Your Retirement Number: The 4% Rule Math, Step by Step

Michael Chen

Michael Chen writes about personal finance fundamentals. Bay Area-based · finance enthusiast for 15 years.

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Quick answer: Estimate your yearly spending in retirement, subtract Social Security and any pension, and multiply what is left by 25. For example, a $28,000 gap means a target of about $700,000. Treat it as a starting point, not a promise, and review it every year.↗ Share on X

To find your retirement savings number with the 4% rule, take the amount you expect to spend each year in retirement, subtract any steady income you will get (like Social Security or a pension), and multiply what is left by 25. If you will need $50,000 a year and Social Security covers $22,000, the gap is $28,000. Multiply $28,000 by 25 and your target is $700,000. That number is a starting point, not a promise. It rests on history, and the future can be different.

Below you will see where the rule comes from, how to do the math step by step, and when you should adjust it.

What is the 4% rule in plain words?

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The 4% rule says this: in your first year of retirement, you take out 4% of your savings. Every year after that, you take out the same dollar amount, raised for inflation (the rise in prices). If you do that, history suggests your money has a good chance of lasting about 30 years.

Example with $700,000:

• Year 1: 4% of $700,000 = $28,000.
• Year 2: if prices went up 3%, you take $28,840.
• Year 3: you raise it again by that year's inflation, and so on.

Notice that after year 1, you stop looking at the 4%. You follow the dollar amount plus inflation, no matter what the market did.

The idea comes from research by financial planner William Bengen in the 1990s, who tested withdrawal rates against past U.S. market returns. Later, a well-known study from Trinity University looked at the same question. Both looked at portfolios with a mix of stocks and bonds, not all cash and not all stocks.

Why does "multiply by 25" work?

Because 4% is the same as 1/25. If you want to pull $1 each year, you need $25 saved. So:

Retirement number = yearly amount you need from savings × 25

That is the whole trick. You can also run it the other way: savings × 0.04 = yearly income you can draw.

How do you calculate your number step by step?

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Step 1: Estimate your yearly spending in retirement

Start with what you spend today. Look at 3 to 6 months of bank and card statements, add them up and turn it into a yearly figure.

Then adjust:

• Subtract costs that will end, like commuting, work clothes, retirement contributions, or a mortgage you will pay off.
• Add costs that may grow, like health care, travel, or home repairs.

If you are far from retirement, a rough guess is fine. Many people use 70% to 80% of their current income as a first estimate, but your own spending is always a better guide than a general percentage.

Step 2: Subtract steady income sources

Here we mean income that does not depend on your investments:

• Social Security (check your estimate on your ssa.gov account)
• A pension
• Rental income you expect to keep
• Part-time work you plan to do

Step 3: Multiply the gap by 25

This is your target for invested savings, such as 401(k), IRA, and brokerage accounts.

Step 4: Add a cushion for taxes

Money in a traditional 401(k) or IRA is taxed when you take it out. If most of your savings are in those accounts, the $28,000 you withdraw is not $28,000 you can spend. A simple way to handle this is to estimate your tax rate and gross up your yearly need before multiplying by 25.

What does the math look like for different people?

These are examples to show the math. Your real numbers depend on your own budget and benefits.

When should you use a lower number than 4%?

The rule was built for about 30 years of retirement. Consider a lower rate, like 3% to 3.5% (which means multiplying by roughly 29 to 33), if:

• You plan to retire early. Retiring at 50 may mean 40 or more years of withdrawals.
• Your savings are mostly in cash or very safe bonds. Lower growth makes the money run out sooner.
• You would not be able to cut spending in a bad year. Flexibility is a big part of what makes any withdrawal plan work.
• You pay high fees. An investment fee of 1% a year eats a large bite of a 4% withdrawal.

When might 4% be too cautious?

Some people can safely think a bit higher, as long as they understand the risk:

• You are retiring later, with fewer years to fund.
• You are willing to spend less after a big market drop.
• A large share of your spending is already covered by Social Security or a pension.
• You would be fine leaving little or no money behind.

What are the biggest risks with the 4% rule?

The rule is a guide from past data. It has weak spots you should know:

1. Bad timing. If the market falls hard in your first few years of retirement, while you are also withdrawing, your savings can shrink fast. This is called sequence-of-returns risk: the order of good and bad years matters a lot.

2. High inflation. Rising prices make each year's withdrawal bigger.

3. Health care costs. They tend to rise with age and can be hard to predict.

4. Living longer than expected. A plan built for 30 years may need to stretch to 35.

5. The future is not the past. The rule is based on U.S. history. Future returns may be lower.

No withdrawal rate can remove these risks. The goal is to pick a number that gives you a reasonable margin and then check it every year.

How can you make the plan safer?

• Keep 1 to 2 years of spending in cash or short-term savings. In a down market, you can live on that instead of selling stocks at a low price.
• Use a spending floor and ceiling. Decide in advance that you will cut travel or big purchases by a set amount if your portfolio drops a lot.
• Delay Social Security if you can. Each year you wait past full retirement age, up to 70, raises your monthly benefit, which lowers how much you need from savings.
• Review once a year. Recheck your spending, your balance, and your withdrawal amount.

What does a full example look like?

Meet a couple, both 62, who plan to retire at 65.

1. Spending today: $5,000 a month, or $60,000 a year.

2. Adjustments: their mortgage of $1,000 a month ends before retirement, so they drop $12,000. They add $4,000 a year for health costs and travel. New yearly need: $52,000.

3. Social Security: together, their estimates at 65 add up to about $30,000 a year.

4. Gap: $52,000 minus $30,000 = $22,000.

5. Taxes: most of their savings sit in traditional IRAs. They assume roughly 12% goes to taxes, so they plan to withdraw about $25,000 to spend $22,000.

6. Target: $25,000 × 25 = $625,000.

If they have $500,000 today, they know they are about $125,000 short. They can close that gap by saving more, working a little longer, delaying Social Security, or planning to spend a bit less. Seeing the number turns a vague worry into a clear choice.

Should you get professional help?

This calculation is a good first step, but retirement touches taxes, Social Security timing, health insurance, and how your money is invested. Before you retire, or if you are unsure about your numbers, talk to a fee-only financial planner (someone paid a flat fee, not a commission on products) or a certified financial planner (CFP). This article is general education, not personal financial advice.

Your next step today

1. Pull the last 3 months of statements and add up what you spend. Multiply by 4 to get a yearly figure.

2. Log in to ssa.gov and write down your estimated Social Security benefit at 62, at full retirement age, and at 70.

3. Subtract the benefit from your yearly spending and multiply the gap by 25.

Write that number down. Then compare it with what you have saved today. The difference tells you how much work is left, and that is the first real step toward a plan.

FAQ

Why do you multiply by 25 for the 4% rule?

Because 4% equals 1/25. To draw $1 a year at a 4% rate, you need $25 saved, so your yearly need times 25 gives your target.

Is the 4% rule safe for early retirement?

It was built for about 30 years. If you retire early and need money for 40 years or more, many people use 3% to 3.5% instead, which means a bigger target.

Does the 4% rule include taxes?

No. Withdrawals from a traditional 401(k) or IRA are taxed, so add an estimate for taxes to your yearly need before multiplying by 25.

Educational content, not personalized financial advice. Sources cited where applicable.