Reading time: 3 minutes
Most people guess their retirement number.
They say "$1 million sounds right" or "I'll figure it out later."
The problem: if you guess wrong, you either run out of money at 80 or work 10 extra years you didn't need to.
There's a formula. It's called the 4% rule.
Here's what it is, where it comes from, and how to calculate the exact number you need.
The 4% Rule Explained
The 4% rule says: withdraw 4% of your portfolio in year one of retirement, then adjust for inflation each year. Your money should last 30+ years.
Example:
- Portfolio: $1,000,000
- Year 1 withdrawal: $40,000 (4%)
- Year 2 withdrawal: $41,200 (adjusted for 3% inflation)
- Year 3 withdrawal: $42,436
- And so on...
Result: Based on 90 years of historical market data, a portfolio withdrawing 4% annually survives 30 years 95% of the time.
This isn't theory. It's based on the worst market periods in modern history—including the Great Depression, the 1970s stagflation, and multiple bear markets.
The 25x Rule: Your Magic Number
The 25x rule is the flip side of the 4% rule.
If 4% of your portfolio = your annual expenses, then:
Your portfolio needs to be 25× your annual expenses.
The math:
- Annual expenses: $50,000/year → You need $1,250,000
- Annual expenses: $80,000/year → You need $2,000,000
- Annual expenses: $100,000/year → You need $2,500,000
The formula:
Retirement Number = Annual Expenses × 25
That's it. Calculate your annual spending, multiply by 25, and you have your target.
Step 1: Calculate Your Annual Retirement Expenses
Most people overestimate what they'll spend in retirement.
Expenses that go DOWN:
- Work commuting costs disappear
- Work wardrobe eliminated
- Payroll taxes gone (no more Social Security/Medicare withholding)
- Mortgage may be paid off
- Kids off the payroll
- Retirement contributions stop (you're withdrawing, not saving)
Expenses that go UP:
- Healthcare (biggest wildcard)
- Travel and leisure
- Home maintenance (more time at home)
- Potentially long-term care
Rule of thumb: Most retirees need 70–80% of their pre-retirement income.
Example:
You earn $100,000/year now.
- Retirement income target: $75,000/year (75%)
- Minus Social Security: -$20,000/year
- You need to fund: $55,000/year from savings
Retirement number: $55,000 × 25 = $1,375,000
Step 2: Factor In Social Security
Social Security is real income that reduces how much your portfolio needs to cover.
Average Social Security benefit (2024): ~$1,900/month ($22,800/year)
For a married couple: Up to $3,800/month ($45,600/year)
This changes the math significantly.
Example without Social Security:
- Annual expenses: $80,000
- Portfolio needed: $80,000 × 25 = $2,000,000
Example with Social Security:
- Annual expenses: $80,000
- Social Security income: -$24,000/year
- Gap to fund: $56,000/year
- Portfolio needed: $56,000 × 25 = $1,400,000
Social Security reduces your portfolio target by $600,000 in this example.
Check your estimated Social Security benefit at ssa.gov/myaccount.
Step 3: Stress-Test the 4% Rule
The 4% rule works most of the time. But not all of the time.
When 4% might not be enough:
❌ You retire early (before 60) If you need your money to last 40-50 years, not 30, consider using 3.5% instead. 3.5% rule → multiply expenses by 29 instead of 25.
❌ You retire during a market peak "Sequence of returns risk" means a crash in your first 5 years can permanently damage your portfolio. Market valuation matters.
❌ You have high fixed expenses If most of your spending is non-negotiable (mortgage, medical, etc.), you have less ability to cut back during downturns.
❌ Healthcare costs are uncertain Long-term care can cost $100,000+/year. Budget separately for this.
When 4% is conservative (you may be able to spend more):
✅ You have a pension or annuity covering basic expenses ✅ You're willing to cut spending 10-15% during market downturns ✅ You have other income sources (rental properties, part-time work) ✅ You don't plan to leave a large inheritance
The Real Numbers: What People Actually Need
Scenario A: Lean Retirement ($45,000/year spending)
- Social Security: $18,000/year
- Gap: $27,000/year
- Portfolio needed: $27,000 × 25 = $675,000
Achievable for most people who start saving at 30.
Scenario B: Comfortable Retirement ($75,000/year spending)
- Social Security: $24,000/year
- Gap: $51,000/year
- Portfolio needed: $51,000 × 25 = $1,275,000
The most common target for middle-income Americans.
Scenario C: Affluent Retirement ($120,000/year spending)
- Social Security: $30,000/year
- Gap: $90,000/year
- Portfolio needed: $90,000 × 25 = $2,250,000
Requires consistent high savings rate or above-average investment returns.
The Sequence of Returns Problem
Here's the retirement risk most people don't know about.
Two retirees, both with $1,000,000, both withdrawing $40,000/year:
Retiree A: Market crashes 30% in Year 1, then recovers normally Retiree B: Market grows normally, then crashes 30% in Year 20
Outcome:
- Retiree A runs out of money at age 83
- Retiree B is fine—their portfolio survives
Same average returns. Completely different outcomes.
Why? Early losses force you to sell more shares at low prices to fund withdrawals. Those shares never recover to help you later.
How to protect against it:
- Keep 1-2 years of expenses in cash (don't sell during crashes)
- Have a "flex spending" plan: cut discretionary spending 10-15% if the market drops >20%
- Consider delaying Social Security to age 70 (maximizes your guaranteed income floor)
The Healthcare Wildcard
Healthcare is the biggest variable in retirement planning.
Average retirement healthcare costs:
- Medicare premiums + out-of-pocket: ~$6,000-$8,000/year per person
- Long-term care: Average stay is 3 years at $50,000-$100,000/year
Long-term care statistics:
- 70% of people 65+ will need some form of long-term care
- Average long-term care need: 2.5 years
- Average cost: $150,000-$250,000 total
What to do:
- Add $200,000-$300,000 to your retirement number as a healthcare buffer
- Or buy long-term care insurance in your 50s (cheaper than funding it yourself)
- Or plan on Medicaid as a last resort (requires spending down assets)
Revised retirement formula (with healthcare buffer):
Retirement Number = (Annual Expenses × 25) + $250,000 healthcare reserve
How Much Should You Have Saved by Age?
These are general benchmarks—not rules. Your number depends on your specific expenses and income.
By age 30: 1× your annual salary By age 40: 3× your annual salary By age 50: 6× your annual salary By age 60: 8× your annual salary At retirement (65): 10-12× your annual salary
Example ($80,000 salary):
- Age 30: $80,000 saved
- Age 40: $240,000 saved
- Age 50: $480,000 saved
- Age 60: $640,000 saved
- Age 65: $800,000-$960,000 saved
These benchmarks assume Social Security covers a significant portion of expenses.
The "One More Year" Trap
Many people over-save out of fear—working years longer than necessary.
The math is brutal:
If you need $1,500,000 and you have $1,450,000 at age 62, you're 97% there.
Working one more year adds ~$100,000-$150,000 to your portfolio and delays withdrawals by 12 months.
But it also costs you one year of retirement.
If you live to 85, you have 23 years of retirement from 62 or 22 from 63.
One year of retirement is worth approximately $75,000 in lifestyle value (at $75k/year spending).
The question: Is working one more year worth trading one year of retirement?
For most people who are at 90%+ of their number with Social Security ahead—no.
The Action Plan
Step 1: Calculate your retirement expenses
Track your current spending. Remove work-related costs. Add healthcare buffer. This is your target annual retirement income.
Step 2: Check your Social Security estimate
Visit ssa.gov/myaccount. Subtract your estimated benefit from Step 1.
Step 3: Calculate your number
(Annual gap after Social Security) × 25 = Your portfolio target
Step 4: Add a healthcare reserve
Add $200,000-$300,000 to your target for healthcare and long-term care.
Step 5: Run the retirement calculator
Input your current savings, monthly contributions, and expected return. See if you're on track—and what you need to change if you're not.
Step 6: Revisit every 5 years
Life changes. Income changes. Expenses change. Your retirement number should evolve too.
More Ways to Master Your Finances
Ready to take control of your money? Visit CashWise.app for:
- Free financial calculators - No signup required
- Portfolio tracking - Monitor your investments in one place
- Stock backtesting - Test strategies with historical data
- Educational resources - Guides on debt, investing, and retirement
Create a free account to save your calculations and track your progress.
Calculate Your Retirement Number
Use the Retirement Calculator to:
- Find your exact retirement number based on your expenses and Social Security
- See how your current savings rate puts you on track (or not)
- Model early retirement vs. standard retirement age
- Stress-test your plan against historical market downturns
Run your numbers before you decide.
Previous: Roth IRA vs Traditional IRA: The Tax Game Explained Next: Social Security Timing: When Should You Start Collecting? - Claiming at 62 vs. 67 vs. 70 is a $150,000+ decision. Here's how to get it right.