You need enough to cover the part of your future spending that Social Security, pensions, work, rent, and other dependable income will not cover. There is no useful answer until you know that yearly gap.
The five steps
Step 1: estimate one year of retirement spending. Include taxes and irregular costs, not only monthly bills. Step 2: subtract dependable income. Step 3: note when each income starts, because the gap can change by age.
Step 4: divide the long-term yearly gap by more than one starting withdrawal rate. At 4%, multiply the gap by 25. At 3%, multiply it by about 33. These are tests, not guarantees. Step 5: run difficult cases: poor early returns, higher prices, a long life, and a large one-time cost.
Keep bridge money separate in your thinking. The years before Social Security, Medicare, a pension, or easy account access may need their own pool of cash. Add that bridge to the long-term estimate instead of pretending every year is the same.
A long-term gap plus a bridge
Pat expects $75,000 of yearly spending. Social Security and a pension may provide $45,000 after both begin. The long-term gap is $30,000. That points to $750,000 at 4% and $1 million at 3%.
But Pat will retire three years before the pension starts. Those years have a $50,000 gap, or $150,000 before growth and tax effects. Pat adds that bridge to the range and tests the full timeline instead of choosing $750,000 from one division problem.
Two details that break quick estimates
Do not mix today’s dollars with future inflated dollars. Use the same basis for spending, income, and savings throughout the estimate.
Taxes come from the account type and the income mix. A $1 withdrawal from a pretax account may not leave $1 to spend.
Three numbers to test
- What is my yearly spending gap after dependable income?
- Which years have a larger bridge gap?
- What changes if returns are poor early in retirement?
Quick answers
How many times my salary do I need to retire?
Salary is only a rough shortcut. Spending and dependable retirement income give a more personal answer.
What is the 25-times rule?
It is a quick estimate made by dividing a yearly spending gap by 4%. It is useful for a first look, not proof that the plan will last.
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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