year). And I have 100% survivorship in DH’s pension (and as noted earlier am myself very close to being fully invested in stocks in my 403b). Oh, and DH has about $80K in his 403b that I have, so far, managed to prevent him from spending (see previous). And is 3 or so years from collecting SS (early, which I am actually OK with — longevity in his family’s OK, but not great). Best-case scenario, I’m about 20 years from retiring (being financial independent, and/or close enough that I could just generate income to live on for a few years but not need to save). Big and obvious unknowns are the health of our aging parents, and our unknown future health(s). Contemplating long-term care insurance or some similar product (e.g. longevity insurance) should perhaps be on my to-do list.

    • pfblogwatchdog Says:


      it is a bit clunky at first, but you should be able to get just about everything you want in there. it seems simple at first, but keep clicking across the top as you fill out pages.

      it should be pointed out that this a historical calculator. The bad thing is an event, although unlikely, can occur that has never happened before (and we’re more worried about bad events).

      • bogart Says:

        Thanks, I’ll check it out.

        Yes, I sometimes think of my grandmother, who raised 4 kids (and lost a 5th) in pre- and post-war Europe (the omission of during is not an oversight; long story, but she and they were elsewhere then), a non-trivial amount of the post- part as a widow, and of everything that planning for the future in that era would have entailed, or of course entails for many in the world today — you know, stuff like, will a stable government persist, will this currency have any value, and so forth. So there are plenty of bad events, even those that have occurred (often) before that we omit from planning because — I guess — on some level they just aren’t plan-for-able (or not exactly. Though no doubt the stash of gold coins I keep buried in a jar in the backyard will come in handy when the zombie apocalypse arrives.).

    • nicoleandmaggie Says:

      You can use his income as a flat income to you for the amount of time you expect to be receiving that income. (That will depend on the kind of pension you have etc.)

      And don’t expect expensive advice to be worth much more than the free advice– they don’t know either.

      • bogart Says:

        OK, I’ll try that.

        Yes, good point on the expensive advice point. Actually I have sought out paid advice a few times and that has pretty much been my experience. Though I am actually considering trying again in the next few years — hope springs eternal, and there’s the SS decision to be made, though DH will flip if we do anything other than have him start collecting.

      • nicoleandmaggie Says:

        That’s how we treat spousal income in the models (if we’re not doing it at the household level).

        In theory, SS is actuarially fair. So in theory it shouldn’t matter if he gets the money now or gets another 6.7% added on the next year. However, your DH is probably planning to be long-lived so he’d probably be better off waiting if he wants to optimize his total SS earnings. He may also want to take into account the child benefit since you have a young kid. He can probably sit down with a SS person and run all these numbers.

        It’s actually easier to game these retirement things when you’re right up against retirement! It’s those of us who are younger who are basically guessing blind.

      • bogart Says:

        Yes, on the kid thing. I think that pretty much makes the early SS a no-brainer. And yes on gaming, assuming of course there is something to game — clearly for us, there is; not everyone is so lucky, of course.

  10. MutantSupermodel Says:

    At 31, retirement is a very intangible thing for me but that doesn’t mean I ignore it. I contribute 5% to my 403-b because my university makes an automatic core contribution of 5% and matches up to another 5% of my contribution. So I get a 15% contribution for only 5%. Not bad. I will be increasing it as I get past debt.

    I played with one of those calculators and it says I’ll be good at the current rate I’m going. It’d be really nice to be able to retire and be able to give a lot of money away to good causes. That’s what I really save for.

  11. Leigh Says:

    I find that those calculators are more fun than useful when I’m in my twenties. There are too many (life) variables: will I get married? will I have kids? will I live where I am now for how long? will I buy a house? will I quit working and stay home if I have kids? will I change careers and make less money?

    I like the 20% number personally. If you’re single, you can easily put away more too. You definitely need to satisfice between travel/retirement/other priorities, but doing a little bit of each will definitely help in the long run. You do only have so many vacation days!

    • nicoleandmaggie Says:

      And if you find you’ve saved too much when you’re 40 or 50, you can just save less at that point (when you have more vacation days!)

      And definitely, single people don’t have that insurance from the spouse adding more hours to the job when a negative employment shock occurs, so more precautionary savings might be necessary.

      • Leigh Says:

        I would way rather save “too much” now with the compounding when I don’t need the money than run into problems later…

        My mom tried to tell me that maxing out my 401(k) and my Roth IRA was too much retirement savings at my age and don’t I have something I want to spend that money on? I pretty told her she was crazy and that I was already spending more than enough money on the things I want.

      • nicoleandmaggie Says:

        Something to spend on always finds you eventually, and you’ll be happy to have that money when you really want it, rather than trying to find stuff you don’t really want now just for the sake of spending.

      • Leigh Says:

        Very true. The level of retirement savings is really ingrained in me now and feels like a commitment, so when my mom suggested I stop contributing to my 401(k) so I could buy a condo with a larger down payment, that didn’t even make any sense to me. It’s also a good excuse to take my time finding a place when $22,000 of my income is gone without thinking about it (takes longer to save up a down payment).

  12. becca Says:

    Have the grumpies ever done a bit on socially conscious investing? Or do you have any links from one of the other many fine blogs of the personal finance carnival?

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