If I had any advice for my younger self, it would be to keep living like a broke graduate student for 10 more years and invest 70%-75% of your after-tax income in a 90% stock and 10% bond portfolio. Whatever you do after that is up to you.
If you have an investment portfolio and only take 4% from it to spend each year, then you should be able to last 30 years without running out of money based on simulations of historical returns [1, 2, 3, 4, 5]. Even if you are really conservative, it doesn’t make much sense to go below 3.5% [6].
Vanguard target date funds are about 90% stocks and 10% bonds initially. If we look at predicted future market returns, we can take a ballpark estimate of 5% real returns even though historical S&P 500 real returns were 7% [7, 8, 9].
To get full social security and medicare benefits, you or your spouse needs to have earned 40 credits [10]. This is equivalent to having worked for 10 years straight. You probably want to make sure you have a safety net even though you might stop working before retirement age.
Let’s take a 3.5% safe withdrawal rate and a 5% real returns to see how many years you would need to work at each savings rate to retire. Based on Table 1, you would need to saving close to 70% of your after tax earnings in order to stop working in 10 years to maintain the quality of life you had while working those 10 years. You need to save at least 15% if you want to retire without having to rely on social security. A good rule of thumb would to be invest two dollars for every dollar you spend. Shaq’s advice would be to save at least 50% and save 75% if you want to become wealthy [11, 12].
| savings rate | years |
| 0.15 | 45.2 |
| 0.20 | 39.0 |
| 0.25 | 34.1 |
| 0.30 | 30.1 |
| 0.35 | 26.5 |
| 0.40 | 23.5 |
| 0.45 | 20.7 |
| 0.50 | 18.2 |
| 0.55 | 15.9 |
| 0.60 | 13.7 |
| 0.65 | 11.7 |
| 0.70 | 9.8 |
| 0.75 | 8.0 |
| 0.80 | 6.3 |
| 0.85 | 4.6 |
| 0.90 | 3.0 |
| 0.95 | 1.5 |
[1] William P. Bengen. Determining withdrawal rates using historical data. Journal of Financial Planning, page 14–24, October 1994.
[2] Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz. Retirement savings: Choosing a withdrawal rate that is sustainable. AAII Journal, 10(3):16–21, February 1998.
[3] Vanguard. Fueling the fire movement: Updating the 4% rule for early retirees. https://investor.vanguard.com/investor-resources-education/article/fueling-the-fire-movement-updating-the-4-rule-for-early-retirees, July 2021. Accessed: 2022-06-10.
[4] EarlyRetirementNow. The safe withdrawal rate series – a guide for first-time readers. https://earlyretirementnow.com/safe-withdrawal-rate-series/, November 2021. Accessed: 2022-06-11.
[5] EarlyRetirementNow. Safe withdrawal rates: A guide for early retirees. SSRN, February 2017.
[6] EarlyRetirementNow. The ultimate guide to safe withdrawal rates – part 1: Introduction. https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/, December 2016. Accessed: 2022-12-05.
[7] Vanguard. Market perspectives: May 2022. https://advisors.vanguard.com/insights/article/marketperspectivesmay2022, May 2022. Accessed: 2022-06-11.
[8] Vanguard. The power behind target retirement funds. https://retirementplans.vanguard.com/VGApp/pe/pubeducation/bank/targetdate/PowerBehindTRF.jsf?SelectedSegment=BuildingWealth&Article=The+power+behind+Target+Retirement+Funds, 2022. Accessed: 2022-06-11.
[9] J.B. Maverick. What is the average annual return for the s&p 500? https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp, January 2022. Accessed: 2022-06-11.
[10] Social Security Administration. How you become eligible for benefits. https://www.ssa.gov/myaccount/assets/materials/eligibility-for-benefits.pdf, June 2022. Accessed: 2022-12-05.
[11] CNBC Make It. Shaquille o’neal’s money advice to young people. https://www.youtube.com/watch?v=D4RppC6PHZU, May 2018. Accessed: 2022-06-11.
[12] Wall Street Journal. Shaquille o’neal discusses investing, franchising, and donuts. https://www.youtube.com/watch?v=w9eiTmNLvRk, October 2019. Accessed: 2022-06-11.