What academic research suggests is a safe withdrawal rate to calculate your retirement needs and the three scenarios you should test to arrive at your target number.
There are dozens of competing philosophies out there on how to calculate your required retirement nest egg.
I have spent over a hundred hours reading about and testing all of them. Let me show you all what that process looked like:
What I’m saying is that you didn’t miss much.
I’ll give you the highlights version, minus the fiery flames of mind-numbing doom. We will walk through a strategy built upon the most data-driven, academically rigorous foundations out there. We will then apply that research in three scenarios to arrive at the right amount for your retirement.
What Matters In A Retirement Strategy
At the heart of any retirement calculation is the goal of understanding how you can draw what you need for as long as you need without running out.
For folks who are planning to retire early, this can get really dangerous, really fast. Each variable you introduce is highly sensitive – if you are wrong about having your investments grow 4% vs 5%, it is small difference across a 10 year retirement but a huge on over a 50 year retirement.
- Year 10: $100k growing at 4% would be worth $148k vs $163k growing at 5%.
- Year 50: $100k growing at 4% would be worth $711k vs $1.15 million growing at 5%.
For this reason, many retirement experts want you to focus on the holy grail of a perpetual draw strategy. With a perpetual draw calculation, you are attempting to determine what you can draw without eating into the principal of the nest egg. If you are not eating into the principal itself, you have much more certainty your nest egg will last as long as you will. It is a method of eliminating some of the more volatile aspects of calculating retirement – there’s nothing more terrifying than watching your nest egg shrink as you grow older and more feeble, hoping it will outlast you as you age.
So we want to stash enough away to live off a perpetual withdrawal rate. Sounds reasonable so far.
The question that follows: what should that perpetual withdrawal rate be?
Academic Research: The Trinity Study
Most folks will point to the great grandfather of retirement research, the Trinity Study, for inspiration. The Trinity study was a research paper published in 1998 and updated in 2009 by three professors at Trinity University. They looked at portfolios of stocks and bonds over each 30-year period for which they had data (ie. 1926-1956, 1927-1957, etc.), and saw that a withdrawal rate of 4% each year was extremely likely to take you through your retirement without your portfolio going to zero.
Of the 53 data points from 1926-2009, a 4% withdrawal rate (inflation-adjusted) would have successfully carried a family through a 30-year retirement period 51 out of 53 times.
Chart created by RetirementResearcher.com based on Trinity Study data
Tweaking The Trinity Study Takeaway
4% is a nice starting point based on this historical data. There will always be some risk, but only two failure points out of a data set of dozens and dozens of samples? That’s pretty good.
Of course, we will want to modify our conclusion for a few important caveats.
Firstly, the time period the original Trinity study used was 1926-1995, and the compound annual growth rate was 10.6%. How have more recent years looked?
The answer is worse.
From 1996-2015, the compound annual growth rate was 8.2%.
We want to factor this negative trend into our conclusion. While some of it was captured with the 2009 update, there are very few 30 year cycles that would include those more recent years. The year 2009 would appear in only one 30 year example (1979-2009). The year 2008 would appear in only two (1978-2008 and 1979-2009). What’s more: remember that these negative-trending years are only appearing on the back end of a full retirement period, when retirees will have much less need rather than at the beginning of the period. That understates how much negative impact they could have for a retiree like you if you were to retire into a period that looked like the 2000’s.
The second important point is that with the marvels of modern medicine, there is a good chance at least one spouse will live longer than the 30 year retirement time frame the Trinity professors studied. This is especially true if you are cruising toward early retirement as the readers of this blog are doing.
Because of these two factors, 3% is a more appropriate withdrawal rate – the inflation-adjusted rate that you can draw on the nest egg with reasonable confidence that it will not deplete the principal.
How to Calculate How Much You Need to Retire
With our foundation in place, we can now dive right into calculating how much you need to retire.
I think it’s funny when retirement articles suggest a method that spits out one specific number. It’s like they expect you to live like a robot with unchanging costs and unchanging needs. It’s difficult to show up at the store with a budget of $7 for diapers and see that they are charging $8.
Forget it! No diapers for my baby! Or not escalating for higher medical costs as you age. Eh, well I guess no doctor visits or lung surgery for me, then. This is a real issue when you’re forecasting your costs and needs 20 years out.
For this reason, I like to present retirement goals as a range.
You can run through three common scenarios to triangulate to the right target for you.
Scenario One: Extrapolating Current Life Into The Future
A great exercise to get your bearings for how much you’ll need inretirement is to extrapolate how much it would take to support your current life now. You like your current wine habit? Enjoy fostering puppies and doing good in the world with your charitable contributions? Let’s get it all baked in there.
Here’s an example: if you currently spend $40k after tax each year, divide that figure by a 3% withdrawal rate.
$40,000 ÷ .03 = $1.33 million Target Retirement Figure
Extrapolating your current life into the future also gives you a directly viewable relationship to how long you need to work and which lever you need to pull to reach retirement. Assuming you make what you make now, and that you spend what you spend now, you can boil down how long it will take you to get to retirement based entirely on your savings rate.
Assumptions:
- Assets grow on average at 6% CAGR until you retire
- Safe withdrawal rate of 3%
- Income and expenses are static
This grid will tell you how long it will take you to hoard a nest egg large enough to last you forever, living off the interest it throws off each year rather than touching the principal.
| Savings Rate (Post Tax & Tax Deferred Account Contributions) | Years Until Retirement |
| 5% | 63 |
| 10% | 51 |
| 15% | 43 |
| 20% | 38 |
| 25% | 33 |
| 30% | 30 |
| 35% | 27 |
| 40% | 24 |
| 45% | 21 |
| 50% | 19 |
| 55% | 17 |
| 60% | 15 |
| 65% | 13 |
| 70% | 11 |
| 75% | 9 |
| 80% | 7 |
| 85% | 5 |
| 90% | 3 |
Chart inspiration provided by Mr. Money Mustache and created with the tools at NetWorthify.
Savings Rate: Savings rate is defined as the percentage of all total dollars you could have potentially saved. That means any tax advantaged account contributions plus total post-tax income.
If you are a six-figure household, there’s no reason you can’t get to a 50-80%+ savings rate. With two income earners each earning $50k, you reach that threshold easily. Folks who have a total household income of $50k-$100k should still be able to save 30-50%+.
The most eye-opening takeaway from this grid is how many years conventional wisdom would require that you work.
If you save 10% of your income as many financial experts recommend, it would take you a ridiculous 51 years to retire!!
Do you want to be working until you’re 73? Will you even be able to find a job at that age?
Run your eye along the grid and determine what feels right for you. Personally, my recommendation is that we all aim for a maximum 20-30 year career, which suggests a 30-50+% savings rate. For more detail on what savings rate to target, check out this article.
Scenario 2: Dream Budget
This is the place to get a little more creative with your retirement dreams.
Maybe you expect to have a very different expense structure when you retire. You’ve got a lot of traveling in mind, for example. You will be older, wiser…and perhaps more likely to break and need medical care.
Most folks find they can actually decrease their net spending in retirement, even if they want to do things like travel the world. They have the flexibility to take advantage of last-minute deals or off-peak specials when everyone else is reporting for duty at the office.
Some folks, like me, expect expenses to go up. I’m 28, and I plan on having kids one day. Those lunchables and juicy fruits won’t pay for themselves.
Whether you expect your costs to go up or down, you want to build your own budget; my favorite approach is described here. Then, just take that pre-tax number and divide by a 3% withdrawal rate. If you expect to need $50k a year, you would take $50k/.03 = $1.67 million nest egg.
Scenario 3: Bare-Bones Budget
Does $1.67 million feel out of the question? That is a big, beefy number! The third scenario should help you find the bottom of your retirement range by figuring out how much you’d need to support a bare-bones life: basic housing, food, health insurance, and transportation. Again, this is my favorite budget framework and will help make sure you don’t miss any major expenses.
Maybe instead of $50k a year, you’d only need $30k a year. At $30k household income, your required nest egg would be $1 million. You could then supplement your income with part-time work if you wanted to go on special trips or splurge on major luxuries.
Final Product
So here’s Jane. Jane has just found this blog.
- She currently has a net worth of zero
- She makes $65k after tax
- She is currently spending $40k a year and saving $25k (close to a 40% savings rate)
Current Spending Scenario: To maintain her current spending rate in retirement, it would take her 24 years at her current savings rate to build her target nest egg of $1.3 million.
Dream Spending Scenario: To amass $1.67 million to support her dream budget of $50k a year, she would need to work for 28 years.
Bare-Bones Scenario: At a bare-bones budget of $30k a year, she’d need $1 million, which would take 20 years of work at her current savings rate to accomplish.
Jane’s target nest egg will be somewhere between $1-$1.67 million, and she can now see what sort of life each number could buy her and how long it would take her at her current savings rate to accomplish this.
Conclusion
What’s your target range? Share your numbers in the comments section.
Acknowledgements:
There are a lot of big brains in the retirement space, and I’d like to call out four who informed much of the content of this article.
- The Trinity Study professors who have created the body of work that informs so much of the intelligent conversation around retirement and safe withdrawal rates today
- Wade Pfau of RetirementResearchers.com who write excellent, highly detailed and complex retirement articles on his site
- Mr. Money Mustache, one of the most interesting bloggers in personal finance. Scenario 1’s savings grid was inspired by a chart on MMM’s website. I think the 4% rate he used is too aggressive and I think the growth of the nest egg pre-retirement he used is not aggressive enough, so I have provided a modified chart of my own.
- Networthify, which provides a fantastic visualization and calculation tools that helped directly build the savings grid in Scenario 1.
I have a lot of respect for you, JP. I’m a 30-year-old who only has $32,000 in the bank and have an AGI of $110,000. Kind of pathetic, I know. Now I’ve thrown all the partying and boozing on the weekends out the door, my next step is to hopefully retire by 45 (because 35 seems impossible unless you think otherwise). I currently only have a Roth IRA and hoping to expand on investing. Any free tips? Also, I already have my own property which is why I only have a savings of $32,000 (does that make me less pathetic?).
Hey Lorenzo. You aren’t in debt and you by yourself make ginormous sums of money compared to the average American couple so I’d say that’s more awesome than pathetic. Hard to have a view on whether 35 or 40 is achievable without knowing what you think your savings rate can be going forward. Retired at 45 is definitely doable with a 60% savings rate per the chart in Scenario One. When I was making $120k in NYC I was able to keep a 70% savings rate, but I also slept on a mattress on the floor in a walk up apartment with slanted floors. No judgment if that’s not what you want to deal with to shave a few years off your plan but if you were able to get your rate up to 70%, you’d be retired at 41, maybe earlier if the market does better than the very conservative assumptions of that chart.
As for investing tips, I think a few things things will get you 80% of the impact while you wait for the savings to build up a bit more. Vanguard has fantastic low-cost index funds (I like VIMAX and VTSAX). If you invest at least $10k, you get the Admiral shares which have a lower expense ratio. Maxing out your 401k and IRA every year is great. Using a Flexible Spending Account for the amount you estimate you’ll spend on medical expenses will help. Other strategies that involve trying to eke out a percentage more return are probably not where you should spend your time know because a 1% difference in return on $32k of savings is $320. So that incremental time would be better spent in my opinion right now on trimming spending or generating more income. This is sort of how I think about the four major steps to retirement.
Do you mind if I ask roughly what part of the country you live in? And would you be interested in moving to a lower cost of living area when you retire? That may also shorten your timeline.
Hi there, I used to do these optimistic calculations for myself as well, until I realized that what you really need is a 3% real yield after inflation. Otherwise, after a while your 3% draw will no longer cover your living expenses. Accounting for inflation really changes the picture.
I completely agree with you. Given recent inflation statistics that would require returns of 5-6%. A 5-6% average return is very doable in the long run. Current leveraged, high grade muni funds in NY State currently offer 5-5.1% yields, and the long term CAGR on the S&P Index is between 8% and 10%, depending on which time frame you measure. And the Trinity Study has measured performance across decades and determined the inflation-adjusted safe withdrawal rate would be 4%, meaning the 50-50 stock and bond portfolio was able to keep up with the 4% draw plus inflation successfully in 51 out of 53 measured consecutive 30-year periods.
I’m glad RockStar linked to this blog today because it is awesome.
I don’t make too much effort with SWR’s at this point because I just don’t see myself “staying retired” at such a young age. I should be able to hit the 4% withdrawal rate by 40 if I continue grinding with a heavy savings rate after my “gap year”, but I also consider going easy if I can live off 3% of my current investments indefinitely, and cover the gap with more enjoyable types of work….that’s an option. But also, the uncertanty of potential marriage and parenthood plays a role too. It seems prudent tos ave and invest, so that’s what I do. Ask me again when i’m knocking on the door of the 4% SWR. Ha.
I’ve read some books of early retirees who didn’t even wait for the traditional 4% SWR and they made it work in their own way and that inspires me too.
Glad you found us!
This is a really great resource you’ve produced – not for myself but I hope my recently married nephew (woo hoo) will be able to use it – he wants to ‘be rich’/retire early … but right now just nose-down in his career – but with good savings. I will let him work w/ your blog to create his own traction. All Pfau & Kitces work rely upon 35 years of working so their data (and that of Fidelity w/ savings factors) are very low bars to hit.
That said, I saw in the ‘getting started’ a phrase:
“put away $15k more a year than my peers. 5 years of that is $45k, but deployed in the stock market over those years, the true amount it’s created for me is about $70k”
Did you mean that of the $15K expense avoidance over 5 years you put away $9k each year (60% savings rate) to produce $70K with a $25K (15.1% ROI) of investment return? If that was your intent then that is inspirational !!! but not aspirational since in the rest of the blog the expected returns over any 5 year period in this environment will be << 15.1%. Unless you have a beat the market page 🙂 !!! 😉
Congrats to your nephew!
I’m not sure why the numbers are wonky. It’s supposed to read as $950-$1000 saved a month so about $11,400-$12,000 a year in straight savings. Some of those savings are compounded for 5 years, some for 4, etc. I couldn’t find the context in the content as that page has changed. I hope that helps. I’ve beat the market by a couple percentage points in a few years, but a 15.1% CAGR would be some real magic.
Hope to see you and your nephew around.
Great insight. Makes perfect sense. Although I’m not quite sure about the whole investing your money and getting 6%+ return. Im from Canada and have zero knowledge of investing. My chequing account gets me 0.8%. 🙁 or if I lock it away for 5 years I can get a whopping 2%.
Would love to hear your thoughts 🙂
Hey Steve. So leveraged municipal bond funds in the US are currently yielding about 5% (unleveraged funds are yielding a sickly 2-3%) and the long-term return of the US stock market is about 8-10% depending on what time frame you’re using. There is certainly risk associated with these kinds of investments above the risk you take buying CD’s or parking it in a savings account but those are the kinds of assets I’d expect a retiree to take part in to some degree.
The goal with the retirement portfolio would be to blend between safer assets yielding lower returns and maintaining some exposure in higher return but higher risk options like equities. The Trinity study, for example, uses a 50-50 bond and stock split. You’d have to venture outside of just savings accounts to get that kind of return: but note that a checking account isn’t even covering inflation at this point (at least in the US it’s been about 2%), so there is no way to retire safely with a perpetual draw assuming you’re parking your money in just checking accounts and CD’s, at least at today’s interest rates.
6% (3% to cover withdrawal, 3% to cover inflation) is not an eyes-closed slam dunk but it has been achieved across many sample periods historically. I also believe that the fact we’re in a historically low interest rate environment makes it hard to envision good ‘safe bond options’ for retirees. You can see the historical chart as well as what I think retirees can do to navigate this if you check out What Retirees Can Do About Today’s Low Interest Rate Environment.
I’d be curious to hear how our major asset classes’ returns compare with returns in Canada.
I am 30. I have $68 in a 401k. My house my LTV on my house is around 50%. Honesty, it’s pretty big, I am hoping to grow into it. I am single with no kids. The HOA by laws state I have to live in it one more year before I can rent it out. Then I might be able to adjust my housing expense which is currently 50% of my teacher salary. I make $41,000. I am grandfathered in to the Florida Retirement System(FRS). I have 1 year completed. (I changed careers.) The projection of the FRS will be around 1/3 of my pay in today’s dollars. What percentage should I put into the 403B?
$68K
JP,
I’ve just recently stumbled upon your writings and knowledge and am feeling inspired – thank you!!
I am almost 31 and between my husband and I, we make roughly $68k after taxes. Today I have about $10k in my Roth IRA and about $5k invested in SLV. I’ve haulted my monthly automatic contributions to my Roth IRA (consisting of mutual funds) because of concerns/feelings of a repeat of 2008 stock market “crash”, using that term loosely. I do make sporadic contributions of about $300 every other or every 3 months.
Mainly, I started to feel beat. The only increases I saw in my IRA were due to MY contributions, not interest. And that is frustrating! I know I have to get back in it, but where and how much? I like the idea of being able to stop working when I’m 50 or 55 – anything sooner just seems impossible. Currently living in MI but we may find ourselves in NY within 12 months.
I’m also wondering where an early retiree would pull money from? Typical retirement accounts have withdraw fees if you take money out before the designated age, correct? So where might one want to start saving money for early retirement purposes so they don’t have to pay those fees on withdraws?
Thanks for dropping financial knowledge on us all! 🙂
B
Hi JP Livingston,
Thank you so much for such an excellent articles, I enjoy reading every single piece of your blog. Kindly help me clarify the reason why our formula is
retirement target number = annual spending / withdrawal rate
Maybe it’s a stupid question but I really hope your guidance for clarity of mind.
Great thanks,
Hey Trinh. It’s not a stupid question at all. Say you want to make sure the amount you’re drawing from your nest egg is less than 3% of your total net worth. Let’s pretend you need $50k a year to live. In order to figure out how much you’d need, you build an arithmetic equation that represents the situation. On the left hand side of the equation you have $50k /(nest egg) = 3 / 100. The equation says you want $50k of your nest egg to equal 3 over 100, which is 3 percent. Then you solve for the unknown variable (nest egg). That would be $50,000*100/3=Nest Egg. That’s the same as saying $50k/.03 or your annual spending divided by your withdrawal rate. I hope that helps.
Hi JP,
You are certainly an inspiration retiring at 28, Kudos!! Wondering if you can provide more detail as to why you choose 3% as your SWR. That number seems very veryconservative. When I plug numbers into cfireCalc I always see 100% success rate and no failures in the history of the data with a 3.25% withdrawal rate. This is with my preferred 90/10 stock/bond ratio however:)
Hey Jason, glad you found the site! Yes, if you use the historical data from cfirecalc, you will not see a scenario in which you have to drop as low as 3% for your safe withdrawal rate. My argument in the article is that if you look at the CAGR of the stock market in the last 10-15 years, it has underperformed the 50+ year period by at least 2 points. Secondly, I will need to plan for a 60+ year retirement period vs the standard 30 yr period where the safe withdrawal rate is estimate to be close to 4%. I don’t recall what it looks like to use a 60 yr time frame in cfirecalc, but I wouldn’t lean too heavily on it as the most recent retiree it would take data from is someone who retired 60 years ago in 1956. Furthermore, cutting the data in 60 year slices cuts your data count to a small N.
The argument is basically that the world is a different, more underperforming place compared to historical data so we need a safe withdrawal rate that is adjusted downward for that. And I am going to be living off that nest egg for a 60 year period rather than a 30 year period, so I need to be more conservative about the rate I choose. Hope that helps!
Hi JP! Just stumbled across your blog. Getting going with more aggressively saving and investing.
I’m 30, and between my wife and I we make about 150k a year. We don’t max our 401ks yet (boo I know, but I don’t even have the option for one at my new job and she puts in enough for the match only, we will change that ASAP). We have around 100k saved up, but I feel like it’s way, way too little. We are starting to hunker down.
What are your thoughts on paying off a mortgage early? On one hand it’s likely that the market would outperform the interest rate, but on the other, opening up some more cash flow and eliminating this expense for retirement would be fantastic.
My idea right now is work on a couple side businesses and put some of that money toward paying the house off early. I was thinking by using the FS-DAIR method (Google it if you’re not sure, Financial Samurai has a good blog post about it) to help speed things up.
Your story is inspirational for sure. I want to join you in early retirement in less than ten years but know that unless we increase our income, it’ll be extremely difficult if not impossible with our mortgage.
Hey Dave! Glad you found the blog. For early mortgage payoff, I think you are thinking about it the right way: it comes down to where you can deploy those dollars for the highest return. So you would compare it to your estimate of what you could earn in the stock market, bonds, or any other avenues you invest in. I wouldn’t think of it as taking away from your cash flow unless you’re paying a high rate on your borrowed dollars. For a more thorough discussion, check out this article.
Increasing income is definitely a possibility. I’d like to spend more time discussing those avenues. Hope to see you around!
Another calculation for the total nest egg, that I came across was the amount you expect to need (say $50k a year) multiplied by your expected number of years in retirement.
So say I am 30 years old and expect to need $50k a year and hope to have 55 years in retirement (life expectancy of 85 years), then my nest egg should be 50K * 55years = $2.75 million.
Hey Ashish. Thanks for sharing! I can sort of see how that was constructed. My chief complaint about that method is that it you will pay for its conservatism with many many more years of additional work. Using a 3% withdrawal rate supported by the academic back-testing described about, a retiree who wants $50k in real dollars per year would need a nest egg of $1.67 million. Under oyur calculation, he or she would need $2.75 million. Coming up with an extra $1+ million could easily add another decade to one’s working life.
What does your current portfolio look like for investments? What would you do if you were in your 50’s if your model works, but can’t risk another 2008?
If the nest egg number is large enough, does it matter where the money is?
My wife and I think we are close, based on our nest egg, expenses, and the 3% rule, but a lot of our money is in retirement accounts. Does the “backdoor Roth” option make this moot, in your opinion? Would love to see more details about how you calculated that you were ready to pull the trigger on retirement.
Thanks in advance.
Matt
My target nest egg range is $1.34 million to $1.5 million.
Thank you for creating the savings rate chart, it is a game changer for me.
My new goal is to ramp up to at least 50% savings rate per month.
That’s a great goal. Best of luck!
JP-
Thank you for the quick visuals, charts, and math to break down early retirement into bite sized chunks. My question is should I be saving XX% of income after I max out all my retirement accounts? Currently, I max out a 401k and an IRA. Should my savings % include these retirement savings or exclude them for your chart purposes? In your early retirement strategy, did you max out retirement accounts in addition to saving 70% of your income? I’m curious how retirement accounts come in to play here.
Thanks!
Hey Happy. The denominator of my calculation for savings rate is “total dollars that were save-able”. That means I would add up post-tax dollars plus and dollars contributed to retirement accounts, and the total would be the denominator. In the numerator, you would include all dollars saved out of your paycheck, both the dollars that went into a retirement account and the dollars post-tax you can park somewhere. I did indeed max out my retirement accounts, and they were included in both the numerator and denominator of the savings rate calculation. Hope that helps.
Hi JP,
How do you view the extra dollars that Social Security might provide in retirement?
As icing on the cake, but absolutely shouldn’t be counted on?
Or it absolutely should be added up with retirement income from assets, thus lowering the nest egg that needs to be accumulated, and thus lowering the retirement age?
Cheers!
And after asking the above, I recall that full Social Security benefits only kick in at age 66, far too late for FIRE. Duh.
Hey Kris. It’s a fair question. I discount social security benefits to zero even though my husband and I both qualify. We are in our late 20’s/early 30’s and there’s a very good chance SS will payouts and age will look very different – if it’s still there at all – in 30 years. For those who are closer to SS benefit age, you could subtract your annual expected SS payout from your annual expenditures estimate before calculating your target nest egg (the rest of your annual expense amount divided by .03). Factoring this in depends on your own personal confidence SS will exist for you.
Hi JP,
Love the article, my wife and I are 32 and 31 and make about $130K combined income right now, she works part time so she can spend more time with our three children. Right now we are saving at about a rate of 40% of our after tax income and have about $260K in investments and $40K in cash. I put most of the money in investment accounts, but am also putting some money in a MMA as well as some in 529’s for the three kids we have. We have a decent sized mortgage and one car payment right now so I am struggling to find any more room in our budget to bump up that savings rate. I am targeting a retirement age of 42 at which point we would rely on my wife’s part time income to cover most, if not all, of our expenses. How should I prioritize accounts to save in, how would you weigh 529’s in the overall equation? What tips do you have to get close to $1.5M in 10 years?
Thanks!
We are 40 and have maxed out 401K and Roth IRA since we finished graduate school at 26. We are debt free except for our mortgage. We have 4 children. What type of account do you recommend placing savings so that you can withdraw the 3% until you reach true retirement age and can access the 401K and Roth IRA? What do you do for family health insurance once you have both quit the day jobs but are still to young to qualify for Medicare?