Teardown: How Much Do You Need To Retire?

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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.

How Much Retire 1

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:

How Much Retire 2

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 would have successfully carried a family through a 30-year retirement period 51 out of 53 times.

How Much Retire 3                            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 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.


  • 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. 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.

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.


What’s your target range? Share your numbers in the comments section.



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.


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5 Responses

  1. Lorenzo says:

    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?).

    • JP says:

      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.

  2. Martin says:

    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.

    • JP says:

      I completely agree with you, which is why the assumptions require a 6% CAGR and a 3% safe withdrawal rate. A 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.

  1. September 2, 2016

    […] the 3% safe withdrawal rate, you would need $79,026/.03 = $2.63 million to fund ongoing expenses plus an additional $670k for […]

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