Before you can safely begin retirement investing, you need to take control of your finances. If you have not read that, do so now.

Be aware that investment returns are not guaranteed. You can lose money. Most investments are not FDIC insured. If they are FDIC insured, they probably do not have large enough returns to allow you to retire.

• If you get greedy and invest with too much risk near retirement, you might need to delay retirement for years to recover. The S&P 500 periodically drops 25%, and sometimes it takes 7 years to recover. If all your money is in equities near retirement, you might have a bad day.
• If you invest more than you can afford, you can lose assets you need for living now (e.g., your house) or go bankrupt.
• If you invest ignorantly because something looks good, you can lose most or all of your retirement savings. Either spend the time to do the research or make sure you buy something reasonable.

The information and formulas here will provide estimates of retirement savings and retirement earnings, but these numbers will not be exact. The details of your future employment, promotions, and pay increases are not known. The future average return of the stock market is not known. Even the specific years in which loses and gains occur can impact the success or failure of a retirement plan. (FYI. the last problem is referred to as the “sequence of investment returns”.) This is why it is important to select appropriate investments, monitor the progress of your plan, and adjust your investment activity appropriately. It is also in your best interest to invest more than you think you need. Not many people are upset about retiring earlier than they expected.

The first thing you have to do is figure out what you are going to do in retirement. If you did not create on for your finances, you are not likely to do it now. A common benchmark is that you will need 75%-85% of working income to live during retirement. This assumption may not apply to you. If you plan to:

• live as a mountain top guru eating grubs and spouting nonsense, you might not need a lot of retirement income, unless you mail order your grubs.
• ride the rails as a hobo, you might not need a lot of retirement income, or not need it for long.
• travel in a luxury cruise ship around the world non-stop until you fall overboard and end up on a deserted island with a volleyball as your only friend, you might require more than you can save in your life.

What you want to do in retirement is something that you have to figure out yourself.

A retirement budget is a good way to get an estimate of what your expenses will be. You can start from your current expenses and determine what will change.

• Will your house be paid off?
• Do you need to down size or up size your house?
• Will you travel more?
• What hobbies will you spend time on?
• Will you eat out more?
• How much will health insurance be?
• Will you get long-term care insurance?

If you have no idea where to start, you can always use the goal of living on 75%-85% of your income, living on 100% of your income, or investing 10% of your income. If you plan to invest 15% of your salary, retiring on 85% of your salary is the same standard of living because you were not spending the money you saved for retirement.

There are other sources of income and other ways to invest. If you retire at a normal retirement age, this income can be subtracted from what you need in retirement savings. If you retire early, you might need money to bridge the gap until you are old enough to receive pension benefits. All of these are beyond the scope of this article, but this includes:

• Pension from employer – These are fading in favor of retirement accounts, such as 401(k), 403(b), and TSP, but some sectors still have them (e.g., government jobs)
• Social Security – If you are not exempt in some way, this could supply up to about $3500-$4000 per month at retirement. This is only about $1000 per month when adjusted for inflation. Also, social security will drop their benefit to 75% in 2035, so make sure to account for that.
• Rental Property – Purchasing and renting property can be an effective source of income. There are significant expenses for rental property, so the rent payments do not go directly into your pocket. For example, repairs, maintenance, grounds care, insurance, rental manager, etc. Think $500/yr for roof replacement, $1500/yr for mowing, $1500/yr insurance, 10%-20% management fee, etc. Make sure to keep abreast of current rent trends. You can lose a lot of money by not setting the rent properly.
• Volunteering for a Benefit – Sometimes there are volunteer work assignments that have benefits. Camp hosting is a part time job that can supply a free full hook-up camp site for 20 hours of work a week. That is worth about $1000 per month.
• Part Time Work – Even minimal paying part time work can make a big difference. If it is something you are interested in doing anyway, it does not feel like work

Now that you know how much you want to spend, you want to know how much you have to save to get there, right? Or if you determined how much you can save, you want to know how much you can spend in retirement, right?

Woah! Hold up there cowpoke! You need to have an idea of what your rate of return will be. You mentioned 12%! I want my rate of return to be 12%! No wait, I want it to be 5 bajillion percent! Well, good luck with that. While it is certainly possible to get 12+% long term, it may not be realistic. Depending on the number of years until retirement, it might not be appropriate because it implies greater risk. If you want to remain an ignorant galoot, you can use 9% as your expected investment return and skip to the next section.

For everyday investors, most advice recommends an asset allocated portfolio, unless they are trying to sell your something. Asset allocation is where the investor assigns percentages to different classes of investment in their portfolio. The basic asset classes are equity (stock), bond (debt), and cash. The equity class is often split into domestic equity (US stocks) and foreign equity (non-US stocks). Asset allocation helps with several problems with retirement investing.

• The expected average return of an asset allocation can be estimated from past performance.
• The process removes emotion from investing. (You are your own worst enemy.)
  • The investor does not need to think much about where to invest each deposit
  • Re-balancing the portfolio to the proper asset percentages inherently sells high and buys low

Different asset allocations have different expected rates of return. The Fidelity website has a lot of good information on investing. One of the classes of mutual fund that they offer is asset allocated. Fidelity’s Approach to Asset Management page briefly describes several different asset allocation types. A “Target Risk” asset allocation mutual fund allows the investor to select their risk profile through the fund they invest in. The risk only changes when the investor sells and buys a different fund. (There are tax implications for doing that.) The selection of risk sets the expected rate of return and vice versa. Remember: the expected rate of return is an estimate not a guarantee. The estimate is based on the weighting of categories and past market performance and/or statistical models. Your selection of investments and the future market performance is not guaranteed to be the same. There are statistical ranges on the performance based on overall market performance, but that is beyond the scope of this.

In the table below, the percentage in parenthesis in the first column is the equity percentage, domestic plus foreign, allocated for the fund. The risk and return increases with the percentage of equity in the fund. The percentage in parenthesis in the last four columns is the “nominal” documented percentages. A 60% domestic equity and 40% foreign equity is used for the split up of the equity because that appears to be what is used in the target date funds. The 10 year average annual return in the table above is a snapshot on whatever day I looked at the fund information. It is not a true long term average return, but it shows that decreasing risk by having less equities will decrease the average annual return. There is no 100% equity allocation fund, but the value in the table is an estimate of what it would be.

Fund	10 yr Avg Return	Domestic Equity	Foreign Equity	Bond	Cash
(100%)	9.2%	(60%)	(40%)	(0%)	(0%)
FAMRX (85%)	8.5%	52% (51%)	36% (34%)	14% (15%)	0% (0%)
FASGX (70%)	7.4%	45% (42%)	30% (28%)	26% (25%)	0% (5%)
FSANX (60%)	6.6%	39% (36%)	26% (24%)	36% (35%)	0% (5%)
FASMX (50%)	5.9%	36% (30%)	23% (20%)	41% (40%)	0% (10%)
FFANX (40%)	5.2%	31% (24%)	19% (16%)	48% (45%)	2.5% (15%)
FTANX (30%)	4.4%	25% (18%)	15% (12%)	58% (50%)	2% (20%)
FASIX (20%)	3.5%	20% (12%)	11% (8%)	59% (50%)	11% (30%)

You might notice that the actual equity percentage (domestic plus foreign) is higher than expected. The bond percentage is on par for high equity and too high for low equity. The cash percentage is universally low. Here are some possible reasons that I can think of for this.

• The fund managers are allowed to flex the asset allocation based on projected market behavior. The market moves in cycles. This may mean that they expect short-term rates to decrease significantly. This is a reasonable thing to do that is documented in the fund description. If the investment firm correctly projects the market cycle, this could slightly improve the long term performance without significantly increasing risk.
• The funds may have sub-standard performance and the fund managers are fudging the percentages to increase the equity content and improve the fund performance. This would be very bad. The fund managers would be silently increasing your investment risk without your knowledge or consent.

There are doubtless other possibilities too, but there is no way to tell without long term tracking to verify that they do in fact average out to the documented asset allocation percentages. Any situation in which someone else is rewarded for you taking on more risk has to be considered from both positive and negative angles.

The “Target Date” type of fund is asset allocated to decrease risk as you approach retirement date. Retirement is assumed to be around age 65 for these funds. If you plan to retire early, they might not have the correct risk profile. When you look at the target date funds in the table below, you can see the asset allocation change as the retirement date approaches. At 15-20 years until retirement, the equity allocation starts to decrease. This data is a snapshot from the funds listed on the Fidelity Fund Overview under the “Asset Allocation” tab under the “Target Date Index” heading.

If you compare the target date asset allocation to the target risk allocation, you should notice that the target risk is

• 90% equity for 20+ years to retirement
• 85% equity for 15-20 years to retirement
• 70% equity for 10-15 years to retirement
• 60% equity for 5-10 years to retirement
• 53% equity for 0-5 years to retirement

The risk of the investments decreases as retirement age approaches. These target date funds continue to decrease risk as you enter retirement until they become low risk and low return income funds around 85 years old. You can also see that using 8%-10% for your early retirement investing years is about what the professionals aim for. You can use the asset allocation funds, or you can observe that the professionals are doing to do it yourself with funds that you research and select.

You could invest 100% of your retirement savings in higher risk funds, but you are gambling with your retirement. A good high return equity fund is risky because it is volatile; the fund could drop 25% due to world events. If you have a 30 year retirement timeline, you can invest 100% in something volatile for 20 years, but you do not want it that allocation near retirement.

It is safer to invest no more than 10% in something high risk. If you invest 10% in a fund that looks like it is getting a 20% return, you could raise your average return to from 9% to 10%. If you lose all of the high risk investment, you still have 90% of your retirement, which should still be enough to live on.

Researchers have found a few significant facts regarding asset allocation.

• A 60% equity / 40% fixed income portfolio has shown to be the most successful long term portfolio mix in retirement.
  • This mix has the lowest failure rate for a given value of retirement savings.
  • The highest equity portfolios (90% equity) failed less often than lowest equity portfolios (20% equity).
• A life long fixed asset allocation performs better, except in the worst market conditions
• Rebalancing reduces volatility, but it can increase or decrease returns
  • It is the most beneficial when investments move independently
  • It can be detrimental to returns when investments move dependently
  • Growth and value fund tend to be less correlated

Based on currently available research, you should probably plan for something close to a 60/40 portfolio in retirement and a higher risk portfolio when saving for retirement. Something like:

• 90/10 from start of work to 45 years old
• 80/20 from 45 to 52 years old
• 70/30 from 52 to 59 years old
• 60/40 from 59 years old and up

This deviates from the behavior of the target data asset allocation fund. You will need to do your own research to decide what is right for you.

My personal investments were closer to a 90/10 portfolio at first, an 80/20 portfolio for 5 years before retirement, and in retirement a 70/30 portfolio. A caveat here is that I retired early. I elected to retire when the market was up, so I captured gains moving the 80% to 70% that I would have lost next year. I used capital loses from under performing funds to offset capital gains when exchanging funds to improve performance. The portfolio ratio excludes my house as an investment. Once you subtract the repairs, taxes, insurance, and interest, it made a whopping 1.8% return, but it is better than the 0% from renting. Given the market conditions, I was able to sell my house at a market peak to use that money to invest when the market was down and live on the remainder for a year. I had a retirement age in mind, but I was less fixated on a specific age of retiring versus meeting favorable conditions to retire. You might have less flexibility or luck at retirement time.

Luck happens when preparation meets opportunity, so start preparing.

This section is for estimating how much income you can generate in retirement from a specific investment amount or percentage. This “simple” shortcut formula can be used to approximate the accumulated retirement savings from constant deposits.

• R_S = Retirement savings at retirement age
• R_R = Average annual rate of return percentage
• Y_D = Years to double = 72 / R_R
• D_A = Annual deposit amount
• Y_R = Years until retirement
• N_D = Number of doubling periods = Y_R / Y_D

The formula is R_S = (2^N_D – 1) * (D_A * Y_D * 1.45)

Investing D_A = $5,000.00 per year at R_R = 9% for Y_R = 48 years would result in more than $3.5 million in retirement savings because Y_D = 8 and N_D = 6. I came up with this calculation as an approximation because I can calculate it in my head as needed for an integer number of doubling years (i.e., 6 years, 12 years, 18 years, etc.) It is usually accurate to within about +/-10% for investment returns between 4% – 12%. It estimates low for 4% and high for 12%. Using a spreadsheet is a more understandable and accurate way to calculate this. Until someone messes it up, you can use this EtherCalc spreadsheet to do these calculations. Appendix B has a sample listing of free simple tools like this, and many provide graphics.

The sample run above is the same 20 year old saving 10% per year and retiring at 68. If they were making $50,000 per year, that 68.43x salary in retirement savings is $3.4 million. It sounds like a lot, but it is only $828.5 thousand in today’s dollars. This still sounds substantial, but it is not quite enough to make it to 94 years old while living at the same standard as before retirement.

Your retirement income is limited by inflation and your retirement rate of return. If your average annual return in retirement is less than the sum of the average inflation and your spending rate, you will eventually run out of money. Your goal should be for the money to last longer than you. For example, the image above shows a 6% return in retirement and 3% inflation. This means that living off more than (6% – 3% =) 3% of retirement savings results in running out of money. Using today’s dollars, a .9 (90%) standard of living divided by 16.56 retirement savings is 5.4% of retirement savings. As shown in the image, retirement savings runs out at 93. If they wanted to never run out of money, they would need closer to a 50% standard of living or 80% more savings. Saving $6.2 million should be almost enough to live indefinitely at a 90% standard of living. The longer your retirement lasts the larger of a buffer is required to be safe from market declines. Living off of 2%-2.5% would be better for a longer term retirement, but this would require spending at a 40% standard of living or saving $8 million.

This section is for estimating how much income you need to save in order to generate the desired retirement income. Calculating how much savings are needed to give you a specific income is non-trivial. It is much easier to bound the value.

On the lower end, you need 8x-12x your salary.

On the higher end, you need:

“Annual Retirement Income Percent” x “Inflation Multiplier at Retirement”
____________________________________________________________________________
“Average Retirement Return Percent” – “Inflation Percent”

For example, our same 20 year old wants to live on 90% of their salary in 48 years with a 6% investment return. The inflation multiplier at retirement is 4x because it is 3% over 48 years. (The Rule of 72 means it doubles every 24 years.). Plugging this in the formula gives (90 * 4) / (6 – 3) = 360 / 3 = 120x.

Take the average of the bounds to get a reasonable estimate of (120x + 12x) / 2 = 132x / 2 = 66x. This is pretty close to the 68x calculated previously.

Getting from retirement savings to annual savings is no better. The best options is to use the calculation in the previous section in reverse.

The reverse formula is D_A = (3 * R_S) / (4 * Y_D * (2^N_D – 1))

Using the same example above, 66x salary is the retirement savings, R_S. This gives

(3 * 66x) / (4 * 8 * (2⁶ -1))
198 / (32 * (64 – 1))
198 / (32 * 63)
198 / 2016
.098

About 9.8%. The actual value is 10%, so close enough. If you want more precision, use the spread sheet starting with 9.8 for the “Current Annual Savings %”. Modify it up or down to get the “Retirement Fail Age” to be 94. The retirement estimators in Appendix B can be used the same way.

As noted earlier, a 60/40 portfolio has the best success rate for retirement. The equity gives enough gains to give it longevity, and the bonds act as a hedge to give it stability through market downs. Unfortunately, bonds are not uncorrelated with equities. This means that they can both be down at the same time. The best hedge is to invest in things that move differently so that they can counteract each other as the market moves. There are some “new” investments that claim to move differently than everything else, but I am not trusting enough to buy them with my limited knowledge.

The 60/40 portfolio is good for retirement, but it does not really have sufficient growth to build retirement savings. We are going to base our investment choices on these assumptions:

• Start with a 90/10 portfolio at a young age to ensure sufficient growth.
• End with a 60/40 portfolio at retirement to ensure longevity
• Large capitalization equities, small capitalization, international equities, and bond investments can move independently which reduces volatility and risk
• Growth equities and Value equities can move independently which reduces volatility and risk
• In general, investment returns from large capitalization equities > small capitalization equities > international equities > bonds > cash
• Fees and taxes eat into investment returns

My best estimate is that I averaged at least 8.5% on average while saving for retirement. It would have been more except that I made some mistakes:

• I did not rebalance my investment at least annually. (unknown)
• I did not exchange under performing funds for better ones. (about -5%)
• I invested in managed funds with sales load (about -5%)
• I bought dividend producing investments too early (about -1%)

If I had been a little more knowledgeable or proactive, I might have had 10% – 15% more retirement savings. Sometimes life happens and other things become a priority; if I did not use automated investing and asset allocation, I would not be retired. Fidelity has a page showing Fidelity Fund Portfolios, sample diversified portfolios, but they are managed funds instead of index funds. With the currently rates of return, the managed funds are out performing the index funds. Sometimes the manged funds out perform the index funds in good years, but they fall behind in bad years. Sometimes the funds have good (or lucky) fund managers, and they out perform the market for year.

My asset allocation was close to the lists below, but it deviated some based on the quality of the investments available in my 401(k) at the time.

• 90/10 portfolio
  • 32% large capitalization blend or growth equities
  • 32% small capitalization blend or growth equities
  • 26% international equities
  • 10% fixed income – CDs, savings accounts, bonds, etc.
• 80/20 portfolio
  • 28% large capitalization blend or growth equities
  • 28% small capitalization blend or growth equities
  • 24% international equities
  • 20% fixed income – CDs, savings accounts, bonds, etc

You can invest in ETFs (Exchange Traded Funds) or mutual funds. I have dealt very little with ETFs, so it is possible they have advantages that I am not aware of. Be aware that mutual funds are not designed for extensive transactions. There may be penalties for excessive trading in and out of a fund. For mutual funds, you should be looking for funds that meet your criteria.

• Proper sectors
• No sales load (i.e., not class A, B, or C)
• Lower management fees
• Higher average returns
• Sufficient diversity

The stock market has performed well recently. The 10 year average returns are likely to be inflated over the actual long term performance. If you are young with minimal money, here are a few options.

This section is not about what company to use; this is more about taxes and what type of investment account to use.

If your employers has matching contributions, you should always contribute enough to you employee plan (e.g., 401(k)) to get the matching contributions. For example, you employer might match 4% for you contributing 6%. Whoop-di-do 4%! No, no, no. It is not 4%. That is 4% / 6% = 66% more retirement savings. That is almost 6 years of growth at 9% that they got for free. Using the example 20 year old, they could put in only 6% and end up with $3.4 million at retirement for 10% contributions instead of only $2 million for 6% contributions. They could also put in 10% to get $4.7 million for 14% contributions.

There are a few caveats to this. Contributing to your employer plan may not be beneficial if:

• Your employer plan only has investments with low rates of return
• Your employer matching contribution is minuscule or inconsistent
• Your employer plan has a vesting period where you will not stay at the place of employment long enough to receive the employer matching contributions
• You are retiring early and do not have enough assets outside of retirement accounts

When you change jobs, you can roll your 401(k) from a previous employer into your new employer 401(k) or an IRA. If the company is large, stable, and has good investments in their plan, it might not be a big deal. If the company is smaller, less stable, or has poor investments in their plan, you might want to roll your money out of the old 401(k). If the company goes bankrupt, you could be unable to deposit or withdrawal for months. You will not lose the money in the 401(k), but you might be upset about not being able to retire for 6 more more. For this reason, you may want to consider rolling your old 401(k) over into an IRA account with a brokerage firm. You roll tax-free accounts to tax-free accounts and tax-deferred accounts to tax-deferred accounts. (There is also a Roth conversion that has tax implications that is beyond the scope of this article.) Make sure that you follow the proper process for a rollover, or you might end up owing taxes on tens of thousands, hundreds of thousands, or even millions of dollars. If at all possible, perform a direct rollover from the 401(k) to IRA to avoid a taxable event. There are many companies that support IRAs – Fidelity, Vanguard, Morgan Stanley, Goldman Sachs, Franklin Templeton, Schwaab, and Edward Jones to name a few. Research their investment options, services, and fees before picking one. Make sure you use two factor authentication and protect your password.

There are some advantages to consolidating your assets.

• A clearer picture of your assets
• More assets with an investment firm can
  • lower fees
  • open up more services
• All one brand of fund can allow overnight exchanges for re-balancing

In 2024, there are three basic tax rules for investing accounts.

• Individual Brokerage Accounts
  • No special tax handing
  • Dividends and Short-term Capital Gains are taxed like ordinary income
  • Qualified Dividends and Long-term Capital Gains are taxed at a reduced rate.
• Tax Deferred Accounts
  • These include 401(k), TSP, 403(b), SIMPLE, Traditional IRA, and a few others.
  • In general,
    • you can not get any money out without a penalty until 59 1/2.
    • you will have to take required minimum distributions starting at 72 years old.
    • there are annual contribution limits
    • you can only contribute earned income
  • These are federally tax deferred accounts. If you meet the requirements:
    • deposits are not taxed by IRS (i.e., subtracted from income on federal taxes)
    • federal taxes are paid on distributions.
  • State laws vary on the taxation of some of these (e.g., Traditional IRA)
  • You lose out on the lower capital gains taxes
  • May be better for you if you have high taxes now and lower taxes in retirement
• Tax Free Accounts
  • These include Roth 401(k) and Roth IRA
  • In general,
    • you can not get gains out without a penalty until 59 1/2.
    • there are annual contribution limits
    • you can only contribute earned income
  • The deposits to the account are included in federal and state taxes
  • Distributions from the account are tax free, if they meet the legal requirements. This includes the rule that you cannot withdraw earnings tax-free until at least 5 years since the first contribution.
  • Some states may double tax (taxed in and taxed out), if you fail to met the legal requirements.
  • May be better if you have low taxes now and expect higher taxes in retirement

Financial experts often say it is a good ideal to have money in a mix of account types so that you have flexibility with respect to tax handling in any given year. Depending on your situation, one tax advantaged account could be much better than the other. In general, the taxes you have to pay while working versus retirement will be opposite for each account type. If you pay lower taxes while working, you pay more taxes in retirement and vice versa.

Taxes Paid	While Working	In Retirement
Most	Tax Free	Tax Deferred
	Individual	Individual
Least	Tax Deferred	Tax Free

When you are deciding whether to use a tax free or tax deferred account, laws and inflation might impact your decision. The Tax Cut and Jobs Act (TCJA) is set to expire after 2025, and taxes will go back to what they were. Inflation increases your cost of living every year, but the tax brackets and other limits do not always keep up. You taxes may go up in the future just because of inflation. Or because TCJA expires. Or because Democrats are in office. It is hard to be sure what it going to happen. Having money in tax deferred, tax free, and individual accounts gives you some hedge for handling multiple situations. If you plan to retire early, you MUST make sure you have enough alternate income or retirement savings in individual accounts to bridge from retirement until you can access savings from retirement accounts at 59 1/2 without penalty or start getting distributions from pensions and social security. Having enough money to retire, but not being able to get to it without a 10% penalty would suck.

There have been instances where the stock market has been down for years. Take a look at the S&P500 from Jan 2000 to Oct 2024.

• In Dec 2021 it started dropping, and it did not recover until Dec 2023.
• In Oct 2007 it started dropping, and it did not recover until Feb 2013.
• In Jul 2000 it started dropping, and it did not recover until May 2007.

Going back for decades, there have been up to seven year periods of decline. Sometimes the declines appear back to back. If you were on the cusp of retiring in 2000 or 2007, you had a bad year. You may not want to go back to work or wait to retire, but it is better than running out of money.