Micro-investing is a relatively common way to start saving and investing. In this article, we’ll detail what micro-investing is, its benefits, and its drawbacks. 

What is Micro-investing?</span>

Have you ever paid for a cup of coffee and tossed your change in the tip jar? Micro-investing is kind of like tipping your spare change. Except with micro-investing, you’re tipping yourself, and instead of just saving the tips, you’re investing them.

Micro-investing typically* works by rounding up each debit card transaction to the nearest dollar and using those funds to purchase fractional shares of different investment products, often ETFs. The idea is that it’s an easy and relatively pretty painless way to make consistent, small investments. Over time, the hope is that the value of your shares grows.

* Some micro-investing services don’t use the rounding up strategy. Instead they give you rewards, say “1% of purchases”, and invest those rewards on your behalf. In this article, we focus on the rounding up strategy. But the key takeaways will be the same.

How do you get started with micro-investing?

You can start micro-investing by opening an account with an institution that does it. Two popular micro-investing platforms are Stash and Acorns but there are others. Note that you’ll likely pay a monthly fee and $3 to $9 is common.

From there, it’s business as usual from a spending standpoint. You will receive a debit card linked to your checking account that you can use like any other card.

However, when you spend, a portion of your spending is either rounded up to the nearest dollar and invested, or you receive a “stock reward.”

Here are two examples:

• Round Up: Using your debit card, you buy a coffee and muffin for $6.45. This transaction rounds up to $7.00, and the full amount is withdrawn from your checking account. But 55 cents of this transaction is invested.
  

• Stock Rewards: Using your debit card, you buy a coffee and a muffin for $6.45. 1% of that transaction, about 6 cents in this case, is given to you as a reward in the form of a stock purchase. 

What are the benefits of micro-investing?

There are two major benefits of micro-investing.

First, micro-investing is an easy way to invest without spending a lot of money. In years past, initial deposits for mutual funds were commonly $1,000 or even more. More recently, it’s become quite easy to find a variety of funds with low fees and no minimum investment requirement. From this standpoint, whether you’re explicitly micro-investing or purchasing fund shares on your own, a lack of significant cash on hand shouldn’t be a barrier.

The second major benefit of micro-investing is that it can offer an easy way to invest without a lot of investing knowledge. Even for those who understand the value of broad market index funds compared with individual stocks, the truth is you still need to make the selection of which fund to invest in. For new investors this can be intimidating. 

Most mico-investing platforms solve this problem by recommending a portfolio for you based a few basic inputs. These may include your age, time horizon, income, goals, and risk tolerance. From there, the micro-investing platform will do the rest by purchasing shares (or fractions of shares) from a range of portfolios.

What are the drawbacks of micro-investing?

There are two potential drawbacks of micro-investing. 

First, micro-investing may cause you to delay taking action on more significant investing strategies. Did you ever start a project well in advance but still found yourself pulling an all-nighter right before the due date? Sometimes this happens because when we’ve done something, we can create a sense of complacency even though we have much more to do. If this sounds like you, be wary of micro-investing. 

The reason, is that investing generally works best when it has more time to grow and compound. So while starting with micro-investing today is better than nothing, if it causes you to delay more significant investing by many years, you may regret it. See point #2 below.

The second drawback to mico-investing is that it’s not likely to produce very much. Put simply, micro-investing produces “micro results.” You need to save more.

Let’s go through a simple micro-investing example for the “round-up” approach.

• On average, let’s say you have 5 transactions per day
• On average, you will have a 50¢ round-up value (some will be 1¢ and others will be 99¢ but over time it will average to 50¢)
• 50¢ x 5 transactions x 365 days per year = $912.50 in annual savings
• If you continued this strategy for 30 years, you will have invested about $27,374 of your own money. Assuming an annualized 7% rate of return, your investments would be worth close to $93,000.

How does $93k compare to the results of other investing strategies?

While $93k might sound like a lot of money, how does it compare to other approaches?

• Saving 10% of Annual Average U.S. Salary: The average salary in the U.S. is about $62k annually. Many experts recommend saving at least 10% of your salary. This works out to saving about $6,200 annually. At a 7% return for 30 years, you would have about $630,322. That’s nearly 579% more in your nest egg compared to a micro-investing-only approach.
• Maxing out a 401k: The 2025 401k maximum contribution is $23,500. Even if we assume no employer matching contributions, and no increases to your contribution amount (even though the contribution limit is raised over time), with a 7% annualized return for 30 years, your nest egg would be worth about $2,389,118. This works out to about 2,474% more in your nest egg compared to a micro-investing-only approach.

A 2024 survey found that for Americans with retirement accounts, they estimated they would need $1.87 million to retire, adjusted for inflation. When you consider this, $93,000 doesn’t seem like much. 

The “Net Net” on Micro-investing

If micro-investments help you get started and don’t delay you from saving and investing larger sums in other ways, there’s nothing wrong with that. After all, something is better than nothing. But, while “investing your spare change” is a nice tagline, it’s not a strategy for long-term financial success.

To learn about the financial steps you should be taking for long-term financial success, the MoneySwell Financial Priorities Action Plan can help. It’s your personalized financial checklist no matter where you are in your financial journey. It can help you understand how to balance debt payments alongside investing for your future and so much more. 

And if you’re interested in understanding how much you might need for your retirement, use the free MoneySwell Retirement Planner (and sign up for an account if you want to track your progress over time). 

What is a ‘Nest Egg’ anyway?

Let’s start by defining a retirement ‘nest egg.’ A retirement nest egg is the money you have saved and invested during your working years. The most common types are 401ks and various types of IRAs because these types of accounts have certain tax benefits. However, any account with savings – or more likely, investments – can be considered a nest egg. When you retire and are no longer earning an income (or aren’t earning enough), you start to draw down your nest egg. Typically this will mean selling some of your investments and using the proceeds to fund your lifestyle.

How big does my nest egg need to be?

The central question when saving for retirement is, “How much will I need?” And here’s the surprising fact: No calculator or financial planner can definitively tell you. The reasons are threefold. 

Firstly, nobody can precisely know how your investments will perform during retirement. When people retire, they don’t immediately sell all their investments and stuff the cash under their mattresses. Instead, the majority of their nest eggs will continue to remain invested. As with all investments, the value of those assets may grow or decline. The extent to which a portfolio grows or declines can have a significant impact on how long the portfolio will last.

Secondly, inflation can have a significant impact on a retirement nest egg. Inflation is a devaluation of your existing dollars. Put another way, if $100 buys you and your partner a nice meal today, a decade from now that same $100 may only be enough for drinks and appetizers. Since the rate of inflation varies, it can be hard to predict if a certain saved dollar amount will be enough to help you buy all the nice dinners you were planning for in your retirement years.

Finally, it can be hard to estimate your nest egg needs because your retirement lifestyle and associated costs are unknown. If you’re 60 and a few years from retirement, you may have a pretty good idea of what your expenses will be, at least for the first part of retirement. But when you’re 25, knowing how much your life will cost many years or decades from now is virtually impossible. There are simply too many unknowns. 

Fortunately, there are several good rules of thumb for estimating nest egg needs. These rules of thumb are based on long-term historical trends and data from millions of retirees. When used appropriately, these guidelines can be incredibly helpful in your planning process. And that’s where MoneySwell comes in.

MoneySwell Can Estimate Your Nest Egg Needs For You

With a few basic inputs the MoneySwell Retirement Planner is set up to answer, “What are your nest egg needs now?” Instead of trying to predict a future number based on income and expenses, MoneySwell asks you for information about your current income and expenses. Then, as your life changes from year to year, you can update those numbers and watch your estimated nest egg needs update too. Of course, you can always use projected income or expenses if you like. But when you use your current values, your estimates will be based on the value of today’s dollars and what you would be projected to need if you wanted to retire today.

How does MoneySwell do this? MoneySwell estimates your nest egg needs in three steps.

1. 1. Calculate the Rules of Thumb: Using your inputs, MoneySwell calculates your needs using three well-known rules of thumb. It then calculates a range within each rule of thumb to produce a “low”, “medium” and “high” estimate. The rules of thumb MoneySwell uses are the Income Multiplier method, the 4% Withdrawal method, and the Annual Expenses method. Here’s the short description of each method:
      • Income Multiplier: Experts suggest your nest egg should be between 10 and 17x your annual, pre-retirement income.
      • 4% Withdrawal: This method estimates a reasonable withdrawal rate from your portfolio to generate retirement income from your investments. 
      • Annual Expenses: When you have between 25 to 30x your annual expenses appropriately invested in a diversified portfolio, you may have enough to retire.
   2. Factor in Other Income: Your nest egg may not be your only source of income in retirement. Therefore, if you have other income sources (and your expenses remain the same), any additional income you have reduces the size your nest egg needs to be. MoneySwell factors this into your original rules of thumb calculations.
   3. Average the Results: With your final “rules of thumb” calculated after considering your other income sources, MoneySwell then averages each method’s low, medium, and high estimate with the other methods’ low, medium, and high estimates.

What do my final nest egg needs estimates mean? 

Your low, medium, and high estimates represent a range of how much you may need. However, there are a few important things to note.

First, if your inputs for income and expenses are based on your current income and current expenses, your estimate is in “today’s dollars.” But if you believe your income or expenses will rise in the future, we suggest using the Experimentation Box to test alternate inputs and see what a future projection of your nest egg needs might be.

Secondly, lifestyle, health, and other factors can significantly affect how big your nest egg needs to be. For example, if you anticipate a retirement filled with lots of international travel and other luxuries you will probably need something toward the higher end of your estimates. Similarly, if you anticipate high healthcare expenses, your higher estimate might be closer to the mark. 

Finally, it’s important to note that when you retire has an impact on your nest egg needs. All else being equal, the earlier you retire, the longer your nest egg needs to last. Many of the “rules of thumb” the planner uses are based on the concept of a 30 year retirement. If you plan to retire significantly before that, you should lean toward your higher estimated needs. 

If you’re concerned that your estimates might be too low for your circumstances, you can increase the “Percent of Pre-retirement Income Desired” values. Experts typically say that retirees will need between 70 and 90% of their final pre-retirement income. However, by increasing  your percentages, this effectively raises your income. The end result is estimates that are higher than they otherwise would be.

Going Beyond Your “Estimate”

Don’t forget that these are only estimates based on a few inputs and rules of thumb. If you are looking for something that is more specific to your individual circumstances, or if you have questions about how your investment portfolio should be balanced, you may want to work with a Certified Financial Planner (CFP). But remember: Even a CFP’s estimate will change with time. The MoneySwell Retirement Planner works best when you use it over time and update your numbers regularly.

If or when you do decide to work with a CFP for a more personalized estimate, the savings targets and Nest Egg Needs estimates from this planner will likely have put you in a much better position than you otherwise would have been.

Good News!

Let’s start with some great news: You are already on track for your retirement savings! With the previous task you increased your savings rate to hit your nest egg goal by the age you want to retire given a projected rate of return. Few people can say this and it’s a fantastic accomplishment.

Reasons for Saving More

As you continue to progress in your financial maturity, you may wonder if there’s even more you can do and if you should be saving more. Here are the top reasons for increasing your savings rate even if you’re already on track.

1. Retire Early: If you reach your nest egg goal number earlier than planned, you may be able to retire early. When you reach that point, just make sure to check that your planned withdrawal rate will last the duration of your now long-than-planned retirement period. (With most of your assets staying invested, some portfolios can last indefinitely given a low enough withdrawal rate but you’ll want to review this for your particular circumstance.)
2. Improved Lifestyle: By increasing your savings rate but retiring at the same age you originally planned, you may have more resources to enjoy your retirement. This may mean more travel, a more luxurious lifestyle, buying a second home, or more. It may also mean you have the resources to support children or grandchildren should the opportunity arise.
3. Hedge Against Poorer Rate of Return: In the long-term the stock market has steadily grown. But even over longer-term time horizons like 20 years, there are huge differences between the best and worst 20 year periods. If you assumed something close to “average performance” but the actual rate of return was less than that, unless you saved more than you originally planned, you may not hit your nest egg goal on schedule.
4. Hedge Against Your Future Ability to Save: With your current job and lifestyle, you may be able to save at a given rate to achieve your goals. But what if you lose your job or change jobs to something less lucrative? What if your expenses rise unexpectedly? These circumstances would affect your ability to save. What’s more, periods of reduced income or increased expenses should be expected to a certain degree. But the more you save now, the harder it will be to get thrown off by future events you can’t control.

Where & How to Save More

If you want to save and invest more for your retirement, you have a few options.

• Use Existing Accounts: If you already have retirement accounts, you can increase the percentage of your pay you put into those (if it’s an employer-sponsored account), or increase the dollar amount you regularly contribute (for individual retirement arrangements, i.e. IRAs).
• Open a New Tax-advantaged Account: If you’re already maxing out in one type of retirement account and you’re still eligible to contribute to another type that you haven’t yet opened, you can do that. For example, in 2025 you may have maxed out your 401(k) at the IRS-imposed limit of $23,500 a year ($31,000 if you’re 50 or older). But if you make less than $150,000 a year (for single filers) or $236,000 (for married filing jointly), you’re eligible to contribute to a Roth IRA too. The Roth will give you tax-free dollars you can draw on in retirement.
  

• Self-employment Income & Savings: As discussed in previous tasks, self-employment income makes you eligible for various types of self-employed and tax-advantaged retirement accounts like Individual 401(ks), SEP IRAs etc. If you’re not already self-employed, you can open up a side business and contribute that way.
• Traditional Brokerage Account: Here’s the bad news: Traditional brokerage investment accounts are not taxed advantaged. This means you’ll pay taxes on the money before you put it into that account (in the form of income tax), and you’ll also pay taxes on any earnings from that account in the year you receive them. These earnings include realized capital gains (which happens when you sell the stock), dividends, and interest. But there’s good news too: Traditional brokerage accounts are not subject to limitations of taxed advantaged accounts. This means can contribute as much as you want, withdraw as much as you want, and you can do it whenever you want – regardless of income limitations or anything else. If you’re looking to save and invest more, don’t overlook the value of traditional brokerage accounts simply because they’re not tax-advantaged.

Calculate the Impact of Additional Savings

If you’ve decided you are able to save more, take a moment to understand the impact additional saving at a given monthly rate can have on your goals. You can easily do this using the MoneySwell Retirement Planner. In Step 2 in the Goals & Progress section, modify your Stretch goal savings number for the year based on your new hoped-for annual savings number. Then, scroll down to the Future Outlook section and compare the projected future value of your retirement savings for a given year given your Target vs. your Stretch annual savings values.

Actions

Once you’ve decided on a new, higher amount that works for your budget and your goals:

1. Write down the increased amount and the date you started doing this in the notes section of this task (logged-in users only) for future reference.
2. Make the updates in your retirement accounts by changing the percentage contribution rate or the automatically invested dollar amount you save and invest on a monthly basis.

Your Higher Savings Rate

In the Growth tier of your plan, you completed major tasks. These included funding your emergency fund up to 3-6 months of living expenses and paying off all your medium-interest debt. Additionally, in the “Growth” tier we provided a generalized recommendation to save “as much as you can” or “10-15%” of your pretax income for long-term/retirement savings.

But take note: This is the last time we’ll provide a generalized recommendation for increasing your savings rate. After this your tasks will be based on specific calculations to ensure you hit your goals.

Savings Benchmarks for Long-term Investments

Having something to shoot for can be helpful even when attempting to complete a generalized task like “increase your savings rate.” The items below represent possible benchmarks for how much you can increase your savings by. Choose one that works for you and your budget or something else entirely. But push yourself to go for the largest one you can.

• Debt Payments: If you previously had debt that you paid off in the Growth tier, use whatever amount you were putting toward debt payments to now put toward long-term saving.

• Emergency Fund Payments: If you previously set savings rate to grow your emergency fund, and your emergency fund is now between 3 and 6 months, consider diverting those payments – or 50-75% of them to long-term savings. How much you divert will depend on your comfort level with your existing emergency fund, your desire to grow it further, and the pace you still want to see your emergency fund grow (if at all).

• A Net 3% Increase: If your previous long-term savings rate was 6%, a 3% net increase would bring it up to 9%. If it was 9%, a net 3% increase would bring it up to 12% etc. Whatever your starting point, 3% is likely to feel just noticeable but not hurt too much and will help you boost your long-term savings.

• $100, $200, $300: Simple, round numbers like these are easy to quantify and adjust to in your budget. In the long run, they can have a great impact on your long-term savings.

Ways to Save More

If you’re finding you don’t have funds to increase your savings rate by any amount, use the Budget Planner tool to review your income and expenses.

• Expenses: Have you experienced “lifestyle creep” as your financial situation improved? If so, that’s understandable and possibly even acceptable. But take a moment to think about the areas of “creep” you get real value from vs. those expenses that have crept higher simply due to laziness or convenience without adding much value.
  
  If you have other very legitimate reasons for increased expenses (e.g. a new child in the family, medical costs etc.), acknowledge that. There’s nothing wrong with a leading a life that costs more than the life you lead before. However, you should also acknowledge your desire to save more for your future. Once you’ve done this, you can confidently move on to thinking about ways you can grow your income.

• Income: If your income has stagnated or dropped, you’ll need to find ways to increase your income if you want to save more. Take a moment to consider if your best avenue is through existing employment, new employment, or some kind of side gig work. Once you’ve decided the path you want to take, focus your efforts on that track since it’s the focus that is most likely to drive meaningful results. You can always change your tactic later (e.g. you didn’t get the promotion at your existing job but you learned something along the way and you can now focus on finding a new job with a different employer).

Summary

Remember, this is the last task where your plan gives you the flexibility to increase your long-term savings by a generalized amount. In the next task you’ll be faced with specific numbers that you’ll likely need to hit to achieve your goals. If you’re already using the MoneySwell Retirement Planner, remember not to get discouraged if even this new savings amount doesn’t put you on track. We recommend reading the examples of different life phases outlined here to clearly see how a person might move from being “off track” at one point, to being “on track” later.

All that said, the more you save and the earlier you save it, the better off you’re likely to be. So, push yourself to save as much as you can now and get creative with how you do it. Doing so will make it that much easier to check off your future long-term savings tasks.

Getting Started

Mountains of books have been written on investing. But these books, along with heroic stories of stock market wins and cautionary tales of catastrophic losses, (to say nothing of the squawking heads on TV) can make the subject incredibly intimidating.

But here’s the worst kept secret of the last many decades: For the average person looking to build wealth, investing isn’t – or “shouldn’t” be  – complicated.

To do well in the stock market, New York Times financial writer Neil Irwin wrote in February 2021, “All you’ve had to do is take the laziest, simplest approach to stock investing imaginable, and have a little patience.” He reiterated the point in a Marketplace radio interview:

“This is not some new piece of, kind of financial advice or personal finance advice. This is what every personal finance advice person has been saying for decades. But the math is clear-cut. You know, if at any point over the last several decades, you’ve had money to invest and just put it in an S&P 500 index fund, reinvested dividends, kept fees low, tried to avoid taxes, you’ve done quite well and you have doubled or tripled your money, depending on the exact time horizon if you had the patience to just stick it out and not overreact to swings in the market.”

Given this, let’s focus on how you can execute this strategy using Index Funds, Exchange Traded Funds, and Target Date Funds. Once armed with this knowledge you should be able to confidently make a decision about what’s right for you.

Investment Products

• Index Funds: This is a grouping of individual assets like stocks or bonds. The most well-known index is the “S&P 500” which contains stocks from 500 of the largest public companies in the U.S. When you buy one share of an index fund, you are buying a small portion of all the companies in that index.

• • Benefits: Index funds (which are technically a type of mutual fund, or in some cases, a type of ETF, by the way) are good choices for long-term investing because they give you instant diversification which means less risk compared to owning an individual stock and fees are generally low because they are “passively managed.” This means nobody is being paid to actively pick and choose which companies are in the index. Better yet, over time, index funds have performed better than actively managed funds.
    
    You’ll want to look for an index fund with an expense ratio of 0.2% or less. While this might not sound like a lot, small differences can make a big difference over time. Don’t even consider funds with expense ratios higher than 0.5%.

• • Considerations: There are different indexes that have more or less risk. For example a bond index is likely to have less risk, but also lower growth, than a stock index. To get your ideal risk vs. growth ratio you may need to manually invest in multiple index funds. Then, depending on how those different funds perform over time, you’ll want to reallocate (i.e. buy and sell) shares in those funds to maintain the right balance.

• • Cost to Get Started: Some index funds – but not all – require an initial investment amount to get started, maybe between $1,000 or $3,000. After you’ve invested that much, additional purchases can usually be made for the cost of a single share of that fund or partial shares with as little as a single dollar of additional investment.

• Exchange Traded Funds (ETFs): For the purposes of the long-term investor, ETFs are very similar to an index fund. Most are passively managed, have low fees, and have produced reliably good returns over the long-term. The main difference is that with an ETF, there usually isn’t a minimum initial investment amount that’s any higher than the cost of a single share of that fund. So if you don’t have a few thousand dollars ready to commit to an index fund, an ETF can be a good way to go.

• Target Date Funds: These are generally a mix of different types of index funds. What makes them special is that as the fund gets closer to its “target date” the types of indexes it is invested in become more conservative – which is generally what you want as you’re focusing on preserving wealth closer to your target date rather than growing wealth (since focusing on growth tends to involve more risk).
  For example, since bonds are generally safer than stocks but also hold less long-term growth potential, a fund that is relatively closer to its “target date”, will have relatively more of its allocation dedicated to bond indexes compared with stock indexes. Conversely, a target date fund further in the future will aim for more growth and will therefore have relatively less allocation to bonds and more to stocks.

• • Benefits: These are your one stop shop to long-term investing. Since the fund’s allocation is automatically adjusted on your behalf over time, its risk vs. growth ratio – stays properly balanced relative to the target date. And you don’t need to do anything. Just buy your shares, and keep buying.

• • Considerations: Because target date funds are “funds of funds”, and it’s possible that each fund has its own set of fees, the expenses associated with target date funds can be higher than an index fund or ETF. This isn’t always the case  – and many target date funds still maintain very low fees – but it’s worth comparing a few target date funds side by side to see how fees compare. Additionally, since age is the only factor in rebalancing, it might not be appropriate for your risk tolerance. (One way to account for this is to select a fund with an earlier date – relative to your “actual target date” – if you have a lower risk tolerance and set a fund with a later date if you have a higher risk tolerance.)

• • Cost to Get Started: It will depend on the fund but many will have a minimum threshold around $1,000.
• Bond Fund: These are similar to index funds. But in the case of a bond fund, the fund is invested only in bonds (not stocks). While there are different types of bond funds, and some which carry more risk than others, the most common goal of a bond fund is to generate income for investors.
  • Benefits: Just like with other funds, you are buying into a grouping of many individual assets (in this case, bonds) and therefore getting a high degree of diversification – and therefore lower risk – within that asset class. Additionally, bond funds tend to have very low investment minimums.
  • Considerations: Typically, bond funds are seen as a less risky investment than stocks but this means that over the long-haul, the returns tend to be lower. Additionally, if you are buying into a bond fund (as opposed to an individual bond) for the purpose of income generation, it’s important to understand that the income generated will fluctuate since the bonds in the fund can change.

Additional Reading

We encourage you to read other online resources so you can be comfortable with your decision. Just try not to fall into the trap of “analysis paralysis.” Remember: the sooner you are invested, the longer your investment has time to grow. When it comes to having success with investing, time is your greatest friend.

If you’re looking for good all around personal finance books that provide particular focus on specific investment choices, here are two we highly recommend.

• JL Collins’ stock series on his blog, or better yet, his popular book The Simple Path to Wealth. This a great all-around personal finance book but particularly well-suited to those interested in the Index Fund do-it-yourself approach to investing. He also provides good detail on Target Date Funds.
• Ramit Sethi’s bestseller I Will Teach You to Be Rich highlights Target Date funds for their beautiful automation and simplicity among a variety of other ways to automate and simplify your financial life.

<< Create Long-term Savings Account

Steps

1. 1. Go to the website of the brokerage company (or if you’re enrolling in an employer-sponsored plan, ask your HR department for a link to their specific retirement plan website link).
   2. Find the “open account” link or button. This is usually quite prominently displayed on the homepage or another main page. 
   3. Provide personal details like Social Security number, date of birth, contact information, employer information. For the employer information, you may need to provide the address and phone number of where you work (or the corporate headquarters details if you work remotely).
   4. Fund your account by transferring funds into your retirement account. If you already have a checking or savings account with the brokerage firm you can often make the transfer and have the funds available immediately. If you need to transfer from another institution, you may need to provide your account number and routing number or link an external account – a process that can take a few days to fully complete (but may be worth it in the end if you plan on making regular contributions). 

Congratulations!

Congratulations! You’ve opened your account. You’re now ready for your next task: choosing your investment and making your first purchase!

Why Calculate Your Retirement Number

Calculating your retirement number can be a daunting task. Not because it’s technically difficult – particularly if you use the MoneySwell Retirement Planner – but because it lays bare the financial mountain you have to climb. In fact, the exercise can be so intimidating that many people never bother to do it until they’ve nearly reached retirement. But whether retirement is 40 days away, or 40 years, calculating your number is incredibly important.

By understanding your target retirement number(s), you can start to formulate a plan for how you can achieve those goals through your retirement funding (which you’ll do in the “Fund” tasks, later).

Don’t forget: If you’re still two or three or four decades away from retirement, you have time to make incredible progress toward your goal. And if calculating your number encourages you to take concrete steps to make any progress, well done! After all, 60% of the “impossible” is better than 100% of the easily achievable. Make the most of the time you have available to you.

And, if you’re closer to retirement, there’s no better time than today to understand where you are, what a reasonable goal is, and create a plan with the resources you’re likely to have. No matter your situation, we can promise you that many have lived fulfilling retirement years with less than you – but it sure helps to know where you are and have a plan in place!

So be brave! Calculate your numbers using the examples from below (and refresh your memory using the “How to Apply It” details for each method here), and make progress toward your goals!

3 Retirement Number Calculation Examples

• 4% Withdrawal Rule Example: John needs his retirement portfolio to generate $65k in income annually. So he takes $65,000 / .04 = $1,625,000 nest egg number.
  
• Income Multiplier Method Example: Jane is 35, and currently makes $75,000. But she expects to be making the equivalent of $125,000 by the time she retires. She takes $125,000 (final income) x 13 (multiplier) = $1,625,000 nest egg number. (Remember a reasonable income multiplier is between 10 – 17.)
  
  
• Annual Spending Method Example: John and Jane would like to spend $115,000 a year. They have $12,000 a year in reliable passive income. Based on a variety of factors like wanting to be very financially secure and spend relatively carefree in retirement,  a spending multiplier of 30 feels right for them (some will use spending multipliers as low as 25). ($115,000 (desired total annual spending) – $12,000 (reliable passive rental income)) = $103,000 x 30 (multiplier) = $3,090,000 nest egg number.

If you’ve completed this step, well done! Most people never do this so you’re ahead of the game!

<< Retirement Account Setup Checklist

Account Considerations

Consider the following and then review the table below:

• Funding Dollars – Do you want to get a tax break now (fund with “pre-tax” dollars) or in retirement (fund with “post-tax” dollars)?
  
  All things being equal, the higher your income, the higher your tax bracket. The lower your income, the lower your tax bracket. Therefore, if you believe you are in a higher tax bracket now than you will be in retirement, you may want to choose an account funded with “pre-tax” dollars, thus delaying paying taxes on that money until you retire and are in a lower tax bracket. Conversely, if you believe you will be in a higher tax bracket in retirement, you may want to fund an account with “post-tax” dollars, thus paying taxes on that money now and withdrawing it tax free in retirement when you are in a higher tax bracket. (And if you can’t predict the future, keep reading!)
• Contribution Amount – How much do you want to contribute each year?
  
  Because retirement accounts come with certain tax advantages, the government restricts how much you can contribute to different accounts. Generally speaking, accounts funded with “pre-tax” dollars allow for more annual contributions but this is changing with the advent of things like “Roth 401ks” and other comparable options.

• Account Limitations – Are there account limitations on opening the account like income limitations, stipulations for withdrawing the money etc?
  
  There are generally three possible account limitations to be aware of.
  • Income limitations stipulate how much you can contribute (if anything) if your income rises above a certain threshold in a given year.
  • Withdrawal limitations affect whether you pay a penalty for withdrawing either your contributions and/or your earnings prior to a certain age.
  • Withdrawal requirements (also known as Required Minimum Distributions or “RMDs”) stipulate how much you must remove each year starting at a certain age in retirement.

• Personal Considerations – If you have (or plan to have) multiple retirement accounts, do you want to create some differentiation between accounts – like the type of funding dollars you use – or keep it the same?
  
  The future is hard to predict. So if you aren’t sure if you will be in a higher or lower tax bracket in retirement (either because your income is fluctuating, you have no idea what the government tax brackets will be in 40 years, how much you’ll have saved and therefore how much you’ll be able to withdraw, or something else) and you’re not sure which account type you should open, consider having an account funded from “pre-tax money” and another funded from “after-tax” money. This is going to give you the most flexibility.

Common Retirement Account Types

The table below provides the highlights for the most common types of accounts. There are additional specific rules not detailed here but this provides the most important information. Find one or two that seem like good contenders and then do a little more research on your own if you want to know all the ins and outs.

Account Type	2025 Income Limits	2025 Annual Contribution Limits	Funding Dollars	Primary Account Limitations
401(k) or 403(b) for public sector and non-profit employees	None	$23,500* (+$7,500 for those aged 50+)	Pre-tax	There is a penalty for withdrawing either your contributions or earnings prior to age 59 ½ and taxes will also be owed. Starting at age 72 (typically) you must make annual withdrawals and pay taxes.
Traditional IRA	None	$7,000** (+$1,000 for 50+)	Pre-tax	There are no income limits but tax benefits for this and other “pre-tax” accounts may be reduced if you earn too much.
Roth IRA	$150,000 (individual tax filer) or $236,000 (joint tax filer)	$7,000** (+$1,000 for 50+)	After-tax	You can withdraw the contributions at any age for any reason and pay no penalty.You can withdraw earnings starting at 59 ½ but there are no RMD rules.
Roth 401(k)	None	$23,500* (+$7,500 for those aged 50+)	After-tax	You can withdraw the contributions at any age for any reason and pay no penalty.You can withdraw earnings starting at 59 ½. RMDs must begin no later than age 72 (typically)
Solo 401(k) (officially “One-Participant 401(k)”)	None	$70,000	Pre-tax or After-tax (via “Roth Solo 401(k)”)	You must be at least part-time self employed to open and maintain this account. The contribution limit is a true maximum based on $23,500 as the “employee” and up to an additional $46,500 or 25% of the total income – whichever is less – as the “employer.” RMDs are required.
SEP IRA	None	$70,000	Pre-tax	The contribution limit is the lesser of $70,000 or 25% of the total employee income. RMDs are required.

* You may have a 401(k) that allows for both traditional pre-tax contributions and after-tax contributions via a Roth 401(k). But the combined total contributions cannot exceed these amounts.

** If you have both a Traditional IRA and a Roth IRA, your combined total contributions cannot exceed $6,000 annually (or $7,000 annually for those over 50). Additionally, since there are income limits for a Roth IRA, the amount you can contribute will be less the closer you are to the income limits. Search for “Roth IRA phase-out limits” to get the most up-to-date information for this year.

<< Retirement Account Setup Checklist

Companies from an Employer-sponsored Plan

If you have an employer-sponsored plan, the brokerage firm is determined by your employer. If your employer matches any portion of your contributions, you should enroll in this plan and contribute at least up to the company match. The “match” is free money that will often equate to a 100% or a 50% return on your investment. (Note that in order to keep the full match you may need to stay at the company for a vesting period, often 4 years where you get 25% each year. But even if you leave the company early this “match” is still a great return and worth taking advantage of.)

Employer Match Examples:

• • Example #1: Your plan says “Employer matches 100% of your contributions up to 3% of your salary.” This means, if you make $100,000 your employer will contribute 3% of that – i.e. $3,000 – as long as you also contribute $3,000. If you only contribute $2,000, your employer will do the same. If you contribute $4,000, your employer will only contribute $3,000 because that’s their max.

• • Example #2: Your plan says “Employer matches 50% up to 6%.” This means your employer will contribute half of what you contribute up to the limit of 50% of 6% of your salary. So if you make $100,000, and you contribute $6,000, your employer will contribute half of that, $3,000. If you only contribute $3,000, your employer will only contribute $1,500. If you contribute more than $6,000 your employer will still only contribute their max of $3,000.
    
    Did you notice how in both examples above, the company match is equally generous at $3k? But the second one requires you to save more in order to get the full match. (In the long run, this extra saving will do you good!)

If you don’t have a company sponsored plan, you’ll need to choose your own brokerage firm. These include companies like Vanguard, Fidelity, Charles Schwab and many others. We mention these three specifically because they are known for providing great options low expense ratio funds that retirement account holders can invest in. But there are many good choices. Below is a list of the things you should be looking for in an online brokerage company. Use the notes section above to jot down points of comparison.

• • Wide Range of Funds: For retirement investing you’re likely going to be investing in index funds, exchange-traded funds (ETFs), and mutual funds. While many of these funds will be available at multiple brokerage companies, not all of them will and if they are, they may have slightly different fee structures and minimums depending on where you buy them.
    
    We recommend considering the funds you’re interested in, and doing a comparison of fund fees and minimums between brokerage companies. Or for the simpler approach, if you know you are going to invest primarily with funds from a particular company (e.g. Vanguard), open an account with that company since they will have the lowest fees and requirements for their own funds (other companies may offer the same options for those funds but they certainly won’t be any better).

• • Low or no Account Fees: Some brokerage firms charge “maintenance fees” for retirement accounts. These could be as low as $10 or $50 annually and there may be an ability to have the fee waived if you meet certain requirements. That said, there are so many brokerage firms that won’t charge these fees so we recommend finding one that doesn’t have a fee or has such easy fee-waive requirements that it will never be an issue.

• • Low or No Transaction Fees: Transaction fees are what you will be charged every time you make a purchase of a fund. In recent years brokerages have eliminated many of these trading fees. But for much longer than that, many brokerage firms have offered their own funds and many others as “no load” funds, meaning there is no transaction fee. This is always great but particularly important when you’re making regular, automatic purchases weekly or monthly. Make sure you choose a broker that offers the funds you’re interested in without charging transaction fees.

• • Good Website: Spend some time on the company’s site and make sure it feels fairly intuitive and user friendly. The major brokerage companies all put a lot of effort into their websites and should have a website experience and resources that work for you.

• • Good Customer Service: At some point you will need to work with the customer service department. Check out online reviews or call the customer service line to get a sense of the helpfulness of the representatives, call wait times, etc.

A Note on “Robo-Advisors”

Since the late 2000’s (2008 to be specific), a new variety of brokerage firm called a “robo-advisor” has emerged. They are an alternative to a professional financial advisor and online brokerage firms. If you’re interested in one of these feel free to do some additional research online (and note that there are “robo-advisor-like” features offered at online brokerages as well). While they can be a viable investment option for investors who want to be completely hands off (and some have great tools for managing your day to day finances), at MoneySwell we’ve decided not to recommend them for investing purposes for the following reasons:

• Fees: Their fees will be lower than a “real person” financial advisor but still be more than going with an online brokerage firm. These fees will eat into your portfolio returns.
• “Rebalancing”: Rebalancing your portfolio is one of the commonly cited benefits of robo-advisors but even for those who want to be totally “hands off”, you can easily achieve this by purchasing a target date fund which will automatically rebalance as you get closer to the set target date.
• No Choice: With a robo-advisor, you don’t get to choose your investments, they do it for you. This may work out fine but you’re putting all your trust in a single company and the algorithms they have created to align with your personal finance profile.
• Empowerment: To be empowered you have to be informed and be involved. But a robo-advisor’s “do it all for me” approach may discourage that. With MoneySwell and dozens of other fantastic online and offline resources, you have all the tools you need to be empowered – and there you can still take a mostly hands-off approach. In the long run, being at least a little bit involved is likely to serve you best.