Our Budget Blunder: Retirement Savings

While completing last week’s post about building a budget, I decided to review the budget that Nicole (my wife) and I had revamped about six months ago. In doing so, I noticed I’m not entirely practicing what I’m preaching. In particular, there was one budgeting blunder that stuck out. While our budget is built around our goals (as it should be), we didn’t accurately calculate how much we need to be saving to accomplish one of our most daunting goals of all: making sure our retirement savings can provide us with a sustainable source of income as we turn old and gray.

Retirement Nest Egg

Frugal to a Fault

For as long as I’ve understood what a dollar is, I have been frugal (often to a fault). One story about my frugality occurred between my sophomore and junior year of college. It was summertime and I lived with two close friends in an apartment. When I moved in, I had the grand idea to hand-wash our dishes to save on utility costs. I naively thought it would be more efficient than using the dishwasher. Little did I know, any cost savings (if there actually were any) would be nowhere near worth the time and effort it took to hand-wash our dishware.

I’m sharing this anecdote because it reflects how poor planning and a lack of thoughtfulness can be detrimental. By choosing to hand-wash the dishes, my roommates and I spent hours in front of the sink each week. Instead of watching our hands turn into prunes, that was time we could have spent playing basketball, tossing around a football, or slaying zombies in Call of Duty. I realized a similar lapse in judgement when Nicole and I recently reviewed the retirement savings portion of our budget.

Tax-advantaged Accounts

Ever since my initial interest in personal finance, I have been intrigued by tax-advantaged accounts. Individual Retirement Accounts (IRAs) and employer-sponsored retirement accounts (the most popular being the 401(k)) fall into the tax-advantaged category. The idea of being able to shelter a portion of my money from taxes has always been appealing to me. I opened my first tax-advantaged account after my freshman year of college and began making contributions to it immediately. Coincidentally, Nicole has been contributing to her Roth IRA (an alternative form of the traditional IRA) since she was in high school. She likes to remind me of that fact often. Since opening these accounts, we’ve contributed to them annually.

Our Finances

Nicole and I have debated whether we would feel comfortable sharing our personal financial information on this blog. We aren’t trying to be boisterous. Most importantly, we don’t want to ostracize anyone in the audience. The last thing we want is to push away those that have different goals or those in different situations. Ultimately, we decided that sharing this type of information would allow me to best serve those reading this blog. Using personal examples can show progress and be motivating. It can also help reinforce the effectiveness of a plan or strategy. In addition, the goals Nicole and I have might be similar to your goals. Sharing our strategy and receiving feedback from readers could lead to great conversations and learning opportunities for all parties.

Retirement Savings

After several lengthy discussions, Nicole and I have determined that one of our goals is to accumulate a total of $2,000,000 between all of our tax-advantaged accounts by the time we are 60 years old. When accounting for dividends and option trading, the annual income provided by a portfolio of that size should cover a substantial portion of our living expenses in our later years. Better yet, with most of the assets being held in Roth IRAs or Roth 401(k)s (I’ll cover Roth accounts in a future post), a sizable portion of the income received will be tax-free (assuming the current tax legislation doesn’t change).

With this goal in mind, we’ve been diligently contributing to our tax-advantaged accounts. However, when recently evaluating our progress, I realized that we are contributing too aggressively to these accounts. It might seem counter-intuitive, but having too much money tied up in these accounts has some negative aspects. The most obvious downfall is accessibility. Generally, you can’t access the funds in tax-advantaged accounts without being subject to penalty until you reach the age of 59 1/2 (there are, of course, exceptions). By continuing to make contributions to our tax-advantaged accounts at our current pace, we would end up over-funding these accounts and depriving ourselves of opportunities and experiences in our younger years.


By following the same calculation process described in last week’s post, we can identify exactly how much we should be contributing to our tax-advantaged accounts on an annual basis. Nicole and I have set a goal to have the option to stop working by the time we reach the age of 40. That means that we have about 15 years left to make contributions to our tax-advantaged accounts (typically, you can only contribute to these types of accounts in the years you have earnings). Based on this information, we can calculate the necessary annual contributions to our tax-advantaged accounts by splitting our scenario into two distinct time periods.

  1. Age 25 to age 40
  2. Age 40 to age 60

25 to 40

As was the case previously, we’ll begin at the end. If we desire to accumulate $2,000,000 in our tax-advantaged accounts by age 60 without making annual contributions after age 40, how much money do we need to have in those accounts at age 40? If we assume an average annual investment return of 7%, we find that we would need to have a combined balance of about $516,838 between all of our tax-advantaged accounts at age 40 (this was solved using the Financial Calculators application [this app can be downloaded to your Android or iPhone]).

retirement savings calculation
Present Value: The amount needed to have saved at age 40 ($516,838; solved for this figure)
Payments: The annual recurring payment amount from age 40 to 60 ($0 in this example)
Future Value: Our target balance at age 60 (-$2,000,000; the number is negative by convention)
Annual Rate %: The assumed investment return rate (7%)
Periods: The number of years between 40 and 60 (20; compounding frequency was set to annually since periods are years)

40 to 60

Now that we know how much we need to have saved when we are 40, the second calculation helps us figure out how to get there. If we need to have $516,838 saved 15 years from now, and we currently have a nest egg of about $96,500 between all of our tax-advantaged accounts, how much do we need to contribute per year? If we again assume an average annual investment return of 7%, we find that we would need to contribute about $9,972 annually for the next 15 years to be on track toward our goal.

retirement savings calculation
Present Value: The amount needed currently saved ($96,500)
Payments: The annual recurring payment amount from age 25 to 40 ($9,972; solved for this figure)
Future Value: Our target balance at age 40 (-$516,838; from the previous calculation; the number is negative by convention)
Annual Rate %: The assumed investment return rate (7%)
Periods: The number of years between 25 and 40 (15; compounding frequency was set to annually since periods are years)

Making a Change

To provide some perspective, Nicole had been contributing about $13,000 a year to her Roth 401(k) on her own. By working through the calculations, we found that continuing on the same path would lead us astray. We would encounter the same pitfall that appeared in the dishwasher example. We would be focusing too many resources on a task that can be accomplished with less. By over-funding our tax-advantaged accounts, we would be sacrificing flexibility and opportunities in our younger years.

By arming ourselves with this updated information, Nicole and I now have a defined path to accomplish our goal. We know we can reduce our annual contributions to our tax-advantaged accounts and shift that money to other areas of our budget. After discussing it with Nicole, we intend to allocate a bit more to our education savings and increase the amount we save in our taxable investment account, which should give us more flexibility in the near-term. As a reward for monitoring our budget and making a change, we are also boosting the amount we allocate to travel (I’m sure you can guess which one of us lobbied for that). Completing this exercise illustrated that we can live more in the present and still accomplish our long-term goal.

Please let me know if you have any questions about the calculations. Are you still struggling to figure out what you need to do to reach your goals? Send me an email, leave a comment, or reach out to me on social media. I’m here to help.

Your thoughts are worth more than a penny.

This Post Has 6 Comments

  1. John Gustke

    Noah, the concept you describe is sound but I am wondering if you should not pick a higher goal as young as you two are. Is your goal in Today’s $ and being adjusted for inflation over the next 30+ years? Our government seems to be addicted to quantitive easing.

    1. Noah 5¢

      Hi John. Thanks for the question. There are a couple of aspects that we took into consideration when Nicole and I decided on setting our goal at $2M.
      The first being that we view the funds accumulated in our tax-advantaged accounts as a saftey net. In addition to our tax-advantaged accounts, we also make monthly deposits into taxable investment accounts. In the case of our taxable accounts, our intention is to leave the principal untouched to allow for compounding growth over time. In addition, we plan to only use the income provided by those investments when necessary.
      We did take inflation into account in a bit of a indirect manner. Over the last 30 years, the average annual inflation rate in the U.S. has been about 2.5% (The inflation data can be found on the website of the Federal Reserve Bank of St. Louis: https://fred.stlouisfed.org/series/FPCPITOTLZGUSA). The average annual return of the SPDR® S&P 500 ETF Trust (Symbol: SPY) since it’s inception in January of 1993 through the end of the second quarter of 2020 has been about 9.4%. Based on the time horizon of our goal and our risk tolerance, our tax-advantaged accounts will most likely be allocated 90-100% to equities for quite some time. In the calculations shown, a 7% average annual rate of return was assumed. This would approximately represent the expected real rate of return to be earned (real rate = nominal rate – inflation = 9.4% – 2.5% = 6.9%). Based on that logic, our money would ideally retain its purchasing power over time (all of this of course comes with the disclaimer that historic performance is not indicative of future results).
      Thanks for the comment!

  2. Zach Avery

    Great post Noah. Enjoyed the read. You inspired me to make these calculations for myself and Anna. One thing I wonder is how average returns look different with a diversified equity portfolio instead of just S&P 500. Also, this calculation assumes you are in 100% equities until retirement. I understand that the more variables you add in the more intricate the calculation becomes, but would it be worthwhile to address appropriate risk levels based on time horizon? Maybe a topic for another post. Keep up the good work!

    1. Noah 5¢

      Thanks for reading Zach. Did you discover anything helpful when completing your own calculations?
      I’m glad you asked those questions. I’ll address the question regarding the diversified equity portfolio first. Thinking about it from a risk-return perspective, it would seem reasonable to assume that a diversified equity portfolio would provide a higher rate of return than a portfolio mimicking the S&P 500 over the long-run. Incorporating mid-cap equities and small-cap equities into a portfolio would tend to increase the risk of the portfolio, which should provide a greater average annual rate of return. The same ideology could most likely be followed for international equities. I admittedly have little experience with international equities and do not currently have any intentional allocation to international equities (I am aware that I might have a small allocation to international equities through some of my ETF holdings). Please note that both conclusions are based simply on the idea that a rational investor would not take on additional risk without the expectation of receiving additional return for doing so. There very well could be data out there showing this hasn’t historically been the case.
      As for your question regarding the 100% allocation to equities until retirement, I believe the allocation is appropriate for the given scenario. Out of all our goals, retirement is the goal with the longest time horizon for Nicole and me. It makes sense that the assets held in our tax-advantaged accounts be allocated entirely to equities for the forseaable future, and perhaps a bit into retirement as well. However, that doesn’t necessarily mean that our entire portfolio will be allocated to equities throughout this period of time (I will admit though, I tend to have a natural aversion to fixed income securities). From a tax-planning perspective, it is also logical to hold highly appreciative securities in our Roth accounts compared to our taxable investment accounts.
      You are absolutely correct that with more variables the calculation becomes more complex. I really appreciate the topic for a future post! Thanks for your feedback Zach and thank you for taking the time to read Nicholl for Your Thoughts!

  3. Kenneth Nicholl

    Not only is this well thought out, it also shows the importance of “here and now” for the both of you. I am glad that your perspective not only looks at tomorrow, rather, it includes today. Nice read.

    1. Noah 5¢

      Historically, I’ve had the tendency to look to the future at the expense of the present. I have been making an effort to alter that behavior and I have started to see a bit of progress. Thanks for reading!

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