
Hello, I am the The Polite Investor, a polite Englishman that has been
living in the US for 10 years.

Although I have always been interested
in personal finance and investing, once my employer enrolled me in
their retirement plan, I thought it was time to
get serious and figure out how the American financial system works to
make sound investment choices. 

I started this site to document my financial
journey and offer my opinions to help others. Perhaps you might learn something from
my experiences and together we can all try to lead better financial
lives.

I believe the key to building wealth is disiplined saving
and investing coupled with a somewhat minimalist lifestyle. You don't
need stuff and you should have a healthy skepticism towards activities
your peers engage in: mortgages, expensive cars, expensive vacations.
You'll find a little bit of my personal philosophy peppered throughout
the site.



I hope you feel welcome here. Take what you find useful and leave the
rest. Pass on what you’ve learned to your friends. May you find the
financial success you deserve.

Want to say hello?  [Email me](mailto:hello@politeinvestor.com).


Antony Holmes

Polite Investor, CEO, CTO, employee #1, whatever

How much do you need to save each year in the accumulation stage of your life?



The simple answer is **as much as you can**, but to look at the issue from a more academic and theoretical perspective, Wade Pfau wrote a [paper](https://www.financialplanningassociation.org/sites/default/files/2020-05/4%20Safe%20Savings%20Rates%20A%20New%20Approach%20to%20Retirement%20Planning%20over%20the%20Life%20Cycle_0.pdf) that nails it down about as well as one can.

## Show me the money

For the TLDR version, Table 1 from the paper summarizes what you need to know. I have reformatted this and presented it here so its easier to read (especially on a phone screen).

### Replacement Rate = 50% of Final Salary

<table>
<thead>
  <tr>
    <th></th>
    <th>20 years</th>
    <th>30 years</th>
    <th>40 years</th>
  </tr>
</thead>
<tbody>
  <tr>
    <td style="font-weight: bold" colspan="4">40/60 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>31.98</td>
    <td>39.5</td>
    <td>47.02</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>15.64</td>
    <td>19.33</td>
    <td>22.19</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>10.26</td>
    <td>12.42</td>
    <td>13.84</td>
  </tr>
  <tr>
    <td style="font-weight: bold" colspan="4">60/40 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>30.94</td>
    <td>35.91</td>
    <td>38.92</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>13.88</td>
    <td>16.62</td>
    <td>18.63</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>7.57</td>
    <td>8.77</td>
    <td>9.22</td>
  </tr>
  <tr>
    <td style="font-weight: bold" colspan="4">80/20 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>30.52</td>
    <td>34.45</td>
    <td>35.94</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>12.85</td>
    <td>15.14</td>
    <td>16.54</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>6.26</td>
    <td>7.39</td>
    <td>8.06</td>
  </tr>
</tbody>
</table>

### Replacement Rate = 70% of Final Salary

<table>
<thead>
  <tr>
    <th></th>
    <th>20 years</th>
    <th>30 years</th>
    <th>40 years</th>
  </tr>
</thead>
<tbody>
  <tr>
    <td style="font-weight: bold" colspan="4">40/60 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>44.78</td>
    <td>55.3</td>
    <td>65.82</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>21.9</td>
    <td>27.07</td>
    <td>31.06</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>14.36</td>
    <td>17.38</td>
    <td>19.38</td>
  </tr>
  <tr>
    <td style="font-weight: bold" colspan="4">60/40 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>43.31</td>
    <td>50.28</td>
    <td>54.49</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>19.43</td>
    <td>23.27</td>
    <td>26.08</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>10.6</td>
    <td>12.27</td>
    <td>12.91</td>
  </tr>
  <tr>
    <td style="font-weight: bold" colspan="4">80/20 Asset Allocation</td>
  </tr>
  <tr>
    <td>20 years</td>
    <td>42.73</td>
    <td>48.24</td>
    <td>50.31</td>
  </tr>
  <tr>
    <td>30 years</td>
    <td>17.99</td>
    <td>21.2</td>
    <td>23.16</td>
  </tr>
  <tr>
    <td>40 years</td>
    <td>8.76</td>
    <td>10.35</td>
    <td>11.28</td>
  </tr>
</tbody>
</table>

The tables show you how you'll need to save per year and for how long to have a % of your final salary for a given number of retirement years. Let's look at two extremes to get an idea of what the table is saying.

First, if you only work and save for 20 years, then want to live in retirement for 40 years on 70% of your final salary, and you're only willing to use a portfolio that is 40% stocks, then you need to save 66% of your income each year. On the other hand, if you're willing to work for 40 years, have a retirement of 20 years, live off 50% of your final salary, and use an 80/20 portfolio, then you only need to save 6.3% of your salary.

So your savings rate needs to be between 6% and 66%. That's quite a range. Let's be a little more specific. With some reasonable assumptions of working for 30 years, having 30 years of retirement, and living off 50% of your final salary (remember you don't have to pay as much in taxes or save for retirement and you'll likely get something from social security) and using a standard 60/40 portfolio the table suggest you need a savings rate of 17% of your gross (before tax) income. So if you take nothing else from this article, aim to save a minimum of 17% (let's round that to 20%) of your salary per year. You can do it.

<div class="conclusions">

- A savings rate of 10% probably isn't enough, 20% and you're doing well, 30% and you can probably retire early. If you want to retire really early (before 50), you're going to have to bump that up even further. Even with only living off 50% of your salary and investing aggressively, you'll still need to save over 1/3 of your income during your working years.
- As for me, I aim for 50%, so 50 cents of every dollar I earn, I save. I **save till it hurts**. Why not come and join me in the 50 Cent Club?

</div>

_Think this is too much? Unrealistic? What percentage of your income are you saving?_

The 50 cent club

Just like full fat milk, a rich retirement needs to hit the 4% sweet spot.



Plan on being able to withdraw a maximum of 4% (full fat) from your portfolio each year if you want it to have a good change of lasting through your retirement. In other words, when you retire you should aim for a portfolio 25 times bigger than the amount you plan to spend from it each year.

## Where does this rule come from?

From a highly cited research paper from 1998 called [The Trinity Study](https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf) that divided financial data into rolling 30 year periods from 1926-1995 and later updated to 1929-2009, and tested how likely a portfolio was to survive for the whole 30 years at various asset allocations and various withdrawal rates.

The prevailing theory at the time was that whatever the market return was, you could safely spend that much of your porfolio and it would last; if the market returned 10%, you could withdraw 10% and so forth. The study showed that if you actually spent more than 5% of your portfolio a year (adjusted for inflation), it was very unlikely your portfolio would last 30 years. Since every financial blogger on earth will eventually mention this study, let's look at it as well.

Most people focus on Table 2 from the paper because it summarizes the set of simulations to determine how likely it was for the portfolio of stocks and bonds to last a given number of years given a certain withdrawl rate. I have recreated so it is easy for you to copy instead of looking at a low resolution image buried in an archived paper.

Highlighted in red are the 3 and 4% withdrawl rates. As you can see, once you go above 4% for almost every combination of stocks and bonds and withdrawl periods, the chance of the portfolio surviving drops precipitously.

<table>
<thead>
<tr>
    <th>Payout Period</th>
    <th>3%</th>
    <th>4%</th>
    <th>5%</th>
    <th>6%</th>
    <th>7%</th>
    <th>8%</th>
    <th>9%</th>
    <th>10%</th>
</thead>
<tbody>
<tr>
    <td class="font-semibold" colspan="9">100% Stocks</td>
</tr>
<tr>
    <td>15 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>100%</td>
    <td>94%</td>
    <td>86%</td>
    <td>76%</td>
    <td>71%</td>
    <td>64%</td>
</tr>
<tr>
    <td>20 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>92%</td>
    <td>80%</td>
    <td>72%</td>
    <td>65%</td>
    <td>52%</td>
    <td>45%</td>
</tr>
<tr>
    <td>25 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>88%</td>
    <td>75%</td>
    <td>63%</td>
    <td>50%</td>
    <td>42%</td>
    <td>33%</td>
</tr>
<tr>
    <td>30 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">98%</td>
    <td>80%</td>
    <td>62%</td>
    <td>55%</td>
    <td>44%</td>
    <td>33%</td>
    <td>27%</td>
</tr>

<tr>
    <td class="font-semibold" colspan="9">75% Stocks / 25% Bonds</td>
</tr>
<tr>
    <td>15 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>100%</td>
    <td>97%</td>
    <td>87%</td>
    <td>77%</td>
    <td>70%</td>
    <td>56%</td>
</tr>
<tr>
    <td>20 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>95%</td>
    <td>80%</td>
    <td>72%</td>
    <td>60%</td>
    <td>49%</td>
    <td>31%</td>
</tr>
<tr>
    <td>25 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>87%</td>
    <td>70%</td>
    <td>58%</td>
    <td>42%</td>
    <td>32%</td>
    <td>20%</td>
</tr>
<tr>
    <td>30 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>82%</td>
    <td>60%</td>
    <td>45%</td>
    <td>35%</td>
    <td>13%</td>
    <td>5%</td>
</tr>

<tr>
    <td class="font-semibold" colspan="9">50% Stocks / 50% Bonds</td>
</tr>
<tr>
    <td>15 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>100%</td>
    <td>99%</td>
    <td>84%</td>
    <td>71%</td>
    <td>61%</td>
    <td>44%</td>
</tr>
<tr>
    <td>20 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>94%</td>
    <td>80%</td>
    <td>63%</td>
    <td>43%</td>
    <td>31%</td>
    <td>23%</td>
</tr>
<tr>
    <td>25 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>83%</td>
    <td>60%</td>
    <td>42%</td>
    <td>23%</td>
    <td>13%</td>
    <td>8%</td>
</tr>
<tr>
    <td>30 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">96%</td>
    <td>67%</td>
    <td>51%</td>
    <td>22%</td>
    <td>9%</td>
    <td>0%</td>
    <td>0%</td>
</tr>

<tr>
    <td class="font-semibold" colspan="9">25% Stocks / 75% Bonds</td>
</tr>
<tr>
    <td>15 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>100%</td>
    <td>99%</td>
    <td>77%</td>
    <td>59%</td>
    <td>43%</td>
    <td>34%</td>
</tr>
<tr>
    <td>20 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>82%</td>
    <td>52%</td>
    <td>26%</td>
    <td>14%</td>
    <td>9%</td>
    <td>3%</td>
</tr>
<tr>
    <td>25 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">95%</td>
    <td>58%</td>
    <td>32%</td>
    <td>25%</td>
    <td>15%</td>
    <td>8%</td>
    <td>7%</td>
</tr>
<tr>
    <td>30 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">80%</td>
    <td>31%</td>
    <td>22%</td>
    <td>7%</td>
    <td>0%</td>
    <td>0%</td>
    <td>0%</td>
</tr>

<tr>
    <td class="font-semibold" colspan="9">100% Bonds</td>
</tr>
<tr>
    <td>15 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">100%</td>
    <td>100%</td>
    <td>81%</td>
    <td>54%</td>
    <td>37%</td>
    <td>34%</td>
    <td>27%</td>
</tr>
<tr>
    <td>20 years</td>
    <td class="text-red-500">100%</td>
    <td>97%</td>
    <td>65%</td>
    <td>37%</td>
    <td>29%</td>
    <td>28%</td>
    <td>17%</td>
    <td>8%</td>
</tr>
<tr>
    <td>25 years</td>
    <td class="text-red-500">100%</td>
    <td class="text-red-500">62%</td>
    <td>33%</td>
    <td>23%</td>
    <td>18%</td>
    <td>8%</td>
    <td>8%</td>
    <td>2%</td>
</tr>
<tr>
    <td>30 years</td>
    <td class="text-red-500">84%</td>
    <td class="text-red-500">35%</td>
    <td>22%</td>
    <td>11%</td>
    <td>2%</td>
    <td>0%</td>
    <td>0%</td>
    <td>0%</td>
</tr>
</tbody>
</table>

<p class="text-sm" style="font-style: italic">Editor's note: One of my pet peeves are journals and websites that include tabular and text data as images, thus rendering the data almost useless for anyone who wants to download it and do some analysis. Journal papers are like data graveyards. This is why I copied out the table by hand and made a HTML version so anyone can use it.</p>

<div class="conclusions">

- Your portfolio is much more likely to last if you keep stocks during retirement.
- A withdrawal rate larger than 4% means a significant risk of running out of money.
- A withdrawl rate of 3% or less will work with just about any asset allocation.
- Even if you think 4% is too conservative, you can be fairly confident a high withdrawl rate, such as 8%, will never work.
- Plan on having a nest egg 25 times what you'll need each year when you retire.

</div>

_What withdrawl rate are you planning for?_

Just like full fat milk, a rich retirement needs to hit the 4% sweet spot

Section

Retirement

The 50 cent club

A full fat retirement