How Much Should You Be Saving for Retirement?
Saving for retirement takes more than reaching a magic number. Learn how spending, income, taxes, inflation, and longevity shape your retirement goal.
Author: Chris Steward, CFP®, CFA®, RICP®, M.A. (CANTAB) | Director of Investments at Impact Advisors Group
For most of our working lives, a regular paycheck arrives in our bank account while our employer withholds federal and state taxes and deducts our share of health insurance costs. In the past, when pensions were common, retirement often meant replacing that paycheck with a pension check. Even if the pension was smaller, retirees no longer needed to set aside part of their income for retirement.
Today, retirement turns that arrangement upside down. The paycheck stops, and retirees must decide how much they can spend without outliving their savings. They must also manage the tax consequences of withdrawals, choose suitable health care coverage, and prepare for large but infrequent expenses—from a major health event to a new roof.
In short, the paycheck disappears, but the bills do not. Accumulating wealth and distributing it are fundamentally different financial challenges.
Last month’s article, “Is Your 401(k) Lying to You?,” showed that investors with the same $5 million in retirement assets could have very different income-generating capacity depending on where the money was held: a taxable account, a traditional IRA or 401(k), or a Roth IRA. The difference was substantial. Over retirement, a mix of taxable assets and either a 401(k) or Roth account supported more than $1 million—and in one case $1.7 million—of additional spending compared with holding everything in a traditional IRA or 401(k).
The essential question is not simply, “How wealthy am I?” It is, “How much after-tax income can I safely spend each year for the rest of my life?” Wealth and after-tax income-producing capacity are not the same.
Garrison Keillor’s A Prairie Home Companion famously described a place where “all the children are above average.” Of course, not everyone can be above average—and even modestly beating an average may not be enough to protect a retirement portfolio. Relying on long-term average returns can obscure a critical risk: sequence-of-returns risk.
During the accumulation phase, investors typically have a long time horizon and naturally focus on average returns. For a young investor who is still contributing, a downturn can even be beneficial because new contributions buy assets at lower prices. In retirement, however, the order in which returns occur becomes critically important.
From 1999 through 2025, the S&P 500 produced an average annual return of about 8%. Yet the period began with three down years that erased 38% of the initial nest egg. With no withdrawals or additional deposits, the portfolio recovered to its starting value within seven years. With annual withdrawals of 4%, however, an all-equity portfolio ran out of money in year 14.
Now reverse the historical order so that the three down years occur at the end rather than the beginning. The average annual return remains 8%, but the outcome changes dramatically: after $1,040,000 of withdrawals, the portfolio finishes the period with more than $5 million.
Before retirement, a bear market is uncomfortable. Shortly before or after retirement, a bear market combined with withdrawals can permanently alter a plan. Mortgage payments, property taxes, groceries, and utility bills continue regardless of market performance. Selling investments after a major decline locks in losses and leaves fewer shares to participate in a recovery.
Most retirees already have a form of lifetime income through Social Security, and its inflation adjustments are valuable. For many households, however, Social Security alone is not enough to cover essential living expenses. Social Security, pensions, annuities, and even a carefully structured bond ladder can create an income floor. The stronger that floor, the less a retiree must depend on market returns to maintain a desired standard of living.
Think of the income floor as the foundation of a house: a strong foundation supports everything above it. Reliable baseline income reduces pressure on the investment portfolio, can support a more measured level of risk, and improves the likelihood that spending needs will be met.
The need for income often draws retirees toward “income-producing investments,” such as dividend-focused equity funds or high-yield bonds. But there is no theoretical reason to expect an income-only strategy to outperform a total-return approach, which can fund spending through interest, dividends, capital gains, and planned sales.
Chasing yield can also introduce unintended risks. The goal is not necessarily to maximize the income generated by the portfolio; it is to create reliable, sustainable spending from the portfolio.
Taxes and inflation both shape sustainable retirement income. Tax-deferred accounts are exactly that: taxes are postponed, not eliminated. At the same time, inflation means most retirement portfolios need meaningful exposure to growth assets. As Jeremy Siegel observed in Stocks for the Long Run, cash and bonds—often considered safe by conventional measures—have frequently failed to keep pace with inflation. That raises an important question: which risk matters most?
This does not mean bonds have no place in a retirement portfolio. It means that moving everything into supposedly “safe” investments can create a different risk: losing purchasing power. A sound portfolio balances near-term stability with long-term growth while accounting for both taxes and inflation.
Past experience can make us assume that a plan will work as expected. A better question is, “What happens if it does not?” As Mike Tyson famously put it, “Everyone has a plan until they get punched in the mouth.”
A meaningful retirement stress test should consider scenarios such as:
A good retirement plan should not depend on everything going right.
Retirement planning is not primarily about achieving the highest possible investment return. It is about creating a dependable stream of income that supports the life you planned without requiring constant concern about yesterday’s market results.
Building a large nest egg is an accomplishment. Turning it into a paycheck that lasts for the rest of your life requires a coordinated plan for spending, taxes, investments, health care, and unexpected events. And because eggs are fragile, that plan should be stress-tested to help ensure it can last as long as you do.
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