How Much Do I Need to Retire? The 4% Rule Explained
Updated: Oct 8
Written by John Macy, Financial Coach, MBA, Retirement Income Certified Professional® (RICP)
The key to retirement income planning and a secure, satisfying retirement isn't a single one-size-fits-all “magic number” like $1 million or $2 million — it's figuring out the size investment portfolio you need to support the life you want.
Quick Formula - Using the "4% Rule of Thumb"
The Retirement Number Formula: Target Savings = (Annual Desired Spending - Guaranteed Annual Income) x Multiplier Use a Multiplier of 25x for a standard 30-year retirement; Use a Multiplier of 33x for early retirement (or if you are very risk averse). |
Origin of the "4% Rule of Thumb"
The 25x Multiplier is based on research conducted by William Bengen, a financial planner, in the early 1990s. In that research ("Determining Withdrawal Rates Using Historical Data", published in the October 1994 issue of the Journal of Financial Planning) he looked at stock and bond market data for rolling 30-year periods from 1926 to 1992 and asked a simple question: how much could a retiree withdraw from a portfolio of 50% stocks and 50% intermediate term U.S. Government bonds every year (adjusted for inflation) and never run out of money over a 30 year retirement? That period included major economic shocks like the Great Depression, World War II, the stagflation of the 1970s, and October 1987 "Black Monday". Based on that historical data he concluded that a retiree could safely withdraw 4% of the original portfolio adjusted for inflation each year. That is the origin of the so-called "4% Rule", or what Bill Bengen called the "SAFEMAX rate". Subsequently, a later study (Retirement Savings: Choosing a Withdrawal Rate that Is Sustainable) published in 1998 by three academic researchers at Trinity University confirmed Bill Bengen's conclusion.
Calculating Your Retirement Number - A Three-Step Formula
STEP 1: Define Your Vision (The Spending Target)
Many people believe you will need to spend about 80% of your pre-retirement income in retirement. While that very basic rule of thumb might work for some, there is no one-size-fits-all rule. Your number might be completely different.
The place to start is answering the question: What lifestyle do you want, and what do you truly need to spend to achieve the retirement lifestyle you desire?
Low-Cost: Simple living, fixed expenses covered, minimal travel, or moving to low cost-of-living states (Mississippi, Oklahoma, Kansas, Missouri, Alabama) or countries (Vietnam, Indonesia, Thailand, Philippines, Malaysia, Ecuador, Mexico, Panama, eastern European countries). Read this article for more information on moving to low-cost countries.
Comfortable: Steady travel, hobbies, and no budgeting stress.
Luxury: World travel, maintaining two homes, and aggressive spending goals.
Your desired annual spending is your starting point.
Recommendation: Create a retirement budget from the bottom up. Use what you currently spend as a starting point. Make adjustments for things like eliminating your mortgage payment, kids leaving home, stopping retirement savings, increased travel, increased spending on hobbies, and rising healthcare expenses. If you are considering moving to a new state or a new country, you can use a tool like numbeo.com to help you develop a budget for that location. But you should definitely spend some time in that new location prior to moving there to validate your budget assumptions.
STEP 2: Calculate The Gap
Next, identify all the guaranteed income that you will receive automatically, such as Social Security, pensions, annuities, or a TIPS bond ladder. Subtract the total guaranteed annual income from your desired annual retirement spending. That will identify the spending gap that your portfolio will need to cover.
Formula to Calculate the Spending Gap: Spending Gap = Desired Retirement Spending - Guaranteed Income |
The Gap is the amount your investment portfolio needs to cover every single year.
Example: You plan to spend $90,000 per year. Your guaranteed income is $40,000 per year. Gap = $50,000 = $90,000 - $40,000 |
STEP 3: Calculate Your Target Savings Goal
Now, multiply the Spending Gap by a Multiplier based on your risk tolerance and time horizon to calculate your savings goal. This is based on the 4% Rule (where 25 is the inverse of 4%) but adjusted for how long you expect to be retired and how much tolerance you have for risk during retirement.
Multiplier | Target Savings | Best For ... |
25x | $1.25 Million | A typical 30-year retirement (the standard safety baseline) |
33x | $1.65 Million | Early retirement (longer time horizon) or a desire for very high safety |
20x | $1.0 Million | Later retirement, flexible spending, or a plan to work part-time in retirement. Highest risk unless short retirement timeline or very flexible spending plan. |
Note: These multipliers are the inverse of your Safe Withdrawal Rate (SWR). A 4% SWR equals a 25x multiplier; a 3% SWR equals a 33x multiplier; a 5% SWR equals a 20x multiplier.
Example: Your income-spending Gap is $50,000. For a typical 30-year retirement multiply that by 25 and your Target Savings is $1.25 million. Target Savings = $1,250,000 = $50,000 X 25 |
Flexible Withdrawal Strategies Can Significantly Increase Withdrawal Rates
In the years since Bill Bengen introduced the so-called "4% Rule", various financial planners and researchers have developed a variety of somewhat more complex flexible spending strategies that can noticeably increase the safe withdrawal rate from 4% to as high as 5% or even 6%. These include the Vanguard Dynamic Spending Strategy, the Variable Percentage Withdrawal strategy, the RMD-based Spending Method, and the Guyton-Klinger Guardrails Strategy. Using one of these flexible systems, the retiree or financial planner monitors the relationship between the current size of the portfolio, withdrawals, and withdrawal rates and periodically adjusts the withdrawals up or down based on recent market and portfolio performance. So, when portfolios do really well retirees can increase their income by taking higher withdrawals. Conversely, when portfolios do poorly retirees decrease their income slightly by reducing withdrawals. Using one of these flexible spending methods, retirees can typically withdraw more (in total) over a 30-year retirement or retire earlier than if they use the more rigid "4% Rule". Combining a flexible spending strategy with an income floor strategy can be a winning strategy for many retirees. Read more about these Flexible Spending Strategies in this article.
Bonus Tips
INFLATION: You must assume your spending will rise by 3%-4% every year. Your portfolio must generate growth to offset this.
Declining Spending As You Age: Research demonstrates that most retirees naturally reduce their spending by about 1%/year (or 10%/decade) as they age and transition from the "Go-Go Years" to the "Slow-Go Years" to the "No-Go Years". This can help to offset (at least partially) the effects of inflation.
HEALTHCARE: These costs are often underestimated. Factor in dedicated funds for rising premiums and potential long-term care. If you plan to live in the U.S., healthcare costs are projected to grow about 5-7% per year over the next 10 years.
THE BOTTOM LINE
Retirement planning isn't about chasing a magic number. It's about designing a resilient plan where your guaranteed income plus portfolio withdrawals keep pace with your desired lifestyle. Minimizing taxes is also important—see my blog post on asset location for helpful tips ("Tax-Efficient Asset Location").
Ready to design or stress-test your retirement plan? |
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This post is for general education and is not investment or tax advice. Please consult a qualified professional to determine what is appropriate for your specific situation.
Author: John Macy, MBA, RICP®
John Macy is a professional financial coach and the founder of FlourishingPath Financial Coaching. With over six years of experience as a financial coach, John helps pre-retirees and retirees design resilient portfolios and income streams for their next act. Read his full story here.
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