Your retirement number is the size of portfolio that can support your spending once you stop working. Estimating it turns a vague worry into a concrete target you can plan around. A few reasonable assumptions about spending, other income, and withdrawal rates get you a workable figure.
Start with your annual spending
The foundation of the calculation is what you expect to spend each year in retirement, not what you earn today. Many people find their spending drops somewhat because they no longer save for retirement, commute, or support children. A common shortcut assumes you will need roughly 70 to 80 percent of your pre-retirement income, but building a real budget is far more accurate. Remember to include taxes, healthcare, and periodic costs like home repairs and travel.
Subtract guaranteed income sources
Not all of your spending has to come from your portfolio, because Social Security and any pensions cover part of it. Estimate your annual Social Security benefit from your official statement and subtract it, along with any pension, from your target spending. What remains is the gap your savings must fill each year. Reducing that gap, for example by delaying Social Security to increase the benefit, directly shrinks the nest egg you need.
Apply a withdrawal rate to find the target
Once you know the annual gap your portfolio must cover, divide it by a safe withdrawal rate to find the required balance. Using the 4 percent guideline, you multiply the gap by 25 to estimate the nest egg. A more cautious 3.5 percent rate implies multiplying by roughly 29, which builds in a bigger safety margin. This multiple-of-expenses approach is the quickest way to translate spending into a savings goal.
Adjust for inflation and your timeline
Your number is a target in today's dollars, so remember that prices will be higher by the time you retire. Investment growth is meant to keep pace with and exceed inflation, which is why the 4 percent rule already builds in annual inflation raises. A longer retirement, early retirement, or a desire to leave an inheritance all argue for a larger target or a lower withdrawal rate. Revisiting the number every few years keeps it aligned with changes in your life and spending.
Suppose you expect to spend 60,000 dollars a year and Social Security will cover 24,000 dollars. Your portfolio needs to supply the remaining 36,000 dollars, so at a 4 percent withdrawal rate you would target 36,000 times 25, or 900,000 dollars.
Key takeaways
- Base your number on expected retirement spending, not current income.
- Subtract Social Security and pensions to find the gap your portfolio must fund.
- Multiply that annual gap by about 25 for a 4 percent withdrawal target.
- Delaying Social Security or trimming spending directly lowers the nest egg you need.
Common mistakes
- Basing the target on current income when actual retirement spending will differ.
- Ignoring taxes and healthcare, which can be large line items in retirement.
- Forgetting that the target is in today's dollars and will grow with inflation.
FAQ
Is the multiply-by-25 rule accurate enough?
It is a solid starting estimate, but a longer retirement, early retirement, or market conditions may justify a more conservative multiple or a detailed cash-flow plan.
Should I include my home in my retirement number?
Usually not directly, since you need a place to live, though downsizing or a reverse mortgage can turn home equity into retirement income later.