"How much do I need to retire?" is the most common money question there is, and the most common answer, "$1 million" or "10 times your salary," is almost useless. The real answer depends on what you spend, what income you'll have anyway, and how much you can safely draw from savings each year. This guide walks through each piece.
Step 1: Start with spending, not salary
Your retirement number is driven by what you'll spend, not what you earn today. Two people earning $120,000 can need wildly different amounts if one spends $4,000 a month and the other spends $9,000.
List your expected monthly expenses in retirement in two groups:
- Essentials: housing, utilities, food, insurance, healthcare, transportation and taxes.
- Discretionary: travel, hobbies, dining out and gifts.
Separating them matters later. Essentials are what you must fund in a bad market year. Discretionary spending is what you can trim.
Step 2: Subtract income you'll get anyway
Social Security, pensions and annuities reduce what your savings must cover. Your personalized Social Security estimate is available by creating an account at ssa.gov. The difference between your expenses and this guaranteed income is your shortfall, which is the part your portfolio has to fund.
Step 3: Divide the shortfall by a withdrawal rate
This is where the "4% rule" comes in. It comes from 1990s research, notably by financial planner William Bengen, which looked at historical U.S. market returns. It found that a retiree who withdrew 4% of their starting portfolio in year one, then adjusted that dollar amount for inflation each year, would historically not have run out of money over 30 years in almost all periods tested.
To turn a withdrawal rate into a target, divide your annual shortfall by it:
| Annual shortfall | At 5% | At 4% | At 3.5% |
|---|---|---|---|
| $24,000 ($2,000/mo) | $480,000 | $600,000 | $685,714 |
| $40,000 | $800,000 | $1,000,000 | $1,142,857 |
| $60,000 | $1,200,000 | $1,500,000 | $1,714,286 |
A small change in the withdrawal rate makes a big difference to the target. That's why the rate you choose is the most important assumption in the whole calculation.
What current research says
Morningstar's annual retirement income research puts the highest "safe" starting withdrawal rate at 3.9% for new retirees. That assumes spending that rises with inflation, a 30-year horizon, a 90% probability of not running out, and a portfolio of 30%–50% stocks. The same research notes that retirees willing to cut spending after bad market years can start meaningfully higher.
In other words, 4% is a reasonable starting point for a 30-year retirement with rigid spending. If you're retiring early and need 40+ years, a lower rate is safer. If you have flexible spending or substantial guaranteed income, a somewhat higher rate may work.
Step 4: Work out what it takes to get there
Once you have a target, the next question is whether your current savings and contributions can reach it. Our Retirement Number Calculator runs all four steps and solves for the annual return you'd need to hit your target by your chosen retirement age. If that required return comes out in the double digits, the plan relies on returns that aren't reliable. The fix is usually more savings, more time or a lower spending target.
Common mistakes
- Forgetting inflation. $60,000 of spending today will need about $126,000 in 25 years at 3% inflation. See our inflation guide.
- Forgetting taxes. Withdrawals from traditional 401(k)s and IRAs are taxed as income. Your gross withdrawal must cover the tax too.
- Ignoring healthcare before Medicare. Retiring before 65 means paying for health insurance yourself.
- Assuming average returns every year. The order of returns matters a lot once you're withdrawing. See sequence-of-returns risk.
Frequently asked questions
Is the 4% rule still valid?
As a rough starting point for a 30-year retirement, yes. Current research clusters around 3.5%–4% for rigid, inflation-adjusted spending. It's a planning rule of thumb, not a guarantee.
Should I include my home equity?
Usually not, unless you plan to sell or downsize and live on the proceeds. A paid-off home lowers your expenses, which is already reflected in Step 1.
What if my number feels impossible?
Each lever helps: a few more working years, delaying Social Security (which increases your benefit), part-time income early in retirement, or trimming discretionary spending. Run the scenarios in the calculator to see which lever moves the result most.