How To Successfully Build Your Retirement Nest Egg

For most Americans, retirement planning is ultimately focused on accumulating a “nest egg” of savings and investments to generate enough income to pay for a comfortable lifestyle.

The Size Of Your Nest Egg

To find out how large a nest egg you will need, you must first estimate your “retirement income gap” which is simply the difference between how much you’ll need (discussed in a previous article) each year to enjoy the lifestyle that you want, and the amount of income that you expect to receive from sources including Social Security, employer pensions, and part-time work. This gap will need to be filled from your personal savings and investments.

[See John’s other tip on How Much Will I Need to Retire?]

For example, using today’s dollars, let’s assume you plan to retire at age 66 and determine you need $75,000 per year (before taxes) to enjoy a comfortable retirement and your only expected income is $25,000 from Social Security. This means your investment portfolio will have to generate $50,000 every year after inflation for as long as you live. Using Social Security as the only income source simplifies the calculation because the benefits are automatically adjusted each year for inflation.

How much is enough?

So how large a portfolio is needed to generate $50,000 annually in inflation-adjusted dollars for as long as you live? Since running out of money is the number one concern for most retirees, much attention has been focused on this subject. The research has been directed specifically toward determining a “sustainable portfolio withdrawal rate”. This is the maximum amount (expressed as a percentage) that can be withdrawn from your retirement assets each year with reasonable confidence that the portfolio will provide lasting income. If you can estimate the sustainable withdrawal rate, you can easily calculate the size of the portfolio required.

The 4% Guideline

Research beginning with a 1994 seminal study conducted by Bill Bengen (a California financial planner), suggests that based upon historical (1926-1975) inflation rates and investment returns, a retiree’s portfolio consisting of approximately 60% stock and 40% fixed income should, with a reasonably high probability, last for approximately 30 years if you initially withdraw 4% of your balance, and continue withdrawing that same inflation-adjusted dollar amount each year. Using this 4% guideline, if you determine that your retirement income gap is $50,000, you will need a portfolio of approximately $1,250,000 ($50,000 divided by .04) at the beginning of your retirement to fill that gap.

A caveat is in order here. While the 4% guideline can provide future retirees a target to shoot for, it is dependent upon several variables that differ from person to person and are impossible to predict with any accuracy. The best you can do is to make reasonable and conservative assumptions regarding how long you plan to live in retirement, what investment returns you expect to earn from your portfolio during retirement and what you expect inflation to be.

For those who want a high degree of confidence that they will not run out of money, it makes sense to be conservative about your future assumptions. Therefore if you expect a retirement period longer than 30 years, or future investment returns to be lower than historical returns, or future inflation to be higher than historical inflation, you should reduce your portfolio withdrawal rate below 4%. This means you will need a larger portfolio at retirement. Remember, the higher the withdrawal rate, the greater the chance the portfolio will not last as long as you need it to.

In future articles we will revisit this concept of sustainable withdrawal rates and discuss sensible ways to adjust these spending rules to improve your chances of enjoying a financially secure retirement.

This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

About the author

John Spoto, CFP®


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  • Due to one tragedy after another in my life I find myself at age 51 without a retirement. I have 5,000.00 in saving no 401k and not sure want to do at this point. I was awarded 100% of my first husbands re tirement up to the year 2000, we were married for 14years. He has not retired as of yet. My second husband and I were married for 8years but he is now deceased. I don’t use my credit cards. I’m mostly a home body. My car is paid off I owe 38,000.00 on my house. I earn 44,000.00 a year on my job. At this point what can I do to secure that I can live a modest life. I may travel once a year and I’m a home body.

  • Nice article, John. You did a good job summing up different things to consider and highlighting how every individual will have different factors to consider as they plan for retirement. This is just another thing that shows the importance of having professional investment advice both before and during retirement.

    Joe McCulloch, CFP(R)

  • I’m not near the 1,250,000 mark in my retirement portfolio. I have about 200,000 in bonds; 70,000 in annuities. a small teacher retirement package (about 1,000 a month after $1000 health insurance withdrawal. We own a business which is paid off; our house is paid off; my car is paid off. No credit debt. A simple lifestyle. And I have long term health care policies for my husband and myself. Am I going to be okay???? I am kind of worried about this.

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