Planning Your Retirement
Retirement planning comes down to three factors: how much you save, how long you invest, and what returns you earn. Starting early is the single most powerful thing you can do, thanks to compound growth.
The 4% Rule
The 4% rule is a widely-used retirement guideline: withdraw 4% of your portfolio in year one, then adjust for inflation each year. Historically, this has sustained portfolios for 30+ years. On $1 million saved, you can withdraw $40,000/year ($3,333/month).
How Much Do You Need?
Multiply your desired annual retirement income by 25. Want $60,000/year? You need $1.5 million. Want $100,000/year? Target $2.5 million. This assumes a 4% withdrawal rate and a balanced investment portfolio.
The Impact of Starting Early
Starting at 25 with $500/month at 7% returns: $1.2 million by 65. Starting at 35: $567,000. Starting at 45: $244,000. The first 10 years produce more wealth than the last 20 — that is the power of compound growth.
Frequently Asked Questions
How much do I need to retire?
A common guideline is 25x your annual expenses (the 4% rule). If you spend $50,000/year, aim for $1,250,000. This amount, invested in a balanced portfolio, should sustain 30+ years of retirement with a 4% annual withdrawal rate.
What is the 4% rule?
The 4% rule suggests you can withdraw 4% of your retirement savings in year one, then adjust for inflation each year, and your money should last 30 years. On a $1 million portfolio, that's $40,000/year or $3,333/month. Some advisors now recommend 3.5% for added safety.
How much should I save for retirement each month?
Financial advisors recommend saving 15-20% of gross income for retirement. Starting at 25 and saving $500/month at 7% returns builds roughly $1.2 million by 65. Starting at 35 requires $1,000/month to reach the same goal. The earlier you start, the less you need to save.
What rate of return should I expect?
Historically, a balanced stock/bond portfolio returns 6-8% annually after inflation. The S&P 500 alone has averaged about 10% (7% after inflation). Use 6-7% for conservative estimates. Your actual returns depend on asset allocation and market conditions.
Will Social Security be enough for retirement?
The average Social Security benefit is about $1,900/month (2024). Maximum benefit at full retirement age is around $3,822/month. Social Security typically replaces 30-40% of pre-retirement income, so most people need additional savings to maintain their lifestyle.