Retirement planning can be a confusing mess. It’s hard enough to make financial estimates one year into the future. For retirement, we’re called upon to make assumptions decades into the future. A reader named Eric recently shared his own frustration in this regard.

Eric wrote:

There are many retirement calculators and rules of thumb online to choose from. Knowing what tool to use is difficult. The calculators can be tough because you need to make assumptions on future earnings, inflation, typical raises, what percent of income you’ll need, how long you’ll live, etc. Many seem to have embraced the new Fidelity 8x ending salary rule as the new standard. What are your thoughts on this? What do you suggest to use and assumptions to make?

Eric’s question is an important one. If assumptions are off significantly, retirees could end up with too little or too much at retirement. The problems with having too little in retirement are self-evident. While having too much doesn’t seem like a problem, it could mean unnecessary sacrifices were made during the working years to achieve a sizable nest egg that wasn’t necessary.

So how do we wade through the myriad assumptions and projections in retirement planning? To answer that question, we’ll first look at the key assumptions that go into retirement planning and how to make them. We’ll then look at some easier ways to plan for retirement that don’t explicitly rely on these assumptions. Finally, I’ll share some of my favorite retirement calculators.

Assumption #1: Expenses in retirement

By far the most important assumption, the amount of expenses in retirement is actually two assumptions in one. The first of course is your monthly budget when you retire. The second is how much your monthly expenses will actually cost once you account for inflation.

The simple approach is to assume your current expenses will remain the same in retirement and to ignore inflation. For many, expenses in retirement may go down. Retirees don’t typically save for retirement, raise a family, or commute to work. They often do, however, travel more frequently, dote on the grandchildren (which can cost money), and spend more on health care. Assuming expenses will not change in retirement gives a bit of a conservative cushion to the calculation. Alternatively, you could subtract from your current income the amount of money you save on the assumption that you’ll no longer be saving during retirement.

As for inflation, one can ignore if you believe your retirement contributions will rise with inflation as well. More importantly, the financial calculators we’ll look at in a minute build in assumptions for inflation.

Assumption #2: When you’ll retire

This may seem like an odd thing to call an assumption. For those that are decades away from their golden years, however, it really is an assumption. When you’ll retire is important for several reasons.

First, your retirement date determines how long you’ll have to save and grow your nest egg. Second, if you plan to retire before you’re eligible for Medicare, you’ll need to plan accordingly. The Affordable Care Act may help in this regard. Third, your retirement age will also allow you to make certain assumptions about social security benefits. Currently, the full retirement age is at most 67, but I wouldn’t be surprised to see this increase for some of us.

Assumption #3: When you’ll die

While perhaps not the must fun thing to estimate, it’s important to know how long your savings needs to last. One option is to use life expectancy tables, better known as an actuarial life table. Here’s the one used by Social Security. In my view, 90 is a reasonably conservative estimate as well.

Assumption #4: Your investment returns

This assumption is hotly contested. Many believe that we won’t see the same returns that we’ve enjoyed over the last 30 years. As a result, some assume future returns as low as six percent. I typically assume eight percent. The key, however, is to keep in mind that the assumption should NOT be what the market will return. The assumption is what YOUR investments will return. The two are never the same for several reasons.

First, the S&P 500 index is a composite of 500 of the largest U.S. companies. Most investors, however, do not invest 100 percent of their portfolio in an S&P 500 index. Instead, they also invest in bonds, small company stocks, and international stocks. Second, fees paid to mutual fund companies and asset managers erode returns. That’s one reason I manage my own investments and invest primarily in individual stocks and index funds. Even so, some amount of fees will always exist.

Finally, investor behavior can have a huge, and typically negative, effect on returns. Many investors get scared when the market goes down and sell many of their investments. When the market heats up again, they start buying back into the market. The result is a cycle of buying high and selling low.

The key is to be honest with yourself, understand your asset allocation and investing habits, and make a conservative assumption. If your investments end up doing better, you’ll have some extra cash in retirement.

Assumption #5: Social Security Benefits

Some people just ignore social security in their retirement planning. That would be a conservative approach. While I don’t believe Social Security is going away, the benefits could certainly be reduced. Still, estimates on your benefits and when you will start receiving those benefits are important. You can read our Guide to Social Security for more information. You can also check out this benefit estimator from the Social Security Administration.

Assumption #6: A safe withdrawal rate

Once you start retirement with your nest egg, you have to determine how much you can withdraw each year without running out of money before you die. Countless articles, books, and studies have been published on this issue.

I typically assume a four percent withdrawal rate. I know others who assume three or five percent. Whatever you decide, understand just how important this assumption is.

Let’s assume you need $40,000 a year from your investments in retirement. Given this required income, here’s the total in savings you would need based on a three, four, or five percent withdrawal rate assumption:

  • Three percent: $1.33 million ($40,000 / .03)
  • Four percent: $1 million ($40,000 / .04)
  • Five percent: $800,000 ($40,000 / .05)

As you can see, the lower the assumed withdrawal rate, the more you need to save.

The Ultimate Question–How much money you’ll need in retirement

All of the above assumptions funnel into the one key retirement question–what’s the number? How much money do you need in the bank when you punch the time clock for the last time?

There are two approaches to answering this question. One is to figure out the number based on the assumptions that you make on the above items. Then using any one of a number of free calculators (see below), you can generate the amount of savings you’ll need in retirement. Of course, the results are only as good as your assumptions.

The second approach is more simple. Just save a certain percentage of your income for retirement. I think 15 percent is usually a good start, particularly if you are starting to save in your 20s or 30s. Easier said than done, I know. It may take some time to reach a 15 percent savings goal, but it’s worth the effort.

For those that are starting later in life or just want an idea of where you stand, I highly recommend this article about saving enough for retirement. It talks about Charles Farrell’s money ratios, which offer a really good guide.


As a final thought, there are some really good financial calculators available for free. While these calculators take different approaches to the retirement question, they all generally tend to make reasonable estimates. The key is to understand what assumptions the calculator is making so that you can make adjustments if you think the assumptions are not quite right for your situation.

Here are a few of the calculators I think are worth trying out:

Fidelity’s myPlan Snapshot calculator

T. Rowe Price’s Retirement Income Calculator

Flexible Retirement Planner (Hat tip to Darrow from Can I Retire Yet? for finding this one)–

You can check out even more retirement calculator options here.


  • Rob Berger

    Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at