Simple Rules, False Comfort – How Much Do You Really Need?

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We all love simple rules, don’t we?

They help us feel more control in a complex world where we have so little control over our circumstances.

Go to college, get a degree, get a job, work hard for several decades, then retire comfortably. Sounds so straightforward, yet how many who try to follow that “simple” rule succeed?

Then there are even simpler (so-called) rules:

How Much Money Are You Told You Need for Retirement?

This question is ripe for over-simplified answers that steer many people wrong.

Here’s a handful of examples.

  1. Investopedia: 8x income (quoting Fidelity, who as you see below, actually suggest 10x income)
  2. Merril: 8.4x income
  3. AARP: 10x income
  4. Fidelity: 10x income
  5. Morningstar: 10x income (quoting Fidelity)
  6. CNBC: 10x income (quoting Fidelity)
  7. Time: 10x income (quoting Fidelity)
  8. Synchrony: 10-12x income (at least it’s a range, but with no guidance on how to figure where you fall)
  9. Kiplinger’s: 14x income

As you can see, these 9 sources give a range of suggestions, from 8x income to 14x income. That’s a pretty wide range, with no insight into which is right for you, why, or why not.

Then, there are a couple who provide more nuanced guidance…

Investor’s Business Daily quotes JP Morgan, giving a wide range of 7.5-16x income, where the table below breaks it down by age and household income (I highlighted in bold red the numbers for age 65).

T. Rowe Price gives nearly as wide a range, 7.5-14x income, breaking it down by age, household income, and household type (where I again highlighted in bold red the numbers for age 65).

It’s nice to have two resources with nuanced guidance.

Unfortunately, when we compare their recommendations, we find discrepancies:

  • For $100,000 household income and age 65, the former recommends 10.8x income, whereas the latter suggests between 8.5x income for a single-earner couple and 11x income for a single person (with a dual-income couple between those at 10x income)
  • For $150,000 income, JP Morgan says 12.8x income, vs. T. Rowe Price’s 10-12x income
  • For $200,000, it’s 14.2x income vs. 11-13x income
  • For $250,000, 15.3x income vs. 11.5-14x income

So, who’s right? Morgan? Price? Neither?

How Do They Come up with These “Rules” Anyway?

As Albert Einstein admonished, we should simplify all problems as far as possible, but no further!

The problem here is that all the above are trying to simplify a complicated question, and to a greater or lesser extent, all of them oversimplify. As a result, you may think you need to save 8x income or even less, and be falsely comforted, or think you need 16x income and be overly concerned.

Here’s the thought process that lies behind these oversimplified “rules.”

  • You “should” replace 80% of income
  • Social Security replaces about 40% of income (for medium earners, per
  • Replacing the remaining 40% requires 10x income according to the 4% “rule”

Simple right?

Yes, but is it accurate?

Probably not for many people, and possibly not for you either.

Here’s where these three simple points may run afoul of reality:

  • Replace 80% of income – Really? What if I’m saving 30% of income? Do I need to replace more than I’m spending? Or how about if I spend more than I make, and am falling further into debt each month?
  • Social Security replaces about 40% of income – What if I’m a low earner whose benefits will cover 53% of income? Or a high earner whose benefits will cover less than 26%?
  • Replacing the remaining 40% requires 10x income – What if I have an annuity and/or pension that covers 20% already? Or how about the lower returns expected in the coming decades?

How Much Money Do You Really Need to Save for Retirement? A 5-Point Roadmap

Here are the 5 things you need to know to be able to answer that question:

  1. How much will you spend annually in retirement?
  2. How much of that spending will Social Security cover?
  3. What sources of income will cover the shortfall?
  4. What tax rate will apply to each income source?
  5. How big a portfolio do you need to let you cover the shortfall (and taxes), that can last for decades?

As you can see, none of these questions is easy or simple to answer in general terms.

Annual Retirement Spending

If you’re many years from retirement, answering this accurately is simply not practical.

What to do?

You must make (over)simplified assumptions (e.g., 80% of your income), but know this is a poor approximation that you’ll need to revisit periodically as your income changes, and as you get closer to retirement age and your spending patterns get closer to what they will be post-work.

Once you’re close to retirement, put together a plausible retirement budget, then “test run” it for at least a year to see if it’s workable for you.

However, remember that in retirement, some budget items will reduce or go away (e.g., work-related costs, saving for retirement, etc.), while others will increase, possibly in a significant way (e.g., health-related costs, travel, gifts, etc.). Make sure your test-run budget accounts for these changes.

Social Security Benefits

According to, Social Security replaces about 53% of income for low earners, 40% for medium earners, 33% for high earners, and 26% for those earning the maximum taxable earnings.

Note that this speaks to replacement of wages, not business profits, so if business profits are a major source of your income, your replacement rate for total income would be lower.

None of that matters here.

Instead, go to the horse’s mouth and ask the Social Security Administration. They have a nice portal where you can create your own Social Security account and get an estimate of your personalized expected benefits. Use this resource to estimate how much of your retirement budget those benefits will cover.

Don’t forget to figure in your spouse’s benefits (if any).

Also, consider reducing the estimated benefits by ~25% to account for the Social Security trust fund’s running dry.

Other Retirement Income Sources

Hopefully, you have more than Social Security to look forward to, or you’ll probably suffer poverty in retirement. These may include:

  • You may be fortunate enough to have a defined-benefit pension plan (if so, you’re one of a dwindling breed)
  • You may have purchased an annuity
  • You may own one or more rental properties
  • You may have a stream of royalties
  • You may (should) have an investment portfolio

Whatever these sources, estimate how much each is likely to provide annually once you retire. Ideally, this should be more than enough to cover the gap between your retirement budget and your Social Security benefits.

Estimate Income Taxes in Retirement

First, you need to decide where you’re likely to live in retirement.

If you’re planning to move away from your current location, ask a friendly CPA whether the state where you currently reside tries to tax retirement income of residents who move away, and if so, how successful they are at forcing the issue.

Assuming you don’t move, or they won’t try to follow your money (or at least won’t succeed), ask the CPA (or use tax software) to figure out what your federal, state, and local income taxes will be, based on your Social Security benefits and the mix of other sources you’ll use to cover the gap to your desired retirement budget.

This is important and less than simple, because some sources will be tax-free (Roth accounts), some partially taxed (Social Security benefits), some taxed at preferred rates (long-term capital gains), and some taxed at higher rates (traditional retirement accounts and returns on taxable accounts).

Now, add enough to your retirement budget to cover those taxes.

Portfolio Size

Here too, there’s more than meets the eye.

Much has been said and written about the so-called 4% rule, which guides you to multiply by 25 the amount you need your portfolio to cover in the first year of your retirement (so the drawdown is 4% of your initial portfolio size).

For example, if you need your portfolio to throw off $40,000/year, the 4% rule says to have at least $1 million. If you need $60,000/year, your portfolio should be at least $1.5 million.

This 4% rule is based on research from the 1990s as to the size portfolio split between stocks and bonds that would have survived the worst 30-year period without running out, where in the second year of retirement and each year thereafter the annual draw was modified to account for inflation.

However, recent research expects returns to be more muted than historic rates for both stocks and bonds, so you might want to use a more conservative 3.5% or even a 3% version of that rule.

In general, the more flexible and discretionary your spending, the higher percentage you can spend in good years, if you then reduce spending in years when your portfolio suffers losses. The more fixed your spending (think the fraction of your retirement budget that goes to cover mortgage and other debt payments, utilities, etc.), the lower your draw percentage should be.

On the other hand, research shows that spending in retirement tends to decrease by about 1% per year, so going by the 4% rule and then adjusting for inflation less 1% annually may actually be a fairly safe path.

The Bottom Line

As you see above, knowing how much you really need to save for retirement is far from simple, and a “rule” like 10x income is woefully oversimplified.

If you want to have a decent estimate, use the above 5-point roadmap to figure out your own personalized answer.

If you’re too far from retirement (or don’t trust your financial literacy), consider hiring a fee-only financial planner, or at least using the more-nuanced estimates from JP Morgan or T. Rowe Price, above.

Regardless of the answer you arrive at, try to lead a balanced life, where you spend enough to enjoy your present, while saving and investing enough for your future self. Here’s my suggestion on how to do that without penny pinching.

Finally, know that according to, the majority of Americans fail to achieve 10x income by retirement age (let alone more than that even if they need it). Don’t let that be you. Start saving and investing as soon as you can.


This article is intended for informational purposes only, and should not be considered financial, business, or legal advice. You should consult a relevant professional before making any major decisions.

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