What is it about?
Planning for retirement involves two closely related questions: How much money will you need when you retire, and what investment return will you need to reach that goal? This study presents a systematic, step-by-step approach for answering both questions. It estimates the retirement nest egg by projecting the income needed during retirement and then determines the investment return required during the working years to accumulate that amount. By connecting the retirement savings goal with the required return, the approach also provides a foundation for making asset-allocation decisions.
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Why is it important?
Retirement planning is often approached by first estimating how much money an individual needs to accumulate and then separately deciding how to invest retirement savings. Our approach directly connects these decisions. After estimating the retirement nest egg using expected retirement cash flows, the model determines the target investment return needed to reach that goal based on current savings and future contributions. That target return can then serve as an important consideration in choosing an appropriate mix of investments. The framework provides a systematic way to connect retirement income needs, saving, investment returns, and asset allocation within a single retirement-planning process.
Perspectives
The motivation for this study came from recognizing the need for a more systematic way to connect several retirement planning decisions that are often considered separately. Knowing how much money is needed at retirement is only one part of the planning process. Individuals also need to determine the return their savings must earn to reach that goal and whether their investment strategy is consistent with the required return. We wanted to develop a practical framework that connects these decisions using time-value-of-money concepts. I hope this approach helps financial planners and individual investors better understand how retirement goals, saving decisions, required investment returns, and asset allocation are interconnected.
Dr. Hongbok Lee
Western Illinois University
Read the Original
This page is a summary of: Systematic estimation of a retirement nest egg and a target return, Managerial Finance, March 2025, Emerald,
DOI: 10.1108/mf-03-2024-0187.
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