Retirement planning feels overwhelming for most people — the numbers involved are large, the timelines are long, and the variables are many. But the core question is actually simple: how much money do you need so that it can support your lifestyle indefinitely, without you needing to work? This guide gives you a clear framework for answering that question.
The 4% rule — your starting point
The 4% rule is the most widely cited guideline in retirement planning. It comes from research by financial planner William Bengen in 1994, later confirmed by the Trinity Study, which found that a retiree could withdraw 4% of their portfolio annually and, with a balanced investment portfolio, the money would last at least 30 years with a high degree of confidence.
This gives us a simple formula for calculating your retirement number:
If you need $40,000 per year to live comfortably in retirement, you need a portfolio of $40,000 × 25 = $1,000,000.
Calculating your retirement number
Here's what different annual expenses require as a retirement portfolio:
| Annual retirement expenses | Required portfolio (4% rule) |
|---|---|
| $25,000/year | $625,000 |
| $40,000/year | $1,000,000 |
| $60,000/year | $1,500,000 |
| $80,000/year | $2,000,000 |
| $100,000/year | $2,500,000 |
Keep in mind that these figures don't include any pension or social security income you might receive. If you expect $15,000/year from a pension, you only need your portfolio to cover the remaining gap.
Why compound interest is your most powerful tool
The good news is that you don't need to save your entire retirement number yourself — compound investment returns do much of the heavy lifting. Here's what happens to $500/month invested at a 7% annual return over different time periods:
| Years investing | Total contributed | Portfolio value |
|---|---|---|
| 10 years | $60,000 | $86,000 |
| 20 years | $120,000 | $260,000 |
| 30 years | $180,000 | $610,000 |
| 40 years | $240,000 | $1,320,000 |
Over 40 years, $500/month grows to over $1.3 million — with only $240,000 of your own money contributed. The remaining $1,080,000 is pure compound growth. This is why starting early is so profoundly important.
💡 Every decade you delay retirement saving roughly doubles the monthly contribution required to reach the same target. Starting at 25 instead of 35 can mean the difference between saving $500/month and $1,500/month for the same outcome.
Adjusting for inflation
The 4% rule accounts for inflation — it assumes your withdrawals increase with inflation over time. However, it's also worth noting that $40,000 today will buy less in 30 years. When estimating your retirement expenses, think about what your lifestyle costs today and consider that costs will likely be somewhat higher in the future.
A simple approach: use today's numbers for your planning, and use real (inflation-adjusted) return assumptions of around 5–6% rather than nominal 7–8% returns when calculating growth.
Steps to start building your retirement plan
- Estimate your retirement expenses — think about housing, food, healthcare, travel, and leisure in retirement
- Calculate your retirement number — multiply annual expenses by 25
- Subtract any pension or social security income — reduce your target by the annual amount × 25
- Check what you've already saved — pension funds, savings accounts, investments
- Calculate the gap — how much more do you need to accumulate?
- Use a compound interest calculator to find the monthly contribution needed
- Start immediately — even a small amount invested now is worth far more than a larger amount invested later
See how your savings can grow with our free compound interest calculator — model your retirement contributions and watch the numbers grow.
Try the compound interest calculator →