We’ve all heard the phrase “a penny saved is a penny earned”, which is usually attributed to Benjamin Franklin, inventor of the bifocals. And while Benjamin Franklin is revered by the monocle-loving crowd, his adage does not accurately represent the true worth of a penny saved in the context of an early retirement. Let’s take a look at what a penny saved in your monthly expenses equals in terms of how much money you need to save.

Retirement Income

When thinking about retirement income, a good rule-of-thumb is to use the 4% rule. This isn’t a hard and fast rule, but it does give us a good idea of how much money we need to save for a particular income. For example, a portfolio of $300,000 can reasonably be expected to generate an income of $12,000 per year (4% of $300,000), or $1000 per month. Conversely, if we want an income of $1000 per month, we need to save 300 times that amount in our retirement account.

When we talk about income needs in retirement, all we’re really talking about is covering our living expenses. So, if we can reduce our expenses by $1 per month, then we can retire with $300 less in our portfolio.


Accounting for taxes can be a little more tricky because the tax rate depends on when the money is taxed. If it is taxed while you are in your peak earning years, you might be paying a combined 33% or more federal and state taxes, not to mention sales tax on whatever your are spending your money on. But after retirement, you should be in a lower tax bracket.

For the sake of argument, let’s assume you have deferred your taxes until retirement and that the money you’re spending is coming out of a traditional IRA. And let’s say you’re in the 15% federal bracket, 5% state and 5% sales tax. It’s pretty easy to get to 25% combined taxes even at lower tax brackets.

With this 25% tax rate, instead of saving $300 now to spend $1 later, we would have to save $400. So, if you start with $400, and subtract 25%, or $100 for taxes, then you arrive at the $300 needed to sustain $1 in monthly spending.

In equation form, you need to save $300/(1-tax_rate) to sustain a dollar of monthly expenses. For example, if you’re combined tax rate is 40%, then the amount you need to earn to save for a $1 monthly expense would be $300/0.6 or $500!

Monthly Expenses

Using the $400 multiplier from above, consider some typical monthly expenses and their impact on your savings.

If you will be spending … You need to save…
$8 your Hulu subscription $3,200
$30 to have your dachshund bathed $12,000
$50 extra on your phone bill $20,000
$100 extra on your cable bill $40,000

The math on this is easy to do in your head, which is partly why I chose the 25% tax rate for our examples. Multiplying by 400 is simply multiplying by 2 twice then adding 2 zeroes. So, when you consider the money you need to save to cover a cost of say, $6.35, times 2 is $12.70, times 2 is $25.40, and add 2 zeros to arrive at $2540. You don’t need a fancy monocle to do that in your head!

Daily Expenses

Daily expenses have an even bigger impact per dollar. If you consider a daily expense to be around 25 times per month, then you need 25*$400, or $10,000, to cover every $1 of daily expenses in the future. The math couldn’t be easier, just add 4 zeros.

If you will be spending … You need to save…
$1 to have your monocle cleaned $10,000
$2 for a fountain drink with lunch $20,000
$5 for a venti Starbucks Frappucino $50,000

Now, if you can’t live without your Starbucks, maybe just downgrading to the grande size will save you $10,000. And maybe you could even learn to clean your own damn monocle and save another $10,000.


I have been a little bit loose with the numbers partially because it’s hard to know exactly what your withdrawal and tax rates will be. But the point of this article is to give you some ballpark numbers with which to evaluate whether an added expense is worth it. Simply put, to figure out how much money you’ll need to support a spending level in retirement:

  • for monthly expenses, multiply the expense by 400.
  • for daily expenses, multiply the expense by 10,000.

Hopefully this rule-of-thumb will help you think about the impact of spending on your retirement.