Retirement Planning: How to Calculate What You Need

The 4% rule comes from the 1994 Trinity Study, which found that a diversified stock/bond portfolio could sustain a 4% annual withdrawal rate (inflation-adjusted) for 30 years across most historical market scenarios. It's a useful starting point, not a guarantee.

Critics note that the 4% rule was developed in a different interest rate environment and may be optimistic given low projected future bond returns. Some financial planners now recommend a 3.5% or even 3% withdrawal rate for people retiring young or planning a 40+ year retirement.

On the other hand, 4% is a worst-case-scenario calculation, not an average. Most historical retirees using 4% ended up with significantly more than they started. For people with flexibility to adjust spending, 4–5% is often defensible.

A common approach is to assume you'll spend 70–80% of your pre-retirement income in retirement — less commuting, work clothes, and mortgage (if paid off). But this varies widely. Some retirees spend more (travel-heavy early retirement); many spend less (simpler lifestyle, no commuting).

Track your actual monthly spending and subtract work-related costs. Add healthcare: the average 65-year-old couple retiring today is estimated to need over $300,000 in out-of-pocket healthcare costs over their lifetime. This is one of the most underestimated retirement expenses.

Account for Social Security and any pension income. If Social Security will cover $24,000/year and you need $60,000, your portfolio only needs to generate $36,000 — meaning your savings target is $900,000 (36,000 × 25), not $1.5 million.

Compound growth heavily favors saving early. To accumulate $1 million by age 65 at 7% annual returns: starting at 25, you need to save about $420/month. Starting at 35, $820/month. Starting at 45, $1,840/month. Every decade of delay roughly doubles the required monthly saving.

The general guideline is to save 10–15% of gross income for retirement starting in your 20s. If you started late, 20–25% may be needed to close the gap. Maximize tax-advantaged accounts first: 401(k) (2025 limit: $23,500, plus $7,500 catch-up if 50+) and IRA ($7,000, plus $1,000 catch-up).

Use our retirement calculator to run a personalized projection: enter your current savings, monthly contribution, expected rate of return, and retirement age. The calculator shows your projected balance and the annual income it can support at a 4% withdrawal rate.

The classic rule of thumb — hold your age as a percentage of bonds — means a 30-year-old holds 30% bonds, 70% stocks. Modern variants suggest more equity for longer time horizons, since retirement may last 30+ years.

Closer to retirement, sequence of returns risk becomes critical: a major market downturn in the first 5 years of retirement can permanently damage your portfolio's longevity, even if markets recover later. This is why advisors recommend shifting toward more conservative allocations as you approach retirement.

A simple three-fund portfolio — total US stock market index, total international stock index, and total bond market index — gives you diversification at low cost. Expense ratios matter: 0.5% lower annual fees on a $500,000 portfolio saves $2,500 per year, compounding to significant sums over decades.