The Retirement Number
The most important question in retirement planning is: how much do I need? The answer depends on your expected annual expenses in retirement. The widely-used 4% rule says you can safely withdraw 4% of your portfolio each year and not run out of money over a 30-year retirement. This means you need 25 times your annual retirement expenses.
- $40,000/year expenses → Need $1,000,000
- $60,000/year expenses → Need $1,500,000
- $80,000/year expenses → Need $2,000,000
- $100,000/year expenses → Need $2,500,000
Remember: Social Security will cover a portion. The average Social Security benefit is about $22,000/year. If you need $60,000/year, Social Security covers $22,000, so you need to generate $38,000 from savings = $950,000 portfolio needed.
Monthly Savings Needed by Age
To accumulate $1,500,000 by age 65 (assuming 8% average return after inflation):
- Start at age 25 — Save $475/month. 40 years of compounding does the heavy lifting
- Start at age 30 — Save $700/month. Still very achievable
- Start at age 35 — Save $1,050/month. Getting expensive
- Start at age 40 — Save $1,600/month. Painful but possible with high income
- Start at age 45 — Save $2,600/month. Very difficult without high income or catch-up
- Start at age 50 — Save $4,500/month. Nearly impossible for most. You are working until 70 or drastically cutting retirement lifestyle
The message is clear: start early. Every decade of delay roughly doubles the monthly savings needed.
Is the 4% Rule Still Valid?
- Origin — Based on the Trinity Study analyzing 30-year rolling periods of US stock/bond returns from 1926-1995. A 50/50 stock/bond portfolio with 4% withdrawal had a 95% success rate
- Critics say — Future returns may be lower, people live longer than 30 years in retirement, and the study used US-only data during a historically strong period
- Conservative alternative — Use 3.5% instead. Need $60,000/year? Save $1,714,000 instead of $1,500,000. More buffer for uncertainty
- Flexible approach — Reduce withdrawals by 10-25% during market downturns. This dramatically increases portfolio survival rate