How much do you actually need?
The common rule of thumb is that you need about 25 times your desired annual retirement spending. That figure is simply the inverse of the 4% withdrawal rate: if you withdraw 4% a year, your portfolio needs to be 25 times that withdrawal.
Another frequently cited target is 10–12 times your final salary by age 65. Both are starting points, not answers. Your real number depends on when you retire, whether your mortgage is paid off, your healthcare costs before Medicare eligibility, and how much Social Security will cover.
Social Security matters more than most projections assume. The average US benefit is roughly $23,000 a year, and for a household with two earners that can cover a substantial share of baseline spending — which meaningfully reduces the portfolio you need to build.
Where the 4% rule comes from, and its limits
The 4% figure comes from the Trinity Study and William Bengen's 1994 research, which tested historical US market data to find the highest starting withdrawal rate that survived every 30-year period, adjusted annually for inflation. Four percent survived the worst historical sequences, including retiring immediately before the 1929 crash.
Three caveats worth knowing. It was built on a 30-year horizon, so early retirees planning for 45+ years should use something closer to 3–3.5%. It assumes a portfolio of roughly 50–75% stocks, which many retirees find uncomfortable. And it is based on historical US returns during an exceptional century — international data produces lower safe rates.
In practice most retirees do not withdraw a rigid inflation-adjusted amount regardless of conditions. Spending flexibly — trimming withdrawals after bad market years — supports meaningfully higher average withdrawal rates than any fixed rule.
Sequence of returns risk
While you are accumulating, the order of your returns barely matters; only the average does. Once you start withdrawing, the order becomes critical.
Two retirees can experience identical average returns over 30 years and get completely different outcomes based purely on when the bad years arrived. Poor returns in the first five years of retirement force you to sell assets while they are depressed, permanently shrinking the base that has to recover. The same bad years occurring late in retirement are largely harmless.
The standard defences are holding one to three years of expenses in cash or short-term bonds, staying flexible on discretionary spending in the early years, and shifting toward a more conservative allocation in the decade around your retirement date.
Get the account order right
A reasonable default sequence: contribute enough to your 401(k) to capture the full employer match, then max out an HSA if you have a high-deductible health plan, then a Roth or traditional IRA, then return to filling the 401(k) up to the annual limit.
The employer match comes first because it is an instant 50–100% return with no risk — nothing else in finance competes. The HSA ranks unusually high because it is the only triple-tax-advantaged account in the US system: deductible going in, growing tax-free, and withdrawn tax-free for qualified medical expenses.
The Roth versus traditional decision comes down to whether your tax rate is higher now or in retirement. Early career, when your income is low, favours Roth. Peak earning years generally favour traditional. Holding some of each provides useful flexibility to manage your tax bracket in retirement.
Reading this projection honestly
The number above is in nominal dollars and assumes a smooth, constant return. Neither is realistic. At 3% inflation, $1,000,000 in 30 years buys roughly what $410,000 buys today — so mentally discount the result substantially, or enter an inflation-adjusted return of around 4–5% instead of 7% to see the figure in today's purchasing power.
The projected income is also pre-tax. Withdrawals from a traditional 401(k) or IRA are taxed as ordinary income; Roth withdrawals are not. And a constant return hides the reality that markets deliver their long-run average through years that swing violently in both directions.
Treat this as a directional planning tool. Its most useful function is comparative: change your contribution or your retirement age and watch how much the outcome moves. Those relationships are far more reliable than any single projected balance.
Frequently asked questions
- What return rate should I assume?
- 7% is a common assumption for a stock-heavy portfolio before inflation; the long-run US equity average is closer to 10% nominal. If you want the result in today's purchasing power, use 4–5% instead. A more conservative assumption is rarely a mistake.
- Should I include my employer's 401(k) match?
- Yes. Add it to your monthly contribution figure. If you contribute $800 and your employer adds $400, enter $1,200.
- Does this include Social Security?
- No. Social Security income is separate and would reduce how much you need from your portfolio. You can get a personalised estimate from your Social Security statement at ssa.gov.
- I'm starting late. Is it still worth it?
- Yes. You have less time for compounding, but three levers remain powerful: higher contributions, catch-up contributions (an extra allowance once you turn 50), and delaying retirement. Working two additional years both adds contributions and removes two years of withdrawals — the effect is much larger than most people expect.