Two blue, wooden Adirondack chairs on a beach

Your retirement savings goal to strive for should mean you never dip into principal

Americans are rotten at saving for retirement.

It’s at least in part because of the seismic market change from 20th century-era defined benefit offerings (the pension you might have gotten working at a company in 1972) to today’s climate of defined contribution plans (the 401k you have at work or the IRA you might have with a company like Vanguard). More recently the Great Recession complicated the story more.

Whatever the case, we know one in three Americans has less than $5,000 in retirement savings. Two-thirds of Americans say they’ll outlive what they have saved, including the half of households that have no retirement-specific savings at all. Rules of thumb to the contrary abound: you ought to have the equivalent of a year’s salary by the time you turn 30, and you might want at least 10 times your top earning salary saved by the time you do retire.

When things are stressful, I tend to try to find some way to make them more approachable.

It’s in part why for the last several years, two childhood friends and I have gotten together once a year to discuss what we’ve tried, learned and accomplished on the subject the previous year. With a bit of nerdy glee, we call it Personal Finance Day, and we just held the fourth annual earlier this month.

Depicted below, the three of us are each holding a bottle of whiskey from our respective states, which we tasted on this evening of sharing.

As always we compared and contrasted experiences we had that year.

As this year’s host, I discussed at length the biggest idea I had wrapped my head around recently: the central difference between middle-class retirement savings (how I was raised) and that of wealthier Americans.

It’s something so obvious it’s easy to ignore but still it’s been something transformative for me to better understand over the last several years. This was the heart of what I brought to our annual discussion among friends.

In short, when confronted with retirement, most middle and low-income earners think of financing their lives as blind guesswork for a general spend-down strategy (if I save a little bit of money, qualify for social security and own my house, I’ll just plan to be dead before I run out of money). In contrast, managed properly, wealthy households can maintain their lifestyle in perpetuity.

The most sustainable and least risky retirement strategy is one in which you aim to only spend a withdrawal rate that is less than the returns your principal and portfolio can earn.

(For an over-simplified example, if you reached the very difficult goal of having $1 million — though people like pointing out that with compound interest, you can do it on a $50,000 salary — and were able to manage the money effectively for an eight percent annual return, and assumed three percent inflation, you could spend five percent, or $50,000, annually.)

No doubt that still takes luck and privilege — also planning.

I am trying but have had my own setbacks. For context, in 2018, I was in the 18th percentile of income earners (the 26th percentile of white male, college-educated income earners).

There’s this lovely short story from George Saunders called Chicago Christmas 1984 that I read at least once every holiday season. Among its many rich themes is the divide of class and money. Two related lines have always rung with me: “Finally, in terms of money, I got it: money forestalled disgrace…A light went on in my head and has stayed on ever since: It was all about capital.”

I think Saunders is saying something like what I’ve been thinking about too: with a big enough pile of money, you can spend returns, not principal. As a friend of mine put it to me once: “you only need to get rich once.”

That might sound obvious; rich people don’t have to worry about retirement in the same way as the rest of us. But I think understanding why they don’t need to worry in the same way is a nuance that can help us prepare for retirement differently.

In 2015, the media startup I own began publishing a nonprofit and social impact focused site called, which included a healthy dose of reporting on foundations. It was then that I developed a far more rigorous understanding of the Five Percent Rule, the federally-mandated requirement that entities within certain tax codes must give at least that percent of its principal away annual (those foundation grants you most often hear about).

The critical logic of that number comes from historical averages: earning eight percent (through investment in stocks, bonds and the like) and facing three percent drag of inflation. Others smartly say in today’s climate we should be assuming an even lower withdrawal rate than five percent but the point is clear. Focus on using returns, not principal, and in theory, if managed well, your retirement savings can last in perpetuity.

I’m passionate about the social justice element of personal finance.

I think it’s rotten that it’s perceived as just the territory of the rich (and largely white men). That’s keeps us from confronting income and wealth inequality head on. I think that’s a mistake: reinforcing stereotype, not unlike why software programming developed a reputation for being overly white and male. It’s why my friends and I do a goofy, annual summit. We’re a little bit teasing ourselves, but we know what we’re talking about is complicated and challenging but very important.

That is why there is so much encouragement to start saving for retirement as soon as possible. I’ve talked to people who have felt ambivalent about the subject because of all the uncertainties — how long they’ll live, what their health will be and what other family members may rely on them.

Those all remain worrisome but I think focusing on storing away a principal, rather than processing all the guess work relieves some of the stress.

The old standard is the four percent rule: if you withdrawal just that on the golden rule of banking that $1 million over a career (which you can do by saving just $400 a month if you start at 25), it can last a while, with even less aggressive (eight percent) returns.

These numbers are intimidating but also empowering. I want more of us to find the power of saving anything from the earliest age, consistently. It’s difficult but it’s the most effective way I understand of confronting longterm savings disparities. (White families have, on average, 10 times the savings of Black families.)

Here’s to more open and transparent discussion.

(Photo via Unsplash ofBlue Chairs by Aaron Burden)

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