Creating a Retirement Plan

Jul 2003

If workers want to retire in comfort, they need to save adequately and invest wisely.  It’s as simple as that, dear clients.  How large a nest egg should one accumulate?  That depends on a number of factors, such as living costs, the expected length of retirement, inflation, taxes and one’s investment rate of return. ... consider both 20-year and 30-year retirements.  I assumed a 20% average tax rate on funds withdrawn from a retirement account, 3% inflation, 5% annual investment return and the expectation of drawing one’s nest egg down to zero at the end of retirement.  While 5% is well below what we’ve achieved for our clients since our inception and well below what we expect to achieve going forward (past performance is no guarantee of future results), I think it’s a realistic estimate for most investors—given low interest rates, our outlook for about 6% annual returns for the S&P 500 over the next ten years, and given the typical investor’s actual results during the prosperous 1984 - 2002 period ... over a 20-year retirement, one’s starting nest egg would need to be approximately 21 times after-tax living expenses in the first year of retirement.  Over a 30-year retirement, it was about 29 times.  Soooo . . . a simplistic rule of thumb would be that, given our assumptions, one should accumulate a nest egg that is approximately equal to annual living expenses (to be supported by this nest egg) multiplied by the number of years one expects to be retired.  Thus, if one has after-tax living expenses of $100,000, for example, then a reasonable goal would be to accumulate a $2 million or $3 million nest egg for a 20-year or 30-year retirement, respectively.  (Of course, one’s retirement analysis should be updated regularly, especially if circumstances change.)