To find your retirement number, estimate what you’ll spend in a year of retirement, subtract what Social Security or a pension will pay, and multiply the gap by 25. Savings of that size have historically supported withdrawals that start at 4% of the balance and rise with inflation for at least 30 years.
Without that number, retirement saving is guesswork. You can’t tell whether putting away 10% of your pay is plenty or a fraction of what you need.
The 25 is the 4% rule flipped, since 4% of 25 years of spending covers one year. Financial planner William Bengen’s 1994 study tested U.S. market returns back to 1926. His hypothetical retiree withdrew 4% of the portfolio in year one, then raised that dollar amount with inflation. With half in stocks and half in Treasury notes, the money lasted at least 33 years in every period he studied.
Only the spending Social Security or a pension won’t cover needs the multiple. A couple expecting to spend $70,000 a year, with $30,000 from Social Security, needs 25 times $40,000, or $1 million. Multiplying the full $70,000 would point them to $1.75 million, a target $750,000 too high.
Start from spending, not salary. Your paycheck also funds payroll taxes and retirement contributions that end when you retire. Count income tax on traditional 401(k) and IRA withdrawals as spending. Don’t assume spending will drop, though. An Employee Benefit Research Institute study found nearly half of households spent more in their first two years of retirement than they had just before retiring.
For the Social Security side, your account at ssa.gov estimates your benefit if you claim at 62, at full retirement age, or at 70. Add any pension. The rule assumes a similar mix of stocks and bonds and roughly 30 years of withdrawals. Retiring in your 50s or earlier can mean 40 years of withdrawals, so use a multiple of 30 or more.
Enter the target in a retirement calculator along with your current savings and years until retirement, and it returns the monthly amount to save. Rerun the numbers every few years, since spending plans and Social Security estimates change.
Pull last year’s bank and credit card statements this week and add up what you spent. That total is the first input to your retirement number.
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