I want to share with you a scenario that I’ve encountered several times when doing retirement planning for high salaried individuals, especially legal and medical professionals. All too often I see these clients not begin saving for retirement early enough and not putting enough away when larger paychecks start rolling in.

How Saving for Retirement Should Work

To best illustrate the issue let’s first take a look at a traditional professional white collar worker who saves enough for retirement. Let’s call her Jane Techie. Jane went to a public college and majored in information technology. She graduated in four years and has $25,000 in student debt (about the average for a public college graduate). Out of school, she gets her first job making $66,000 per year (about the average for an information technology worker). She’s busy paying down student loans so she only puts away 5% in her company 401(k). Her employer also matches 5%. After 10 years when her student loans are paid down she follows conventional wisdom and starts putting away 10% of her salary or $6,600 per year again with a $3300 employer match.

Let’s assume Jane earns 8% on average in her portfolio and gets a 3.5% raise every year. If Jane works for 43 years (retiring at around age 65) she’ll have an investment portfolio worth about $1,200,000 in today dollars, assuming cost of living inflation of 2.85%, when she retires. The financial planning industry is constantly debating what the safe withdraw rate from a portfolio is to avoid the chance of running out of money. Estimates range from 3% to 5% so for our discussion we’ll use that range rather than any exact estimate. If she doesn’t want to run out of money she can withdraw about $37,000 to $60,000 every year. She’ll also be earning a bit over $17,500 in Social Security depending on when she files. All together she’s looking at in income of $54,500 to $67,500 in retirement.

Jane will be able to keep up whatever life style she is currently living when she retires. She’ll be able to come close to her pre-retirement income of $66,000 to $86,500.