The average American adult can meet the challenge of ensuring a resilient retirement income even in the absence of a fiscally challenged Social Security program. At retirement, the individual must have accumulated an endowment fund that will be sufficient to provide an annual income for life that will be comparable to the individual’s earnings in the final year before retirement.
There is a clear path to retirement security: (1) Contribute 15% of annual earnings over a 40-year period to the individual’s retirement endowment fund; (2) target a minimum 7.5% annual rate of return on the investment portfolio of the fund; and (3) over a 30-year period following retirement, limit annual withdrawals from the retirement endowment fund to a maximum amount that is comparable to the individual’s final year earnings (adjusted for inflation).
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The average American head of household has annual earnings of about $75,000. For purposes of illustration, it is assumed that contributions equal to 15% of annual earnings are made over 40 years (say age 30 to age 70), while withdrawals are made over a 30-year period (assuming a remaining life expectancy of 30 years following retirement).
Patient investors with long-term horizons, such as pension funds and endowments, strive to meet the twin objectives of capital preservation and capital growth by using the following rule of thumb: Allocate 40% of investments for lower risk bonds (capital preservation), and 60% of investments for higher risk equities (capital growth). The suggested model investment portfolio for the retirement endowment fund is: 40% in long-term U.S. Treasuries and 60% in U.S.-listed equities.
So, what is a reasonable expectation with respect to the annualized rate of return on the retirement endowment fund? The short answer is inflation plus 500 basis points (5%). Such a rate of return target addresses the twin objectives of a retirement endowment fund: capital preservation and capital growth. If inflation expectations are anchored at 2.5% per year, the expected annual nominal rate of return on the retirement endowment fund would be 7.5%.
The S&P 500 Index annual total return for the 10-year period ending Dec. 31, 2025, was about 14.8%. The yield on 10-Year US Treasuries was about 4.2% per year as of year-end 2025. The inflation rate in December 2025 was about 2.7% per year, above the Federal Reserve’s target of 2% per year.
Finally, it is important to consider fees and expenses as they reduce the rate of return on the investments of the retirement endowment fund. Representative total expense ratios for some relevant investment products currently are: long-term US Treasuries Index ETF, 15 basis points; and S&P 500 Index ETF (U.S.-listed equities), 3 basis points.
RETIREMENT NEST EGGS ARE IN JEOPARDY. SAFER ACT IS THE ANSWER
In the base case, the individual contributes a constant percentage of 15% of annual income, which is indexed to inflation. The initial annual income of $75,000 is assumed to be adjusted for inflation at the rate of 2.5% per year. In the final year prior to retirement, the individual’s inflation-adjusted earnings will be about $201,375. At the end of the 40-year employment period, the size of the retirement endowment fund will be about $3.4 million.
In the first year of retirement, the individual can withdraw up to $201,375. In each of the following years, withdrawals from the retirement endowment fund are expected to be adjusted for inflation (2.5% per year) to maintain the purchasing power of the individual’s retirement income. At the beginning of the 30-year retirement period, the present value of the stream of expected withdrawals will be about $3.3 million, so at that point the individual will be fully covered, as the size of the retirement endowment fund will be about $3.4 million.
Samir Tata is the founder and president of International Political Risk Analytics, an advisory firm based in Reston, Virginia, and author of the book Reflections on Grand Strategy: The Great Powers in the Twenty-first Century.
