A common way to estimate how much you need to retire is to take your yearly spending in retirement, subtract guaranteed income such as Social Security or a pension, and multiply the gap by 25. That multiplier comes from the 4% rule: a portfolio 25 times your annual withdrawals has historically supported inflation-adjusted withdrawals for about 30 years. If you expect to spend $60,000 a year and Social Security will cover $24,000, your gap is $36,000 and your target is about $900,000 in today’s dollars.
Step 1: Estimate retirement spending
There are two approaches.
Replacement ratio. Many planners start with 70% to 80% of pre-retirement gross income, because in retirement you no longer pay Social Security and Medicare tax on wages or set money aside for retirement. On a $90,000 income, 75% is $67,500.
Bottom-up budget. List expected costs: housing (is the mortgage paid off?), food, transportation, insurance, travel, gifts and especially health care. Before Medicare eligibility at 65, health insurance can be one of the largest costs; after 65, plan for Medicare premiums, supplemental coverage and out-of-pocket costs. A budget is more work but captures big changes, such as a paid-off house or a costly hobby.
Step 2: Subtract guaranteed income
Social Security, pensions and annuity income reduce what your savings must cover. The Social Security Administration’s my Social Security account shows your estimated benefit at different claiming ages. Two facts matter for planning:
- Full retirement age is 67 for anyone born in 1960 or later.
- Claiming at 62 reduces the benefit by up to 30%; waiting past full retirement age increases it by 8% a year until 70, for a benefit 24% higher than at 67.
The Social Security calculator estimates benefits at each age.
Step 3: Apply a withdrawal rate
At 4%, dividing by 0.04 is the same as multiplying by 25. Here is how the target for a $36,000 gap changes with the withdrawal rate:
| Withdrawal rate | Multiple of spending gap | Portfolio needed |
|---|---|---|
| 3.0% | 33.3× | $1,200,000 |
| 3.5% | 28.6× | $1,028,571 |
| 4.0% | 25× | $900,000 |
| 4.5% | 22.2× | $800,000 |
| 5.0% | 20× | $720,000 |
Where the 4% rule comes from
Financial planner William Bengen’s 1994 research tested withdrawal rates against historical US stock and bond returns going back to the 1920s. A first-year withdrawal of about 4%, raised each year for inflation, lasted at least 30 years in every historical period he studied for portfolios with roughly half or more in stocks. Later studies broadly confirmed the finding.
Its limits
- It targets 30 years. Retiring at 50 may call for 3% to 3.5%.
- It uses historical US returns, which may not repeat.
- It assumes you never cut spending. In practice, adjusting withdrawals after bad market years makes a higher starting rate more durable.
- It ignores taxes and fees, covered below.
The retirement withdrawal calculator tests how long a portfolio lasts at any withdrawal rate and return.
Step 4: Adjust for taxes
Withdrawals from traditional 401(k)s and IRAs are taxable income. If your gap is $36,000 after tax and you expect an average tax rate of about 12% on withdrawals, you need to withdraw about $36,000 ÷ 0.88 = $40,909, which at 4% means about $1.02 million. Roth accounts and long-term capital gains in a taxable account change the math, which is one reason to hold a mix. See Roth vs. traditional IRA and marginal vs. effective tax rate.
Step 5: Think in today’s dollars
All the numbers above are in today’s dollars. Prices rise over time: at 3% inflation, $60,000 of spending today costs about $125,600 in 25 years. You can handle this in two consistent ways:
- Keep the target in today’s dollars and assume a real (after-inflation) return, such as 4% to 5% for a balanced portfolio.
- Inflate the target to future dollars and use a nominal return.
Mixing them, a today’s-dollar target with a nominal return, makes saving look easier than it is. The inflation calculator converts between the two.
How much to save each month
To reach $900,000 in today’s dollars, assuming a 4% real return:
| Years until retirement | Starting from $0 (4% real) | Starting from $0 (5% real) | Starting from $100,000 (4% real) |
|---|---|---|---|
| 15 | $3,657 | $3,367 | $2,918 |
| 20 | $2,454 | $2,190 | $1,848 |
| 25 | $1,751 | $1,511 | $1,223 |
| 30 | $1,297 | $1,081 | $819 |
| 35 | $985 | $792 | $542 |
Employer matching contributions count toward these amounts. The retirement savings calculator and the 401(k) calculator project your balance with raises and a match; how a 401(k) match works explains the match itself.
Early retirement and the FIRE number
The financial-independence crowd uses the same formula with no Social Security for many years and often a 3.5% rate: 28.6 times annual spending. Someone spending $50,000 a year would aim for about $1.43 million. The FIRE calculator estimates the number and how many years it takes at your savings rate.
A worked plan
Maria is 40, earns $90,000 and expects to retire at 67.
- Spending: a budget shows $60,000 a year in today’s dollars, with the mortgage paid off.
- Social Security: her statement estimates $24,000 a year at 67.
- Gap: $36,000. Grossed up for about 12% tax on traditional withdrawals: about $40,900.
- Target at 4%: about $1.02 million in today’s dollars.
- Savings: she has $100,000. Over 27 years at a 4% real return, that grows to about $294,000, leaving about $729,000 to accumulate, or roughly $1,250 a month including her employer match.
If that is too much, her levers are clear: work a few more years, delay Social Security to 70, spend less in retirement or save more now.
This guide offers general planning math, not personalized financial advice. Returns, inflation, taxes, health costs and longevity are uncertain; consider reviewing your plan with a fee-only financial planner.
Frequently asked questions
What is the 4% rule?
It is a planning guideline that you can withdraw 4% of your portfolio in the first year of retirement, then adjust that dollar amount for inflation each year, with a high chance the money lasts 30 years. It comes from 1990s research on historical US stock and bond returns.
How much do I need to retire at 65 with $60,000 a year of spending?
Subtract guaranteed income first. If Social Security covers $24,000, the gap is $36,000 a year, and 25 times that is $900,000 in today's dollars. Without Social Security, the same spending would need $1.5 million.
Is $1 million enough to retire?
At a 4% withdrawal rate, $1 million supports about $40,000 a year of inflation-adjusted withdrawals before taxes. Whether that is enough depends on your spending, Social Security, pensions, health costs and how long retirement lasts.
Should I use a lower withdrawal rate than 4%?
Many planners suggest 3% to 3.5% for retirements longer than 30 years, such as early retirement, or when expected returns are low. A lower rate needs a larger portfolio: covering a $36,000 gap at 3.5% takes about $1.03 million instead of $900,000.
Do I need to replace 100% of my income in retirement?
Usually not. You stop paying payroll taxes and saving for retirement, and some work costs disappear. Many planners use 70% to 80% of pre-retirement income as a starting estimate, but a line-by-line budget is more accurate.