Jim writes in to ask:

“I’m 58 now and planning to retire in the next couple years. After much reading, I’ve decided that I’m comfortable using a 4% starting withdrawal rate, which means I need to have saved 25 times my annual expenses.

The thing is, I expect my expenses to change over time. Approximately 3 years into retirement, I will finish paying off my mortgage. And once I reach age 70 I’ll begin collecting Social Security, which will further reduce the amount I’ll have to withdraw from my portfolio each year.

How do I account for those changes when calculating how much I need saved before I can retire?”

Situations like Jim’s are pretty common, due to the fact that many investors retire before they begin taking Social Security. So I thought it would make sense to work through it to provide a framework for other readers who have similar plans.

### How About Some Actual Numbers?

First, let’s make up some numbers to use. Ignoring inflation for the moment, let’s assume that Jim plans to withdraw the following amounts from his portfolio:

- $55,000 per year for the first 3 years,
- $40,000 per year for the next 7 years (assuming his mortgage payments totaled $15,000 per year), and
- $30,000 per year for the remainder of his life (assuming Social Security provides $10,000 of income per year).

So how much money does Jim need saved before he can retire?

### Mental Accounting Tricks

I often find that a little mental accounting makes things easier to understand. Try thinking of Jim’s spending needs as distinct segments:

- $30,000 per year, plus
- $10,000 per year for 10 years (from age 60-70, before claiming Social Security), plus
- $15,000 per year for 3 years (for the final 3 years of his mortgage).

Given that Jim wants to use a 4% starting withdrawal rate, funding the $30,000-per-year need would require $750,000 of savings (because $30,000 ÷ 0.04 = $750,000).

From there, we can just add the remaining numbers:

- $100,000 to fund 10 years of $10,000 per year, and
- $45,000 to fund 3 years of $15,000 per year.

So, in total, Jim could retire once his savings reach $895,000.

### Accounting for Interest

In actuality, Jim can retire with *slightly* less than $895,000 due to the fact that he can earn interest on the money that will go toward funding the final 3 years of mortgage payments.

And if Jim expects his savings to outpace inflation, he can reduce his savings goal a little further to account for the above-inflation interest earned on the money that will fund the $10,000 of annual spending prior to claiming Social Security. (I’m assuming that, in contrast to the mortgage payments which are a fixed nominal amount, this $10,000 per year will increase with inflation–hence the need to earn interest above inflation in order to reduce the savings target.)

### Multiple (Mental) Portfolios

As to the question of how to actually invest the money, I think it can be helpful to continue with our mental accounting. Think of it as three separate portfolios:

- A $750,000 portfolio, invested in keeping with whatever asset allocation you think is appropriate for a typical retirement portfolio.
- A $100,000 portfolio, invested very conservatively (nominal Treasury bonds or TIPS, for example).
- A $45,000 portfolio, invested in something with zero risk (CDs, savings, etc.).