Retirement Guidelines, Pointers and Pitfalls


Jane Young, CFP, EA


Below are some general guidelines and rules of thumb for retirement planning.  While general guidelines can be useful, I recommend that you do the work to run retirement calculations with well thought out figures that represent your unique situation. These should be revisited on an annual basis to be sure you are on track.  Guidelines and rules of thumb can be misleading and may not fit every situation.


  • Always save between 10% and 15% of your annual income.  If you are starting late this needs to be much higher.


  • A rule of thumb is that you will spend 60-80% of your pre-retirement expenses in retirement.  However, I recommend doing the detailed work to determine what your unique situation may look like.


  • Over a long period of time inflation has averaged about 3%.  In retirement some of your expenses may not be subject to inflation such as your house payment. Other expenses, such as healthcare, will be higher.  Health care is projected to increase at a rate of 7% annually.


  • You will probably spend more during your first few years of retirement and much less during your last years in retirement.  Due to compounding, money spent early in retirement has a more dramatic impact on reducing your nest egg than money spent later in life.  You may want to consider working a part time or seasonal job to help cover large travel expenses during the first few years of retirement.


  • One guideline to determine the size of retirement nest egg required is to assume you will need $15 – $20 in savings for every dollar of shortfall between your projected income from pensions and social security and your expenses.


  • A guideline on how much you can pull from your retirement savings without running out is 3-4% if you have a conservative portfolio and 4-5% if you have a moderate or more aggressive portfolio.  Most retirement guidelines assume 30 years in retirement.  I recommend running numbers that represent your specific situation to get a better understanding of what you can spend.





  • Avoid taking Social Security before your normal retirement age if you plan to work between 62 and your normal retirement age.  In 2011, Social Security will withhold $1 for every $2 earned above $14,160 between the time you are 62 and   your normal retirement age.  Additionally, working while taking Social Security may result in more income tax on your benefit.


  • If you are planning to retire before 65, be ready to pay a hefty bill for health insurance until Medicare kicks in at 65.


  • Avoid pulling money from your retirement funds to meet short term, pre-retirement living expenses. 


  • Don’t sacrifice your retirement to put your children through college.


  • Don’t automatically transfer your entire portfolio into CD’s or other extremely conservative investments upon retirement.  You may spend more than 30 years in retirement.  Some of your money should be invested in the stock market to stay ahead of inflation. 


  • You don’t need an “income” producing investment to cover your retirement distribution needs.  You can make systematic withdrawals from your portfolio to meet your living expenses.  However, you should maintain at least 5-10 years of expenses in fixed income investments.  This will prevent the need to sell equities when the stock market is down.  A significant portion of your annual return will come from capital appreciation on the stock portion of your portfolio.


  • Maintain a diversified portfolio and don’t keep too much in your company’s stock or in the stock of any one company.


  • Monitor your situation on an annual basis to stay on track.


Planning for Retirement is More Than Picking a Date

Jane M. Young, CFP, EA

Below are some questions you may want to consider when you start planning for retirement.

What does retirement look like?
When do you want to start cutting back on your work hours? Do you want to stop working altogether or try something new?

Do you want to take a break for a few years and return to work part time? What are the opportunities for someone of retirement age in your chosen field?

How will you feel in retirement? How much of your personal identity and self esteem is associated with what you do? How will you feed your need for a sense of accomplishment, friendships, social interaction and status? Are you ready for retirement? Maybe a gradual transition will be more comfortable.

Where and how will you live? Do you plan to move to a less expensive city or country? Are you going to stay in your home or downsize to something with less maintenance?

How will you spend your time and money? Do you plan to travel, write a book or play tennis?

How will your expenses change in retirement? (Downsize or pay-off house, travel, no kids and no 401k contribution)

Where are you today?
What are your current expenses and what are you earning? How will this change in the coming years? Do you need to make some improvements in your career/earning situation?

How much are you saving for retirement? Could you squeeze out just a little more? Most people need to be saving between 10 – 15%. If you are getting started late you should be saving more.

What can you expect from a pension or social security?

Are you maximizing your ability to contribute to retirement plans such as 401ks, 403bs and Roth IRAs? Are you taking advantage of opportunities for matching contributions from your employer?

How much do you have put away for retirement?

Is your portfolio well diversified to meet your retirement needs? Avoid being too conservation or too aggressive.