In a recent issue of the Wall Street Journal, there was an excellent retirement article. In it, the author responded to a reader’s question “How much does my nest egg need to be?”. Your retirement nest egg is very important! So, we prepared a summary and some additional insights to consider. Our perspective is drawn, in part, from our award-winning research on retirement income planning.

Article summary by ETFMathGuy
The article starts with predicting your expenses. This is arguably a difficult task, and where many people stop. But, without this information, there is really no way to estimate the “right size” of a retirement nest egg.
In summary, the article suggests the following calculation.
- Start with an estimate of your expenses. A common approach to this is to assume a percent between 60-80% of expenses pre-retirement. This approach assumes that your expenses go down in retirement. That may be true for many retirees, as they no longer have mortgage payments or dependent expenses. Of course, a more precise estimate can be done.
- Subtract from this any guaranteed income, such as social security and after-tax pension benefits or annuities.
- Take this difference and multiply it by 25. In this article, they assume that a 65-year old lives until 90. This age is a conservative estimate, based on information from the Social Security Administration.
What isn’t stated in the article about your retirement nest egg
While I enjoyed this article, it made some assumptions about your retirement nest egg. For instance, the suggested value doesn’t include uncertain investment returns or inflation. The net effect of including both of these would typically give a retiree more years of retirement income. The extra income would come from a conservative investment in retirement, less inflation. Using a 4% conservative after-tax average return and 3% average inflation, this net effect would provide a 1% gain (on average) each year.
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