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Personal Finance > Ask the Expert
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How much is enough?
How much money will it take for me to be able to retire early?
December 16, 2002: 1:18 PM EST
By Walter Updegrave, CNN/Money Contributing Columnist

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NEW YORK (CNN/Money) - How much money do you think I should have saved in order to retire at the age of 55?

-- Ashley Bradford, Kalispell, Montana

Ah, I see the old early retirement dream hasn't died despite the market's meltdown over the past few years.

The answer to your question depends on a variety of factors you haven't mentioned, such as how much money you think you'll be getting from Social Security when you eventually begin collecting it, whether or not you have a pension from a company you've worked for and, most important, how much money you think you'll have to draw from your retirement assets each year.

All of these factors -- plus others like how you invest the money you'll be drawing on in retirement -- will play a major role in determining how much money you ought to have socked away before you retire at age 55, or, for that matter any age.

Invest for living longer

What I can tell you, however, is that unless you've got some horrible health problem you're not telling me about, you should plan on living off your investments for a good 40 years or more.

The way longevity has been increasing the past few decades, it's not uncommon for someone your age to live to 90, 95 or even crack the century mark. (For an estimate of your longevity based on factors such as your lifestyle and family health history, check out the Longevity Game calculator at Northwestern Mutual.

Given that you're going to be drawing on your assets for such a long period -- in your case probably longer than you've been saving for retirement -- you've got to be careful that you don't run out of assets before you run out of time.

Setting a withdrawal rate that will give you the money you need to live and last a lifetime is a tricky business. For one thing, you've got to take inflation into account.

Let's say you've got $500,000 in a retirement portfolio and you figure you can get by withdrawing $40,000 a year. That may be fine for a few years, but, remember, that $40,000 won't buy the same amount of goods and services in 10 or 20 years as it will today. In fact, even if inflation cruises along at a tame annual rate of 2 percent per year, your forty grand will lose about a third of its purchasing power in 20 years. So to be realistic, you should think in terms of adjusting your withdrawals for inflation each year.

Don't run out of money early

Many people also overestimate how much they can draw from a portfolio each year without facing the danger of their money running out in their lifetime.

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On the face of it, for example, you would probably think that you could easily withdraw $40,000 annually adjusted for inflation from a $500,000 portfolio for life without the portfolio running dry. After all, that's only an 8 percent initial withdrawal rate, and who can't earn 8 percent a year over the long term, right?

Not so fast. First of all, that $40,000 is being adjusted for inflation. Secondly, even if you manage to earn 8 percent or more on your portfolio, you're not going to earn that amount year in and year out. There are going to be some years when your investments earn more and some where they earn less, including some years when you have a loss. When you're withdrawing money from portfolio, those years with losses wreak havoc on your capital.

Call it the double-whammy effect: your portfolio value goes down because of the loss and because you're pulling money out at the same time. That means you have less capital to recoup the loss.

This means that a "safe" withdrawal rate -- that is, one that has high odds of lasting a lifetime -- is much lower than people think. It's more on the order of 4 to 6 percent per year, adjusted for inflation. Which means you probably need a bigger retirement stash to retire than you think.

If you want to withdraw $40,000 adjusted upward for inflation each year from a $500,000, you should probably start with annual withdrawals of more like $20,000 to $30,000, not $40,000.

So the question is, do you have enough assets to provide you with the income you'll need if you start with a withdrawal rate in that neighborhood? You can withdraw more, of course. But then you run the risk of running out of money late in life.

Crunch the real numbers first

What I've given you here are some general guidelines. Before you actually retire, though, you should really crunch some numbers, or have someone do it for you. If you want to do the analysis yourself, you can start at our Retirement Planner, which will help you figure out how much money you need based on your expenses and other sources of income.

After going through that exercise, you might want to check out the Retirement Income Calculator at T. Rowe Price's web site. This tool can show you how the odds of outliving your money change based on different withdrawal rates and investment strategies.

I suspect that what you'll find is that it's a lot easier to fantasize about retiring at age 55 than to actually do it. But until you take a hard look at the numbers, you won't really know.


Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.