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Saving for retirement is hard.
Just ask people who are approaching retirement age.
The median net worth of Americans ages 60 to 64 is under $164k, enough to supplement your Social Security benefits with an underwhelming $480 a month.
That figure is per William Bengen’s “4 percent rule,” based on research he published in 1994 using market data from 1926 and on. He found that you wouldn’t have run out of money for at least 30 years if you’d withdraw 4 percent of your portfolio’s value in your first year of retirement, and then adjusted that amount for inflation annually.
How Much Do You Need to Save for Retirement?
Suppose you want to retire with the median US income of $50k and receive the average Social Security benefits for couples of about $35k. In that case, you’d need another $15k from other sources.
If that other source is your portfolio, the 4 percent rule says you’d need to have saved over $375k, which fewer than four in 10 Americans in their early 60s achieve.
Morningstar’s recent figure of 3.7 percent safe initial withdrawal rate increases that to $405.5k, which only 35 percent of Americans in that age bracket manage to accumulate.
But what if you aspire to more than the median income, to have a more comfortable retirement?
Let’s look at two couples, each receiving the average Social Security benefit. The first couple, call them John and Sara, want a budget that’s at the 75th percentile, or $88.7k. The second couple, call them Jack and Bonny, set their sights higher, to the 90th percentile, or $150k.
John and Sara need $53.7k a year from their portfolio.
They can do that if they amass $1.34 million using the 4 percent rule, or $1.45 million if they want to be safer and use Morningstar’s number. Both numbers require them to be in the top 18 percent of savers
Jack and Bonny’s portfolio would need to enable them to start with a $115k initial withdrawal.
That requires $2.9 million using the 4 percent rule, so they’d need to be in the 91st percentile, or $3.1 million assuming a 3.7 percent initial draw, requiring them to reach the 93rd percentile.
Boosting Your Retirement Budget Can Be Simple
In the above examples, we started with the desired retirement budget and worked our way back to how much you need to save, and what percentile of net worth (for Americans in their early 60s) that requires.
However, if you want to look at your own situation and are already in your early 60s, it’s a bit late to accumulate an extra million or two.
That isn’t to say you shouldn’t save as much as you can (without sacrificing your current enjoyment of life too much), as every $10k you add to your nest egg increases your annual budget by about $370 to $400.
However, increasing your budget by, e.g., $10k would require $230k to $250k – not an easy amount to save up in a few short years.
The above-linked Morningstar Retirement Report suggests three relatively simple ways to boost your annual retirement budget without having to add hundreds of thousands of dollars to your nest egg.
If you and your spouse were both born in 1960 or later, your full retirement age for Social Security purposes is 67.
However, for each year you delay claiming benefits up to age 70, your benefits increase by 8 percent. Delaying to age 70 means a 24 percent increase, so the $35k average benefit would jump by $8.4k a year. You’d need to increase your nest egg by over $200k to achieve such a boost in your retirement budget from your portfolio.
Even better, those higher Social Security benefits are adjusted upward when inflation increases your cost of living.
Mike Hunsberger, Owner, Next Mission Financial Planning explains, “Delaying Social Security is a great longevity hedge for many clients. You know you’ll continue to receive this income even if you live into your 90s or longer. It’s especially useful for the higher-earning spouse to delay as long as possible because the spouse who lives longer will continue to receive the higher benefit.”
However, Morningstar finds that drawing extra heavily on your portfolio to enable such a delay negates more than half of the boost: “For people with average or above-average life expectancies, the benefits of delaying Social Security are well acknowledged. However, the benefit of delayed filing is the most pronounced if the retiree can use nonportfolio income, such as a part-time job or rental income, to provide cash flows until Social Security benefits begin. If higher early portfolio withdrawals are the retiree’s only source of cash flow until Social Security commences, that reduces the benefits of delayed filing because it leaves less of the portfolio in place to compound over the 30-year horizon.”
To address this, Michelle Petrowski, Certified Financial Planner and founder of Being in Abundance offers an interesting way to make ends meet while delaying Social Security benefits, “When eligible, if you own your home, a reverse mortgage line of credit can be a valuable tool for retirees seeking additional income while delaying Social Security benefits until age 70, reducing their risk of running out of money if they haven’t saved enough. By using this line of credit, retirees can access funds without needing to sell investments or withdraw from their portfolio, which is particularly beneficial during market downturns. This strategy helps minimize sequence of returns risk – the danger of taking distributions from your portfolio when markets are down early in retirement – by allowing the portfolio to remain untouched and potentially even grow, while the reverse mortgage provides income. This approach helps maximize overall retirement cashflow and protects long-term financial security by lowering the chances that a retiree will run out of money.“
Using Annuities
Morningstar also suggests exploring immediate or deferred annuities, since those typically pay out more than 4 percent. For example, the Schwab annuity calculator estimates you could receive the following benefits for every $100k used to purchase an annuity for a husband and wife (in the state of Maryland).
- A 65 year old male and a 65 year old female purchasing an immediate joint life annuity would receive about $6.7k a year, which is 67 percent more than you could draw based on the 4 percent rule.
- A 55 year old male and a 55 year old female purchasing a 10 year deferred joint life annuity would receive about $11.1k a year, which is 2.8x more than you could draw based on the 4 percent rule.
However, note that if you could invest that $100k from age 55 to age 65 at an annualized return of 7 percent, you could put the resulting $196.7k into an immediate annuity at age 65 and get $13.2k a year.
You could ask if inflation wouldn’t whittle away the value of that $196.7k over those 10 years, and you’d be right. Assuming the 3.67 percent average inflation (since 1945), it would be the same as $137.2k now. That would provide our hypothetical couple an annual joint-life annuity payment of just $9.2k.
However, the same inflation would impact the $11.1k annual payment of the deferred annuity, reducing its purchasing power to just $8.1k, so you’d come out ahead by investing for those 10 years, though you’d be giving up the annuity’s guarantee.
Either way, an annuity is a reasonable way to go with at least a portion of your nest egg assuming (a) you don’t mind losing the liquidity of the amount used to purchase the annuity, and (b) you don’t expect inflation to eat away too much of the annuity payout over the length of your retirement.
As Morningstar says, “In addition to considering delayed Social Security income, an allocation to a simple immediate or deferred annuity can also help enlarge in-retirement cash flows. But as with spending higher amounts from a portfolio to enable delayed Social Security filing, the allocation to the annuity early in retirement reduces the money in the portfolio that can compound over the retiree’s drawdown period.”
Using a Dynamic Withdrawal Strategy
Morningstar reviews four possible strategies in which your annual draw (in inflation-adjusted dollars) isn’t static.
- Forgo inflation adjustments in years when your portfolio loses money. Each such cut would likely be small (unless your portfolio tanks when inflation runs 10 percent!). However, forgoing an adjustment of 3.67 percent (the average inflation since 1945) once every four years (the market has gone down about once every four years since World War II) would cut your purchasing power by about 25 percent over a 30-year retirement!
- Use the IRS Required Minimum Distribution (RMD) table to gradually increase the percentage of your portfolio drawn to cover expenses. This method guarantees you’d never run out of money, because each year you draw the value of your portfolio divided by your remaining life expectancy. However, if your portfolio crashes early on, the RMD amount might not be enough to cover your expenses.
- The Guardrails Approach, where you cut your spending by 10 percent in any year where your inflation-adjusted draw would exceed your target percentage by 20 percent. Conversely, if your inflation-adjusted draw would be 20 percent or more lower than your target percentage, you’d increase your spending by 10 percent.
- Use real-life retirement spending patterns, which show spending declines annually by 1.9 percent for ages 65 to 75; 1.5 percent from age 75 to 85; and 1.8 percent from age 85 to 95.
Morningstar’s simulations showed that instead of a 3.7 percent safe initial withdrawal rate for the static case, you’d have the same 90 percent success probability with a 4.2 percent initial draw for the first dynamic scenario above, forgoing inflation adjustments in market down years.
The RMD strategy gives an even higher safe initial withdrawal of 4.7 percent.
The Guardrails Approach scores highest, at 5.1 percent.
Finally, using the real-life spending pattern lets you start with a 4.8 percent initial draw.
Assuming you have the above-mentioned median $164k nest egg, instead of having a $6.1k annual supplement to your Social Security benefit (with a 3.7 percent static draw), you’d get $6.9k with the first dynamic strategy, $7.7k with the second strategy, $8.4k with the third, and $7.9k with the final one.
If your nest egg places you in the 75th percentile for Americans in their early 60s, at $752k, your retirement budget would be boosted by $3.8k using the first dynamic strategy, $7.5k using the second, $10.5k with the third, and $8.3k with the last.
These numbers would be equivalent to sticking with the 3.7 percent static draw but having a nest egg larger by $103k in the first case, $203k in the second, $284k with the third, or $224k with the last one.
It’s Not Too Late to Boost Your Retirement Budget
Saving for retirement isn’t easy, and even figuring out how much you’ll need is far from simple.
However, the above shows three ways to boost your retirement budget for a given nest egg size. Even better, you don’t have to pick just one. You could get a far bigger boost by using two or even all three methods.
Keep in mind, however, that different people have different priorities, goals, opportunities, and risk tolerance, so your ideal path will vary from mine or anyone else’s. That’s why consulting with a trusted financial advisor to come up with a personalized plan is far better than going by rules of thumb or generic simulations.
As Jordan Gilberti, Founder and Senior Financial Planner, Sage Wealth Group explains, “A smaller nest egg doesn’t have to mean a smaller life. When the numbers don’t quite line up, I encourage clients to focus on what they can control: spending, timing, and flexibility. In general, spending less is always worth considering, but I prefer to focus on conscious spending: trimming what doesn’t bring joy to preserve what does.
“Sometimes it’s about adjusting the timeline (working a few years longer or transitioning to part-time work). Other times, it’s reframing the vision of retirement. Often, with some creativity and prioritization, we can preserve the lifestyle that matters most while trimming the less essential pieces.
“Along with that, delaying Social Security is one of the most powerful levers available – it guarantees a higher, inflation-adjusted income stream for life. Downsizing can also make sense, especially for clients whose housing costs dominate their monthly budget.
“Clients can also consider ‘geoarbitrage’ – moving to a lower-cost area, even internationally, or finding purpose in part-time consulting, teaching, or passion-driven work that generates income. In addition, we consider different tax strategies and optimize the order in which clients withdraw from different account types, which can stretch dollars further than most people expect.
“In all these ways, smart planning often beats simply saving more.”
Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the Author
Opher Ganel, Ph.D.
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.
