Have you ever been envious of someone because they have a health savings account (HSA)? If not, it may be because you haven’t heard how an HSA can supercharge your retirement planning.

Here’s how it works, and why more people are investing in their HSAs with an eye toward the future.

What is an HSA?

An HSA is a tax-advantaged savings account, available only to those with high-deductible health plans. The account is designed to cover qualified medical expenses; these include prescriptions, copays, mental healthcare, dental and vision services, and some over-the-counter purchases. It can even be used for certain insurance premiums, like those for COBRA or Medicare.

If your high-deductible health plan covers only you, you can contribute $4,300 annually to an HSA. If it covers your family, your contribution limit is $8,550. Plus, if you’re 55 or older, you can add a catch-up contribution of $1,000.

A pretax way of saving

Like most employer-sponsored retirement plans, contributions to an HSA are pretax, meaning you don’t pay taxes on the income. Interest and investment earnings grow tax-free, and withdrawals to cover qualified medical expenses are also tax-free.

Here are a few of the finer details regarding HSAs and taxes:

• Qualified medical expenses: Withdrawals for qualified medical expenses are always tax-free, no matter how old you are.
• Under age 65: If you’re under age 65, withdrawals from your HSA for nonqualified medical expenses are taxed as ordinary income. You may also be subject to a 20% penalty on the amount withdrawn.
• 65 and older: If you’re 65 or older and make a withdrawal for something other than a qualified medical expense, the 20% penalty no longer applies, although you will pay ordinary income tax on the withdrawal.

Again, withdrawals for qualified medical expenses at any age are tax-free.

Use it now or use it later

HSAs are nothing if not flexible. Owning an HSA means determining how you want to manage the funds. You can use it solely to cover current medical expenses, or you can save it for later.

Unlike funds in a flexible spending account (FSA), the money left in your HSA can be rolled over from year to year. Imagine you begin contributing to an HSA this year and spend the next 20 years contributing $5,000 annually. At the end of those 20 years, there will be $100,000 in the account.

However, there’s a way to make the account worth far more than $100,000. Like other HSA owners, you could invest the money. Most HSA providers allow you to invest your HSA funds just as you would a 401(k) or IRA, giving your account the potential to grow dramatically.

Let it grow

Let’s say your high-deductible healthcare plan covers your family, and you contribute $8,550 to an HSA each year. You spend the first $3,550 on medical expenses and pay for any additional expenses out of pocket.

You invest the remaining $5,000, earning an average annual return of 7%. Instead of being worth $100,000 after 20 years, your account could be worth almost $205,000, more than twice as much.

Cover retirement-related expenses

Although you can’t contribute any more money to your HSA after you’ve enrolled in Medicare, you can spend your retirement years using funds from the account to cover essential medical expenses. Here are some examples:

• Medicare Part A premiums (though most people get Part A for free)
• Medicare Part B premiums
• Medicare Advantage premiums
• Premiums for Medicare Part D prescription coverage
• Long-term care insurance premiums
• Deductibles and copayments for medical products and services

Alternatively, you have the option of spending HSA money after reaching age 65 on nonmedical expenses with no penalty. You’ll pay taxes at your ordinary tax rate for any such withdrawals (just as with most retirement plans), but you get some extra flexibility to decide where the money will be most helpful.

It’s tough to find much about HSAs to dislike. In fact, they may be attractive enough to tempt you to enroll in a high-deductible health plan.

After doing my first free Empower financial professional review back in 2014, I decided to do another investment portfolio review with them. Given the portfolio review is free for anyone with over $100,000 in investable assets, and my financial situation has changed so dramatically since then, I figured, why not spend a little time uncovering potential optimization opportunities?

I also wanted to experience the process firsthand again, in case any of you want to take advantage of their free financial review as well. Overall, I found it to be a worthwhile and educational experience. You can sign up here if interested once you’ve opened up a free account and linked your assets.

For background, I’ve been using Empower’s free wealth management tools since the end of 2012. I even consulted with them part-time in their San Francisco office in 2013 and 2014. Finally, Financial Samurai is a long-time affiliate partner.

Empower’s Free Professional Review of My Retirement Portfolio

Once you sign up for a free Empower account and link at least $100,000 in investable assets, you can schedule a free financial review. The process includes two calls – a short discovery call, followed by a recommendations call.

The First Call: A 17-Minute Discovery Chat

After scheduling my appointment, an Empower professional called to verify my identity and gain a basic understanding of my financial situation, goals, and desires. Note: you must have linked at least $100,000 in investable assets to qualify for the call.

The conversation lasted about 17 minutes. I told him my age (48), my plan to start withdrawing from my rollover IRA after 60, and my goal of maintaining a comfortable retirement with about $60,000 a year in gross income/withdrawals, supplemented by Social Security.

I didn’t tell the Empower professional that I run Financial Samurai or that I’m a personal finance junkie. This way, things were more realistic for retirement to help more people.

For the purpose of the review, I only shared my rollover IRA with about $1.5 million. This was my 401(k) that I maxed out from 1999 to 2012 before leaving my job. I converted it to have more flexibility in my investments and reduce fees. Since the conversion, I haven’t contributed a single dollar.

I was curious to hear whether their recommendations were similar to how I invest my overall public investment portfolio.

The Second Call: A 40-Minute Recommendation Session

A week later, we had the follow-up phone call. I logged into my Empower dashboard where I linked my IRA so he could walk me through his recommendations via slides. No video or in-person meeting was needed, which was convenient.

Based on my $1.5 million in assets, he introduced Empower’s Private Client service, for those who have a minimum of $1 million in investable assets. As a Private Client, you get two dedicated advisors, priority access to their Investment Committee, retirement and wealth planning specialists, and even private equity investment options.

My Rollover IRA’s Current Asset Allocation

The next slide broke down my IRA allocation. I learned that 99.6% of my holdings are in U.S. assets, complete home-country bias. About 97.5% is in U.S. stocks, with the rest in cash, alternatives, international stocks, and bonds. I thought I was 99.9% in stocks.

Sector-wise:

• 34.4% in Communication Services (Google, Meta, Netflix)
• 35.2% in Tech (mostly Apple)
• 12.2% in Consumer Discretionary
• 5.5% in Financials
• 3.9% in Health Care
• 3.7% in Industrials
• 2.1% in Consumer Staples

In my mind, I just lump Google, Meta, and Netflix into “Tech,” but technically they’re Communication Services. So, my IRA is roughly 70% tech-heavy, a concentration I’m comfortable with given my outlook.

Personal Strategy Allocation Recommended By Empower

Empower recommended a portfolio of:

• 75.6% Stocks
• 10.1% Alternatives
• 13.6% Bonds

Within stocks:

• 69.9% U.S.
• 21.8% Developed International
• 8.3% Emerging Markets

Although I worked in international equities for 13 years, I’ve avoided them for years due to corporate governance concerns and political risks. Except for Taiwan Semiconductor (Ticker: TSM), I’ve stayed U.S.-focused. Fortunately, that worked out well. U.S. stocks have outperformed for over a decade (though 2025 has been a rare year of international outperformance).

Within Alternatives, about 64% was in real estate (including foreign real estate), which caught my eye since ~40% of my overall net worth is already in real estate. I didn’t ask which foreign markets they meant. Worth asking if you take the review.

A 20.9% gold allocation would’ve been nice, given gold’s record 2025 performance.

At only 13.6%, the bond allocation seemed light for someone retiring in 12 years. However, if you view real estate as bonds-plus type of investment, the overall portfolio roughly resembles a 75/25 stocks/bonds mix, which feels right for someone in my position. That’s about my allocation in my taxable accounts too, so Empower’s recommendation made sense.

Smart Weighting: Empower’s Core Strategy

Empower’s Smart Weighting strategy has been around since my consulting days there. It’s their proprietary method of constructing portfolios by evenly weighting across style, size, and sector, instead of following a market-cap index dominated by the biggest names.

The idea: diversify away from bubbles and reduce concentration risk. You end up with a more balanced portfolio that doesn’t lean too heavily on a single sector like tech.

Smart Weighting is a rational, disciplined approach. However, I’m based in San Francisco and am a strong believer in tech, so I’m fine staying overweight. Still, if this were my only portfolio at age 48, having 70% in one sector would be considered excessive.

For instance, my IRA fell from $1,115,000 to $827,000 in 2022, a 26% drop. That’s nearly five years of living expenses gone in one year, if my $60,000 annual living expenses are true. If the exuberance of 1999 is truly back, my tech-heavy portfolio could easily lose 40% of its value during the next bear market.

Therefore, getting a professional review of your investments might be more important than ever.

Smart Weighting May Outperform The S&P 500 During Difficult Times

This below chart tries to emphasize how Smart Weighting outperformed the S&P 500 during two difficult time spans (12/31/1999 – 12/31/04 and 12/31/07 to 12/31/12). However, in a raging bull market, Smart Weighting would underperform given Empower would sell your winners in order to maintain their target weightings.

The closer you are to traditional retirement and the more cautious you are about the stock market, the more Smart Weighting makes sense. Personally, I think the ideal return scenario in retirement is slow and steady returns. I do not like to see more than a 10% downward swing in my net worth in a year, which is why my net worth is so diversified.

On your call with the Empower professional, ask:

• What is the drift threshold (%) per sector / style / size that triggers a rebalancing trade in Smart Weighting?
• How do you balance tax consequences vs. drift correction (especially in taxable accounts)?
• Is there a grace band or “buffer zone” to prevent constant churning?

Holistic Financial Planning

Of course, for most people, a retirement portfolio like an IRA is just one piece of the financial puzzle. Nor is optimizing it the only goal. The slide below shows how Empower can help with broader savings and withdrawal strategies, an area even the most disciplined FIRE enthusiasts often struggle with. Having professional guidance here can make a meaningful difference.

Determining how much to save for your children’s education is another big challenge, especially given the relentless rise in college costs and the uncertain impact of AI on future careers. I’ve explored this in detail in my post on 529 plan savings amounts by age and whether or not to superfund the 529.

For those working in tech with a large portion of compensation tied to stock options, consulting with an advisor on tax-efficient selling strategies can be invaluable. Proper timing and diversification can help reduce tax drag and lower overall portfolio risk.

Estate Planning Is Important But Often Neglected

Finally, estate and legacy planning may be the most overlooked yet essential area of financial management. Most of us don’t like thinking too far ahead, let alone contemplating our own mortality. But having an estate planning specialist walk you through different scenarios can help you minimize estate taxes and ensure your wealth is distributed as intended.

If you’re fortunate enough to die with an estate worth more than the federal estate tax threshold (set to return to around $15 million per person in 2026), you’ll want to plan carefully to reduce the 40% estate tax on every dollar above that limit. One way is through an irrevocable life insurance trust.

Being able to talk to an Empower estate planning professional as part of its service is a big value add.

A Retirement Forecast

Finally, we wrapped up the call by reviewing what my retirement could look like starting at age 60, just 12 years from now, if I followed Empower’s recommendations. You can model similar scenarios yourself using their free wealth management tools by adjusting your own input assumptions.

In general, you want to target at least a 90% probability that your portfolio will support your retirement goals. Ideally, you aim for 99% to build in an extra cushion for unexpected events or lower-than-expected returns.

Based on my assumptions – spending $60,000 a year, receiving $37,416 annually in Social Security, and having ~$1,500,000 in my IRA invested per Empower’s recommendations – I’m comfortably on track.

In fact, if I live to age 92, the projection shows I’d pass away with nearly $4 million left over. This result, ending up wealthier in death than at retirement, is actually quite common when following the 4% safe withdrawal rule.

That’s why, once you officially retire, it’s well worth conducting a detailed financial analysis of your situation and running multiple withdrawal rate scenarios. Doing so can help ensure you strike the right balance between living well today and not running out of money tomorrow.

A More Luxurious Retirement Assumption

Given I don’t want to die with a net worth 2.5X higher than when I retired, I decided to bump up my annual spending from $60,000 to $96,000 and YOLO a little. Even at that level, $96,000 still represents just a 4% safe withdrawal rate if I retire at 60 with a $2.35 million portfolio.

In other words, I’d still be projected to die with around $2.4 million left over. This is plenty of cushion to sleep well at night while enjoying life more along the way. That said, my probability of this retirement scenario coming to fruition is only 81%. So maybe I “only” die with $1-$2 million instead of $2.4 million. That’s fine by me.

The Process Of Hiring Empower

Overall, I thought the 40-minute free financial consultation was worthwhile for understanding where my IRA portfolio stood. It feels great knowing that if I can make it to age 60, I should have no problem spending at least $96,000 a year from my IRA portfolio alone. The projection assumes I rebalance my current highly aggressive portfolio, but since I’ve been semi-retired since 2012, I’m not too worried.

Empower uses BNY Pershing as its custodian, so if you decide to have them manage your money, you’ll simply fill out a transfer form and move your existing assets to Pershing. Having transferred over $1 million portfolios before to get a better mortgage rate, I know the process is straightforward. You just fill out a permission form online and it takes at most two weeks.

Capital Gains Taxes Due To Rebalancing

My main concern was the tax hit from rebalancing. Paying capital gains on roughly $1.2 million of a $1.5 million portfolio would sting. Thankfully, the Empower advisor reminded me that because this was my IRA, there are no tax consequences from buying or selling positions within it.

Therefore, if you are considering hiring Empower, I recommend starting with your tax-advantaged accounts. Alternatively, you could have them manage a smaller taxable brokerage account, ideally close to the $100,000 minimum. This approach helps minimize your tax liabilities.

Empower Management Fees

Empower’s fees are competitive for a full-service wealth management firm.

• 0.89% AUM for investment or wealth management clients with less than $1 million
• Private Clients:
  • 0.79% on the first $3 million
  • 0.69% on the next $2 million
  • 0.59% on the next $5 million
  • 0.49% on assets over $10 million

While nobody enjoys paying management fees, these rates are lower than big names like Goldman Sachs or JP Morgan, which typically charge over 1%, on top of the fees from the funds they invest your capital in.

I know this firsthand because I help manage a close relative’s account for free. She moved her seven-figure portfolio from Goldman to an online brokerage account for me to manage. She was paying over 1% but was unhappy with their service and also wanted to part ways with her ex-husband’s money management firm.

Who Benefits Most From a Financial Advisor

If you don’t like managing your portfolio, aren’t confident in investing, don’t have the time, and want holistic financial guidance, Empower is worth considering. You can try them for a year, learn from their approach, and then decide whether to continue paying or return to managing your money yourself.

Many investors have missed out on huge gains this cycle because they kept too much in cash, paralyzed by indecision. I’ve met many of them and were always shocked to see how much cash they had relative to their net worth. Hiring a disciplined advisor could’ve helped them steadily invest and build wealth.

On the flip side, some investors are too aggressive, trading too often, selling near the bottom, and leveraging near the top. These folks could also benefit from Empower’s structured, unemotional approach to portfolio management.

For those of us who are personal finance fanatics, we can manage our own money just fine. But it’s still smart to get a professional check-up every year or two to ensure we’re on track. Markets change, risk tolerances evolve, and it’s easy to lose perspective during bull and bear cycles alike.

A free Empower financial consultation is a low-effort way to get that second opinion, and maybe uncover a few ways to optimize your wealth along the way.

Thankful For My Free Financial Analysis

Even after decades of managing my own money, I found value in getting a fresh, professional perspective. Empower’s free financial review gave me greater clarity about my retirement plan and confidence that my current strategy still aligns with my long-term goals. Sometimes, an outside set of eyes helps you see what you’ve been overlooking.

It’s funny to think back: when I started Financial Samurai at 32, traditional retirement at 60 or 65 felt like a lifetime away. Now at 48, it suddenly feels right around the corner.

My energy isn’t what it used to be, but my responsibilities have only grown with two young kids and a stay-at-home wife depending on me. The pressure to get our finances right has never been greater. That’s why I’m grateful I went through another free financial review with Empower. It gave me peace of mind and I hope it does the same for you.

Readers, if you’ve had your own free financial review, what are some things you discovered about your portfolio and your overall finances? When was the last time you had a review of your finances and what did you change as a result?

The statement is provided to you by Financial Samurai (“Promoter”) who has entered into a written referral agreement with Empower Advisory Group, LLC (“EAG”). Click here to learn more.

Social Security was never meant to make up the entirety of anyone’s retirement income. The fact is, however, some people are collecting surprisingly big checks. This year’s maximum-possible monthly payment is $5,108, or $61,296 per year. That’s almost as much as the median salary U.S. workers are currently taking home, according to data from the Bureau of Labor Statistics.

How did they do it, and what will it take for you to do it as well? Here’s how to get the very most you can out of the government-managed entitlement program.

1. A minimum of 35 years’ worth of work-based taxable income

There are three components to your future Social Security benefits. One of them the sheer number of years you earned taxable income as an employee. You’ll need to work for at least 35 years to maximize your payments.

See, when calculating your monthly benefit, the Social Security Administration looks at your inflation-adjusted income in your 35 highest-earning years. You don’t have to work a full 35 years to claim benefits, to be clear. It’s just that for any year less than 35 that you don’t earn any reported income, the program fills in those blanks with a value of $0, dragging down your annual average.

Conversely, working more than 35 years won’t necessarily help, since you only get credit for your best 35. There may still be an upside to working more than 35 years though. If you didn’t earn a great deal of money in some of them but are making good money now, you’ll be replacing some of those lower-earning years with higher-earning ones, raising your overall average of your top 35.

2. Strong earnings for at least 35 of those years

It’s not just a matter of making good money for a minimum of 35 years though. You must earn well above average earnings for that length of time, reaching or eclipsing Social Security’s taxable income threshold in each of those.

And these thresholds are pretty high. This year, for instance, the program doesn’t stop increasing your FICA tax liability until you reach earnings of $176,100. Here’s the minimum amount of taxable wages you would have needed to earn each and every year going all the way back to 1986 to max out your future benefits payments.

To be clear, although you pay into Social Security’s pool of funds via taxes on wages up to these amounts, you don’t pay additional FICA taxes above and beyond these amounts (although you do pay ever-rising income tax the more money you make, since tax rates rise the more you earn). The program stops taxing you beyond these levels because it wouldn’t offer you any additional benefit in return. Again, the absolute ceiling is $5,108 per month.

3. Waiting until you turn 70 to claim benefits

Finally, although you can initiate your Social Security retirement benefits as soon as you turn 62, doing so would dramatically reduce the size of your check by as much as 30% of your intended benefit at their full retirement age, depending on when you were born. Even claiming benefits at your official full retirement age, however, still wouldn’t get you to the maximum-possible benefit. To secure the maximum amount of $5,108, you must until you reach the age of 70 to begin your Social Security payments. That will improve the size of most people’s payments by 24% (if not more) above their payment if claiming at their full retirement age.

Just know that there’s no point in waiting any longer than this to file, since Social Security stops adding credit for delaying your benefits beyond the age of 70. In fact, there’s good reason to claim pretty soon after you reach this point. The Social Security Administration will back pay you some of what it owes you if you don’t file right away. But it will only give you a maximum of six months’ worth of back pay, no matter how long after you turn 70 you claim your retirement benefits.

Prioritize what you can control

You know there’s no way you’re going to qualify for this amount? That’s OK. Most people don’t. Fewer than 20% of recipients see monthly checks of more than $3,000, in fact.

Don’t let that discourage you though. Even modest wage-earners can put themselves in a far better financial situation with their own savings than they’d ever be able to achieve with Social Security. Most calculations of Social Security contributions’ effective rate of return only put the figure in the mid-single-digits, versus the stock market’s average annual gain of around 10%.

Besides, Social Security was never meant to be anyone’s sole source of retirement income anyway. Do what you reasonably can to max it out, but mostly stay focused on maximizing the growth of your own personal retirement nest egg.

I use an estimated average annual investment return of 6.5% (before inflation) when planning for my own retirement. I came up with this estimate based upon my individual investment portfolio, which is roughly 70/30 stocks and bonds. Your number may differ.

Why does average annual rate of return matter?

When calculating how much money you need to save for retirement, you must estimate:

• How much you think you’ll spend.
• The average annual inflation rate.
• How much money you expect to get from Social Security.
• And what average annual rate of return you can expect from your investments.

It’s not easy, especially when retirement is decades away.

If you use an estimated rate of return that’s higher than reality, you risk not saving enough and running out of money in retirement. If your estimated rate of return is too conservative, you may end up with more money than you need when you’re older. Although that’s not necessarily a bad thing, it may put undue financial pressure on you now.

Using an investment calculator, you can see how even a 1% different in average annual return can make a big difference over several decades. For example:

• Over 30 years, a $100,000 investment that earns an average 7% return will be worth $200,000 more than if it earned an average return of 6%.
• If it earned an average return of 8%, it would be worth nearly $500,000 more than if it earned an average return of 6%.

What is ‘annual average return’?

The phrase ‘average annual return’ is ambiguous.

If you invested in a stock that went up 100% the first year and then came down 50% the next (a -50% annual return); one could argue the “average” annual return was 25%. But that makes no sense because the value of your investment is exactly where you started. Your net gain is $0.

This kind of “simple average” is sometimes used to describe the performance over time for very volatile investments. But, as you can see, it’s largely useless for planning purposes.

Therefore, when we talk about annual average investment return for planning purposes, we should be talking mean the annualized return, also known as the geometric mean or compound annual growth rate (CAGR).

Compound annual growth rate (CAGR)

Compound annual growth rate (CAGR) is the hypothetical fixed interest rate that would result in compound interest turning a given present value into a given future value over a period of time.

You can calculate CAGR using the following formula, where PV = present value, FV = future value and Y = the number of years.

CAGR   =   (FV / PV)1 / Y  -  1

CAGR will take into account any dividends that are reinvested over the time period. It’s important not to underestimate the importance of reinvested dividends when looking at historical investment returns. Your expected returns will be lower whenever you withdraw dividends rather than reinvest them.

Historical stock market returns

Since it’s impossible to predict future stock market returns, the best we can do is to look at the market’s past performance.

Average annual returns are varied when you look at 10- and even 20-year periods, especially when accounting for inflation.

But when you zoom out to look at 30-year periods, returns stabilize. (Just another reason why time is the most important factor when investing.)

S&P 500 historical average annual returns

10-year periods

10-year period	Annualized return (CAGR)	Inflation-adjusted return
1974-1983	10.62%	2.27%
1984-1993	15.07%	10.95%
1994-2003	11.11%	8.53%
2004-2013	7.36%	4.88%
2014-2023	12.07%	9.03%

20-year periods

20-year period	Annualized return (CAGR)	Inflation-adjusted return
1964-1983	8.26%	2.02%
1984-2003	13.07%	9.74%
2004-2023	9.69%	6.93%

30-year periods

30-year period	Annualized return (CAGR)	Inflation-adjusted return
1933-1963	13.41%	10.31%
1963-1993	10.87%	5.40%
1993-2023	10.16%	7.46%

I don’t recommend anyone invest solely in the S&P 500. But if you did, it would be reasonable — based upon past performance — to use a 10% expected average annual return, before inflation.

In reality, you should have a more diversified portfolio. Although the S&P 500 — an index of 500 of the largest U.S. public companies — is probably the most common yardstick for the stock market as a whole, it’s not the whole story.

60/40 portfolio historical average annual returns

If we wanted a more typical example of how many people actually invest for retirement, we should look at a portfolio that’s 60% diversified stocks (large and small, U.S. and foreign) and 40% bonds.

The 60/40 portfolio is so popular because it balances the high risk and higher rewards of stock investing with lower-risk but lower-return bonds.

As of April 30, 2024, the 30-year average annual return of a 60/40 portfolio stands at 8.28%, or 5.42% adjusted for inflation (source).

Recently, the 60/40 portfolio has fallen out of favor somewhat because bonds have performed so badly in the current high-interest-rate environment. But the actual picture isn’t as awful as some critics say: Over the 10-year period ending in 2022, the 60/40 portfolio returned an average of 6.1%. In the 9 years prior to 2022, it returned 8.9%.

Will future stock market returns be worse?

Every so often, I come across financial experts warning that the decades of reliable stock market returns are over. Personally, I don’t buy it.

Someday, our global economy may hit its limit and be unable to grow much bigger. We are, after all, running out of natural resources and population growth is slowing. Most likely, these are concerns for our grandchildren.

That said, the future will always be uncertain. There is no guarantee that, over the next 30 years, the stock market will match its past performance.

This is where it pays to be slightly conservative when estimating future average investment returns.

Dave Ramsey is infamous for using a 12% expected average return when explaining the importance of investing. I think that’s not just a poor assumption but a dangerous one, as do most smart investors I know.

Why I use a 6.5% expected average annual return

I chose to use a 6.5% expected average annual return because it’s on the low end of recent 30-year returns for a 60/40 portfolio.

I hope and expect my actual returns may be higher, but I’d much rather be conservative in my estimate and be pleasantly surprised than get to retirement and realize I can’t afford the lifestyle I thought I could.

Still, some would say I’m not being conservative enough. I’ve seen people use estimated average annual returns, before inflation, as low as 5%.

What average annual return should you use?

The biggest individual factor in the estimated rate of return you’ll use is your risk tolerance and investment strategy.

For example:

• If you’re an aggressive investor and plan to stay invested in 90% to 100% stocks, a 10% estimated rate of return makes sense.
• If you’re an average investor with a 60/40 portfolio (or similar), I recommend an estimated return between 6% and 8%.
• If you’re a very conservative investor who plans to move to more than 40% bonds and/or cash, an estimated rate of return of 4% or 5% is appropriate.

What about inflation?

Inflation is the other wild card in retirement planning.

Historically, the U.S. inflation rate fluctuates between about 1.5% and 4% per year. So if you got a 10% return on your investments in a year that saw 3% inflation, your inflation-adjusted return is more like 7% (that’s an oversimplification, but you get the idea).

Remember, inflation is the whole reason you can’t just stash your savings in a bank account and expect to grow wealthy. If inflation is 3% and you’re only earning 2%, you’re losing money!

Personally, I like to look at inflation separately from investment returns. But doing so requires looking at what your inflation-adjusted spending needs will be in the future. Let’s look at the difference:

Returns not adjusted for inflation

If you invest $100,000 over 30 years and earn 9.5% rate of return, your money will be worth about $1.7 million in today’s dollars. If you’re planning to spend about $65,000 of today’s dollars in retirement, you might think that figure looks pretty good. $65,000 is 3.8% of $1.7 million, and that’s a comfortable withdrawal rate assuming you retire at or near 65.

What this forgets to take into account is how much money you’ll need to spend after adjusting for inflation. Assuming a 3% average annual inflation rate, you’ll need $157,000 in 30 years to afford the same lifestyle as $65,000 buys you today. Withdrawing $157,000 from $1.7 million is a 9.2% withdrawal rate, putting your retirement on shaky ground.

Returns adjusted for inflation

If we used inflation-adjusted returns instead, we find that $100,000 invested earning an annual return, after inflation, of 6.5% will yield $700,000 after 30 years.

Either way, the result is the same: You’ll need to withdraw 9.2% of your principal in order to cover $65,000 of expenses, in today’s dollars. So, in this case, you might need to adjust either how much you’re saving or how much you plan to spend in retirement.

Where to get help

Anticipating your rate of return is one piece of a much larger retirement puzzle.

If you’re still not sure, the best way to give yourself a head start on your retirement planning is to work with a certified financial planner. If you need help tracking one down, Paladin is a great resource. Simply input information about your goals and Paladin Registry will match you with a pre-screened financial fiduciary who can help you reach your savings goals.

Ten percent? Twenty percent? More?

I’ve written a lot about the benefits of both 401(k)s and IRAs. We’ve also looked at the emerging Roth 401(k) option and when it makes sense for young investors.

But everybody’s next question is: “Okay, okay, but how much should I put into my 401(k)?”

One of the most popular posts in this blog’s ten-year archives is “How Much Should Be In Your 401(k) At 30?”

I was 25 when I wrote it, trying to decide how much to contribute to my own 401(k).

But what I learned from over 200 (sometimes nasty) comments is that setting a savings benchmark by age alone is silly; no two savers are the same. You can’t compare the engineer who graduated at 22 into a $65,000-a-year job with no student loan debt to a doctor who starts practicing at 29 and has $200,000 in loans. Or the social worker earning $35,000 a year and needing all of it just to eat.

You can use this basic 401(k) calculator to estimate how much you will save on your 401(k) based on your personal status:

retirement age – age
 


Your current yearly income (before tax):
 


How much have you already saved in your 401(k) account?
 


Monthly 401(k) contributions
 


Limit on matching contributions
 


401(K) savings summary

 


401(K) Balance at retirement (age 67)
 


Your 401(k) will contribute:
in retirement at your current savings rate
 


Based on your current income, you will need about:
to maintain a similar income in retirement
 


Cost of fees
The total amount of fees you will pay over time until your retriement. If you see 0, please re-calculate
 


401(K) Balance at retirement (inc. fees)
 


Tip: You can optimize your 401(k) to reduce fees with blooom Learn more
 


Assumes 6% annual rate of return on your 401(k) investment.
401(k) fee of 0.05%.
Retirement age of 67 and life expectancy of 95.

 

 


 

 


Today I want to provide slightly more tactical advice. As a percentage of your income, how much should you contribute to your 401(k)?

If you’re in debt?
If you can also do a Roth IRA?
If your employer does not match funds?

The two fundamental rules of retirement savings
Here are two rules that will apply to almost everyone:

If your employer matches 401(k) funds, contribute enough to get the full match. Do this first. Even if you’re in debt. Even if you don’t put in a penny more. It’s free money, and you should take it.
Next, if you can contribute to a Roth IRA, work on contributing the full annual limit a year to that account before you contribute any extra to your 401(k) (aside from what’s necessary to get the employer match). This will give you a nice cushion of tax-free cash in retirement.

Figure out the ratio you’re the most comfortable with—but keep upping your savings
There are lots of ratios out there recommending how to divide up your income. Some are as simple as spend 50%, save 50%. Although an admirable goal, most people will have a hard time with this. Especially in your twenties. I like 75/20/5.

Spend 75%
Save 20%
Give 5%

But figure out the ratio you’re comfortable with. You may want to defer charitable giving until you’re debt-free. If you need most of your income to eat, it might be spend 90, save 10 or even 95/5. That’s okay. But you should reevaluate this as your financial situation changes and aim to get to at least 80/20.
In this example (75/20/5), if you earn $40,000, you would spend $30,000 or $2,500 a month, save $8,000 a year, or $667 a month, and—if you want—set aside $2,000 a year for your chosen causes. Note that we’re working off of before-tax income, so that $2,500 a month for spending might be more like $2,000 after taxes).
Working backwards from this, let’s say your employer will match up to half of a 6% contribution to your 401(k). So 6% of your pre-tax income is $3,000. Your employer throws in $1,500. You put that in, and you have $3,500 left in your savings budget.
If you don’t have a fully funded emergency fund, this comes next. Open a simple online savings account—they’re boring, but safe—and load it with cash.
If you have plenty for a rainy day, then you return to your retirement options. If you qualify for a Roth IRA, that’s probably where the $3,500 should go. If you don’t qualify or have more than that max left to spend, return to your 401(k) and up your contributions.
The four levels of retirement savings
The lesson is: Figure out what percentage of your income you can save in total, and allocate it appropriately:
Level 1: Max out your employer match in your 401(k). (Free money!)
Level 2: Max out your emergency savings (about six months’ living expenses).
Level 3: Max out your Roth IRA (up to the annual cap).
Level 4: Max out your 401(k) (up to a total limit for employee contributions).
This flowchart will also help.

If you’re in debt, focus on high-interest balances while you save
If your employer matches 401(k) contributions, put in enough to get that match, even if you’re in debt.
Next, if you’re in credit card debt, stop. Put your extra money towards paying that off before making additional retirement contributions. Focus first on getting out of credit card debt and then come back.
Got student loans? Follow the above schedule anyway. Unless your private loans have double-digit interest rates, I don’t recommend repaying student loans early.
It never hurts to save more
Twenty percent is a great goal, but some retirement experts actually suggest saving more like 25% or even 30. Why?
You know that saying, “Past returns are no guarantee of future performance”? That’s why. It’s true that the annual average return of the S&P 500 between 1928 and 2014 was 10%, for example. But that doesn’t mean anything for future returns.
We have no way of knowing what future returns will be—they could be 8%, they could be 4%. But the only way to hedge against an uncertain future is to save more money. The more you have, the less you need jaw-dropping returns to meet your goals.
Get help with your 401(k)
Already have a 401(k)? While you’re researching contributions, take a minute to analyze your current holdings too—there could be big savings to be found.
Check out Empower for a free app that creates easy-to-understand visuals of the investments you own in your 401(k), IRA, and other investment accounts. There’s also Wealthfront for a great all-in-one financial app that allows account holders to take control over their finances, automate saving and investing, and manage their accounts all in one place.
Summary
Everyone’s financial situation is different, and thus everyone’s retirement contributions will also be different. The key is to find a ratio you’re comfortable with, but that also encourages you to save a little extra than you might otherwise. We suggest aiming for a ratio of 80/20 to start with, and upping as you can.

Many who reach CoastFI find themselves in a strange in-between: financially independent enough to stop saving, but not ready to fully retire. When you’re living off a taxable brokerage for decades, does the “never hold bonds in taxable” rule still apply?

This episode explores how traditional asset location advice meets real-life spending. We unpack how to balance growth, taxes, and stability when your taxable account becomes your paycheck. Then we shift to two more listener dilemmas: helping a parent retire through shared home ownership, and using covered-call strategies to earn income from a stock-heavy portfolio.

Listener Questions in This Episode

Brandon (1:28): “I’m CoastFI and will withdraw from my taxable account for the next 20 years. Should I hold bonds in taxable, or keep it all in stocks?”

Brandon’s retirement accounts can grow untouched, but his taxable brokerage will fund two decades of living expenses. The classic rule says avoid bonds in taxable, yet Paula explains why that advice isn’t universal. When your taxable account funds your life, it needs to act as a complete portfolio. We discuss how to balance risk, prioritize liquidity, and plan your glidepath into CoastFI life.

Andrew (21:26): “My spouse and I co-own a home with my mother-in-law. How can we help her retire without creating family tension?”

We explore fair, flexible ways to support an aging parent while keeping relationships healthy. Paula explains how to design a win-win deal and why seller financing can help balance cash flow and peace of mind.

Chandan (59:24): “Can covered-call ETFs help me generate income from my stock portfolio and RSUs?”

We explain how covered calls work, what “covered” really means, and the tradeoff between steady income and limited upside. For those with concentrated stock positions, Paula shares when covered calls make sense—and when simpler plans win.

Key Takeaways

• The “no bonds in taxable” rule isn’t universal. When you’re drawing solely from taxable accounts for many years, that account needs to function as its own mini-portfolio, including bonds or cash for stability.
• Asset location follows purpose, not dogma. Tax efficiency matters, but liquidity and risk management take priority when the account funds your life.
• Think in terms of buckets. Your retirement accounts can stay growth-oriented while your taxable account carries the ballast for spending.
• Plan ahead for rebalancing. When taxable balances decline, know how and when to refill your bond/cash sleeve from other sources to keep your glidepath intact.
• The transition to CoastFI is a mental shift. You’re no longer optimizing for maximum returns, you’re designing for peace of mind and steady withdrawals.

Chapters

Note: Timestamps are approximate and may differ across listening platforms due to dynamically inserted ads.

• (0:00) Introduction and overview of listener questions
• (1:28) Brandon’s CoastFI question: bonds in taxable when withdrawals start now
• (3:56) Why “no bonds in taxable” is a rule of thumb, not a law
• (12:42) How to treat taxable as a stand-alone portfolio
• (18:31) Balancing tax efficiency with cash-flow reality
• (25:26) Helping a parent retire through shared property ownership
• (67:24) Covered calls explained simply, income with a ceiling

Resources & Links

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