# How much money do I need to retire?

By James Ustby, CFP®, APMA®. Canonical URL: https://jamesustby.com/retire-how-much-do-i-need-to-retire

> Roughly 25 times the annual income you need from your savings, after Social Security and any pension are subtracted. If you need $40,000 a year from your accounts, the target is about $1,000,000. That rule comes from a sustainable withdrawal rate of about 4 percent a year, and it is a starting point, not a verdict.

## Start with spending, not with a rule of thumb

Most people guess at a number like a million dollars and then feel either safe or doomed. Neither is useful. The number only means something when it comes from your own spending. Write down what you spend in a normal month, add the things that happen once a year (property tax, insurance premiums, the trip), and add what you want retirement to include that it does not include now. That is your annual retirement spending in today's dollars.

## Subtract the income that shows up without your savings

Social Security for each of you, a pension if you have one, rental income, a part-time job if you intend to work. What is left is the gap your savings have to fill every year. Most of the fear people carry about retirement comes from never having done this subtraction. The gap is almost always smaller than the spending.

## Multiply the gap by 25

A withdrawal rate near 4 percent a year has, in long-run historical testing, left a balanced portfolio standing for 30 years in most periods. Twenty-five times the gap is the amount that supports that rate. A $30,000 gap means about $750,000. A $60,000 gap means about $1,500,000. If the number is higher than what you have, you now know the size of the problem, which is the first thing you need.

## Then adjust for the things the rule ignores

The rule assumes a steady withdrawal that rises with inflation, a balanced portfolio, and a 30-year retirement. It ignores taxes, which come out of every withdrawal from a traditional IRA or 401(k). It ignores healthcare before Medicare at 65. It ignores a bad market in the first few years, which hurts more than a bad market later. And it ignores the fact that most people spend more in the first ten years than the last ten. A real plan adjusts for all four, and the adjustments usually move the number by 10 to 25 percent in either direction.

## A worked example

| Item | Amount |
|---|---|
| Annual spending in retirement (today's dollars) | $84,000 |
| Social Security, both spouses, claimed at full retirement age | $46,000 |
| Pension | $0 |
| Gap the savings must fill each year | $38,000 |
| Gap times 25 | $950,000 |
| Add 15 percent for taxes on IRA withdrawals and early healthcare | about $1,090,000 |

If this couple has $900,000 saved, they are close, and the plan is about Social Security timing and tax placement, not about saving more. If they have $500,000, the plan is about working two more years, spending less, or both. Either way they now know which conversation they are in.

## Questions people ask next

### Is the 4 percent rule still valid?

It remains the most common starting point and has held up across most 30-year historical periods for a balanced portfolio. Many planners now use a range of 3.5 to 4.5 percent and adjust year by year rather than treating it as fixed.

### Does the number include my house?

No. Home equity only counts if you intend to sell or borrow against it. Count the house as a place to live, not as retirement savings, unless you have a specific plan to turn it into cash.

### What if I will have a pension?

A pension reduces the gap directly. A $24,000 pension lowers the savings target by about $600,000 at a 4 percent rate, which is why people with pensions can retire on much smaller balances.

## Sources

- [Social Security Administration: my Social Security account and benefit estimates](https://www.ssa.gov/myaccount/)
- [IRS: Retirement plans, required minimum distributions](https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs)

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Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.