# How big must your nest egg be?

• By Glenn Ruffenach,
• The Wall Street Journal

Q: How can I figure out how much money I need to save for retirement? How big does my nest egg need to be?

A: A good way to think about this is in terms of expenses. At its simplest, a nest egg helps cover your living expenses in later life. With that in mind, the following calculation — courtesy of William Bernstein, an investment adviser and author — can help pinpoint your particular “number” for retirement.

The first step, not surprisingly, is to add up your basic annual expenses. I know, that exercise alone will stop some people in their tracks. But get over it. If you care enough about your future (and you should) to calculate the savings you’ll need for retirement, you can spend part of a weekend examining receipts and account statements and estimating how much you spend each year.

And don’t forget, Mr. Bernstein notes, to include the taxes you’ll owe on withdrawals (voluntary and required) from your retirement accounts and on the income (interest, dividends, capital gains) in your taxable assets.

Once you have that figure, subtract your Social Security and, if you’re fortunate, any money you get from a pension. This will leave you with what Mr. Bernstein calls your “residual living expenses,” or RLE.

Example: You determine that you need \$70,000 a year to meet your expenses and pay taxes. And let’s say you receive \$30,000 a year from Social Security and a small pension. If we subtract the latter total from the former, we end up with \$40,000 in residual living expenses — those that aren’t covered by guaranteed sources of income. Knowing that figure can help you calculate how large your nest egg should be.

Mr. Bernstein recommends that most people should plan to save for about 25 years of RLE (which is a reasonable number if you retire at or near age 65, since most financial planners would urge you to assume a life expectancy of 90, if not longer.) To continue our example above, we multiply \$40,000 (again, your annual shortfall) by 25 years. That gives us a target of \$1 million for your nest egg. That’s how much you would need to save before retiring. The math, of course, isn’t a guarantee of retirement success, Mr. Bernstein notes, but “at least gives you a decent shot at it.”

Obviously, you can play with the numbers somewhat. If you retire at 60 — or at 70 — you might need more, or fewer, years of RLE. Or if you have a large pension, or modest living expenses, your annual shortfall could be modest, as well. In which case, you might be fine with a relatively small nest egg. But again, the point is to think about retirement savings in terms of assets and expenses: How much will you need to acquire to pay the bills that your guaranteed income won’t cover?

Finally, if you reach your particular savings goal, Mr. Bernstein recommends that the bulk of your portfolio should be invested in relatively safe holdings, such as bonds, Treasury inflation-protected securities and inflation-adjusted immediate annuities. Think about it this way, he suggests: If you have saved and invested well, it’s possible you have “won” the game; you have built the nest egg you need. And if that’s the case, stop playing. In other words, start reducing the risk in your savings.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

### How much do you know about 529 plans?

Basically, 529 plans provide a tax-advantaged way to save for college and other education expenses. But can you separate myth from fact when it comes to the details? Test yourself with this 10-question quiz.

### Deduction limits affect residency in high-tax states

The limit on deductions for state income taxes and property taxes costs some taxpayers tens of thousands.

### HSA & FSA: Understanding the differences

They may sound similar, but there are important distinctions between a health savings account (HSA) and a flexible spending account (FSA). Here's what you need to know.