How Much Money Do I Need to Retire?

Ask how much money you need to retire and you will usu­ally hear one answer: 25 times your yearly spend­ing. If you spend €30,000 a year, that means €750,000.

The figure comes from the 4% rule, which is easy to re­mem­ber and rests on se­ri­ous re­search. That re­search, how­ever, an­swered a nar­rower ques­tion than the one you are asking, and for most people the number it gives is wrong. To see why, it helps to start from the be­gin­ning.

Why you need money when you stop work­ing

Your bills don’t stop when your pay­check does

Hous­ing, food, energy and health­care keep cost­ing money after your last pay­check, so your sav­ings must cover those ex­penses for every year you live after you stop work­ing:

$$\text{Money you need} \geq \text{Yearly expenses} \times \text{Years you need to cover}$$

Take Ana and David, both 50. They spend €30,000 a year, want to stop work­ing at 60 and need their money to last until 90, which adds up to 30 years of ex­penses:

$$€30{,}000 \times 30 = €900{,}000$$

In­vested money makes more money

That sum as­sumes their sav­ings sit idle for 30 years, and they don’t have to. In­vest­ing means buying assets that pay an income or grow in value: shares give you a slice of com­pa­nies’ profits, while bonds pay you in­ter­est for lend­ing to gov­ern­ments or com­pa­nies.

The gains then earn gains of their own. This is com­pound in­ter­est, and over time it pulls far ahead of simple in­ter­est, which only pays on the orig­i­nal amount. Here is how €10,000 grows at 5% a year above inflation:

After 30 years com­pound­ing has pro­duced more than twice the gains, which is why Ana and David need far less than €900,000, as long as they accept that mar­kets also fall, some­times by a third or more in a single year.

Money left in cash qui­etly shrinks

Inflation is the sus­tained, gen­eral rise in prices. At 3% a year, the €30,000 Ana and David spend this year will cost €30,900 next year, and money left in cash buys a little less every year:

After 30 years, money left in cash has lost almost 60% of its pur­chas­ing power, which is why, from here on, all amounts are in to­day’s euros and re­turns are mea­sured above inflation.

Putting the pieces to­gether

Ex­penses, years, re­turns and inflation are the four in­gre­di­ents. With a per­fectly steady 5% a year above inflation, Ana and David could fund their 30 years with about €461,000. Real mar­kets are never that steady, so the real ques­tion is how much money also sur­vives the bad years. Re­searchers an­swered it by re­play­ing his­tory.

The Trin­ity study

In 1994, the finan­cial plan­ner William Bengen re­played US market his­tory since 1926 in a study that imag­ined a new re­tiree in every year. Each one with­drew a per­cent­age of their start­ing sav­ings in the first year and raised that amount with inflation every year after. At 4%, every port­fo­lio lasted at least 33 years.^[1]

Four years later, three pro­fes­sors at Trin­ity Uni­ver­sity ran the same test with more with­drawal rates and port­fo­lio mixes. Their paper, now known as the Trin­ity study, is where most people first meet the 4% rule. Using US data from 1926 to 1995, they mea­sured how often the money lasted 30 years:^[2]

At 4%, every port­fo­lio with at least half its money in shares lasted the full 30 years in 95% or more of the pe­ri­ods tested.

The 4% rule, or 25 years of spend­ing

The rule that came out of this re­search has three steps:

1. In the first year, with­draw 4% of your start­ing sav­ings.
2. In every year after that, with­draw the same amount raised with inflation, what­ever the mar­kets have done.
3. Leave the rest in­vested.

Turned around, the rule gives the fa­mil­iar target: your sav­ings should equal 25 years of spend­ing.

$$\text{Money you need} = \frac{\text{Yearly spending}}{0.04} = 25 \times \text{Yearly spending}$$

For Ana and David, that comes to 25 × €30,000 = €750,000, almost €290,000 more than the €461,000 that would be enough if mar­kets rose ex­actly 5% every year. The gap exists be­cause the order of re­turns mat­ters, not just their av­er­age. Sup­pose their €461,000 earns that same 5% a year on av­er­age over 30 years, but with three bad years (−25%, −15% and −5%) and about 7.5% in every other year:

With the bad years at the end, money is left over. With the same years at the start, it runs out in year 13, when Ana and David are 73, be­cause every with­drawal during the fall sells assets at low prices, and what has been sold can’t re­cover when the market does. This is se­quence-of-re­turns risk. Cov­er­ing a bad start like this takes roughly the €750,000 that the 4% rule gives.

It is a tidy result, but it de­scribes the re­tiree in the ex­per­i­ment: no pen­sion, no taxes or fees, one port­fo­lio for life, a budget that never changes and ex­actly 30 years to fund. Few real re­tire­ments look like that.

Seven rea­sons the 4% rule gets your number wrong

1. It as­sumes you have no pen­sion

The rule ex­pects your in­vest­ments to pay for every­thing, even though most people will also re­ceive a state or work­place pen­sion.

Ana and David expect a com­bined pen­sion of €15,000 a year after tax from age 67, so from then on their in­vest­ments only need to cover the other half of their spend­ing:

$$(€30{,}000 - €15{,}000) \times 25 = €375{,}000$$

They still plan to stop work­ing at 60, though, which leaves seven years in which their sav­ings must also pay the €15,000 the pen­sion will later cover. That bridge costs 7 × €15,000 = €105,000, so what they really need is €375,000 + €105,000 = €480,000 rather than €750,000.

A single mul­ti­plier can’t cap­ture either part of this. Ap­plied to their whole budget, it over­states their need by €270,000, and ap­plied only to the gap after 67 it for­gets the bridge and leaves them €105,000 short. Get­ting it right means plac­ing each source of income on the date it ac­tu­ally starts.

2. It never changes your spend­ing, even in a crash

The re­tiree in the study raises their spend­ing with inflation every year no matter what hap­pens, which means that after a crash they sell more shares at low prices to pay for the same hol­i­days.

We have al­ready seen what that costs: with the same bad years at the start in­stead of the end, Ana and David’s €461,000 runs out at 73 in­stead of leav­ing money over. Ben­gen’s worst cases were ex­actly this, people who re­tired in the late 1960s and ran into a crash and high inflation in their first few years.

Real re­tirees rarely behave like the one in the study, be­cause most of them would travel less after a bad year, and that flex­i­bil­ity turns out to be worth a great deal. In 2006, Jonathan Guyton and William Klinger tested re­tirees who skipped the inflation raise after a losing year and cut spend­ing by 10% when­ever with­drawals grew too large rel­a­tive to the port­fo­lio. With those two rules, start­ing with­drawals of 5.2 – 5.6% held up in 99% of their his­tor­i­cal tests for port­fo­lios with at least 65% in shares.^[3]

At 5.2%, Ana and David’s €30,000 would re­quire about €577,000 in­stead of €750,000. In return, they would have to accept a smaller budget in some years, which is only rea­son­able if es­sen­tials such as hous­ing and food stay pro­tected while the op­tional spend­ing ab­sorbs the cuts.

See how return order changes re­tire­ment out­comesFollow two port­fo­lios with the same re­turns in a dif­fer­ent order as with­drawals push their out­comes apart.→

3. It as­sumes one fixed port­fo­lio for 30 years

Each port­fo­lio in the re­search kept the same mix, re­bal­anced every year for 30 years, and the ver­sion most people quote is half shares and half bonds.

The mix you choose mat­ters more than the rule sug­gests. At 4% in the Trin­ity study, a port­fo­lio with 75% in shares lasted in 98% of pe­ri­ods com­pared with 95% for an even split, and bond-heavy port­fo­lios did far worse, with only 71% last­ing when shares made up a quar­ter of the mix. Assets that grow slowly simply could­n’t keep pace with spend­ing that rose with inflation every year.

Real plans also tend to change their mix as time goes on. Ana and David might keep the seven years of bridge money in cash and short-term bonds, hold their long-term sav­ings mostly in shares, and grad­u­ally move money from one to the other as the pen­sion date ap­proaches, none of which the 4% rule has any way to ex­press.

4. It buys 95% cer­tainty at a steep price

Here are the Trin­ity re­sults for an even split of shares and bonds, trans­lated into the money Ana and David would need to save:

Moving from 51% to 76% costs €100,000, or about €4,000 for each per­cent­age point, while moving from 76% to 95% costs €150,000, closer to €8,000 a point. The last five points, from 95% to 100%, cost €250,000, which works out at €50,000 a point.

In other words, cer­tainty gets more ex­pen­sive the closer you push it to­wards 100%, and since every euro of extra sav­ings has to be earned, each ad­di­tional point also costs more work­ing time than the one before it.

It is also worth re­mem­ber­ing what “fail­ure” meant in this study, which is a re­tiree who kept spend­ing the same amount all the way down with­out ever ad­just­ing. A plan that shows a 75% suc­cess rate on a rigid budget there­fore does­n’t mean a 25% chance of going broke so much as roughly a 25% chance that you would need to cut back at some point. Re­search on spend­ing ad­just­ments sug­gests that for house­holds will­ing to do that, a lower start­ing prob­a­bil­ity can be a per­fectly rea­son­able plan,^[5] pro­vided they know in ad­vance how deep the cuts could go and their es­sen­tial spend­ing stays pro­tected.

5. It ig­nores the cost of ending up with too much

The study counts a re­tiree as a suc­cess whether they finish with €1 or with €3 mil­lion, and in prac­tice most finished far above €1.

When Michael Kitces looked at rolling 30-year pe­ri­ods going back to the 1870s with a 60/40 port­fo­lio, he found that a re­tiree fol­low­ing the 4% rule ended up with more than their start­ing money 60% of the time, even after ad­just­ing for inflation.^[4]

Money you never spend has a cost of its own, paid in extra years of work or in trips and help for your chil­dren that you put off be­cause a for­mula told you to wait. Leav­ing an in­her­i­tance is a per­fectly good goal, but it ought to be a de­ci­sion you make rather than the side effect of an overly cau­tious rule of thumb.

This is the flip side of the pre­vi­ous point, be­cause the higher the suc­cess rate you insist on, the more often you will finish with far more than you needed.

6. It ig­nores taxes

The Trin­ity study used re­turns before any tax or fund fees, whereas you will be paying your bills with money that has al­ready been taxed.

Sup­pose, purely as an il­lus­tra­tion, that Ana and David’s with­drawals are taxed at an ef­fec­tive rate of 15%. To spend €15,000 they would need to with­draw €15,000 ÷ 0.85 ≈ €17,647, and ap­ply­ing that to their plan with the pen­sion and bridge raises their €480,000 to about €565,000. Fees have the same effect, since a 1% yearly fund fee on €750,000 takes €7,500 a year, a quar­ter of a €30,000 with­drawal.

Careful plan­ning can bring the tax bill down. Many tax sys­tems only tax the gain when you sell rather than the whole amount, so early with­drawals, which are mostly your orig­i­nal sav­ings, can be lightly taxed. Tax-loss har­vest­ing goes fur­ther by sell­ing in­vest­ments at a loss to offset tax­able gains, al­though many coun­tries re­strict buying the same asset back straight away. Bor­row­ing against your port­fo­lio, some­times called a Lom­bard loan, lets you pay for spend­ing with­out sell­ing any­thing, so no sale is taxed yet, but the loan charges in­ter­est and a falling market can force you to repay it or sell at the worst pos­si­ble moment. Which of these op­tions you have de­pends on where you live and how your ac­counts are held.

7. It as­sumes ex­actly 30 years

Trin­i­ty’s longest test lasted 30 years, but some­one re­tir­ing at 60 might well live to 95 or beyond, and some­one re­tir­ing at 45 needs money for half a cen­tury. Cou­ples also have to plan for whichever part­ner lives longer, often on a single re­duced pen­sion, so the hori­zon that mat­ters is your own, and the rule does­n’t adjust to it.

What the rule got wrong for Ana and David

The 4% rule told Ana and David they needed €750,000, while their own num­bers put the figure at about €565,000, almost €200,000 less, and that is before al­low­ing for any flex­i­bil­ity in their spend­ing. For them, the dif­fer­ence amounts to years of extra saving.

The error can just as easily run the other way. Some­one re­tir­ing at 45 with­out a pen­sion, facing high taxes or hold­ing mostly bonds could find that the rule leaves them short, which is why a single mul­ti­plier is the wrong tool for a de­ci­sion this large.

How Fignis re­places the rule with your plan

Each of the as­sump­tions above can be re­placed with one of your own. Fignis builds a finan­cial pro­jec­tion from your actual num­bers in­stead of a mul­ti­plier:

To see it with num­bers, we ran Ana and David’s plan through Fignis. They reach 60 with about €565,000 in a 60/40 port­fo­lio: 60% in an equity fund we expect to return 5% a year above inflation, and 40% in a bond fund at 1.5%. When they retire they set aside €105,000 in a de­posit for the bridge, and from 67 they re­ceive €15,000 a year of pen­sion be­tween them. Fignis does­n’t yet cal­cu­late tax on with­drawals, so the €565,000 in­cludes the tax cush­ion from point 6.

Income on its real dates

Ana and David can enter their salaries until 60 and each pen­sion from 67, and the pro­jec­tion then shows both the bridge years, when their sav­ings carry every­thing, and the years when the pen­sion takes over, with­out anyone having to decide which mul­ti­plier ap­plies.

• Equity fund
• Bond fund
• Account and bridge deposit

€0€200K€400K€600K€800K€1M

RetirementPension

505560657075808590

Age

Show the data

Age	Equity fund	Bond fund	Account and bridge deposit
50	€133,000	€88,000	€10,000
55	€236,700	€135,800	€8,800
60	€369,000	€187,200	€7,800
65	€470,900	€53,200	€0
70	€534,700	€9,600	€0
75	€610,700	€0	€0
80	€695,800	€0	€0
85	€804,400	€0	€0
90	€940,400	€0	€0

Spend­ing that re­sponds to mar­kets

Every ex­pense is marked as either es­sen­tial or op­tional, and for op­tional spend­ing Fignis offers three poli­cies:

• Use avail­able assets first sells in­vest­ments to keep paying.
• Pre­serve cap­i­tal pays op­tional spend­ing only from what the in­vest­ments earned in that period, so a bad year trims the travel budget au­to­mat­i­cally in­stead of forc­ing a sale at low prices.
• Pre­serve pur­chas­ing power works the same way while also pro­tect­ing the cap­i­tal against inflation.

This builds the flex­i­bil­ity de­scribed in point 2 into the plan itself rather than leav­ing it to willpower in the middle of a crash.

Large one-off costs, such as a new car at 65 or a kitchen at 70, go on the dates they are ex­pected to happen rather than being spread into an av­er­age.

A port­fo­lio that changes over time

Each asset has its own return as­sump­tion, al­lo­ca­tion rules decide where new money goes, and trans­fer rules can move money be­tween assets on a given date or when a life event hap­pens. That lets Ana and David take the bridge out of the bond fund so they don’t sell eq­ui­ties as they retire, and decide what is sold first when cash runs short: the de­posit, then the bonds, with eq­ui­ties last.

Suc­cess rates that mean some­thing

Fignis runs your whole plan through up to 1,000 sim­u­lated market paths, with crash years and shift­ing inflation. Every path ends in one of three out­comes: the plan is funded (even if some op­tional spend­ing had to be cut), an illiq­uid asset such as the house had to be sold, or es­sen­tial bills went unpaid. Cuts are counted sep­a­rately, how often and for how many years, so you can see what each point of suc­cess costs.

With their rigid plan, in which they sell what­ever it takes before cut­ting any­thing, Ana and David still have money at 90 in 89.9% of the sim­u­lated mar­kets:

• Middle half (25th–75th percentile)
• Median
• Worst 10% (10th percentile)
• Plan at constant returns

€0€500K€1M€1.5M€2M€2.5M

RetirementPension

505560657075808590

Age

Show the data

Age	Median	Worst 10% (10th percentile)	Plan at constant returns	25th percentile	75th percentile
50	€235,300	€224,200	€235,600	€229,300	€241,400
55	€388,000	€301,700	€383,800	€339,900	€445,700
60	€575,000	€398,000	€555,900	€476,900	€696,100
65	€544,900	€274,000	€516,100	€385,900	€766,200
70	€557,300	€212,300	€541,500	€349,600	€889,000
75	€618,600	€164,800	€610,200	€337,300	€1,093,300
80	€716,500	€128,500	€697,900	€315,500	€1,454,300
85	€810,300	€57,500	€809,800	€293,100	€1,878,500
90	€934,500	€0	€947,300	€288,200	€2,291,400

The median tracks the con­stant-re­turn plan closely, but the range opens wide: in one market in ten the money runs out before 90, while in the luck­i­est quar­ter they finish with more than €2 mil­lion. If your plan ends with mil­lions in most paths, you are prob­a­bly saving more than you need.

The flex­i­bil­ity from point 2 changes the result. If they let travel be paid only from the port­fo­lio’s gains, suc­cess rises to 96.7%:

• Rigid spending
• Travel paid from gains

85%90%95%100%

Pension89.9%96.7%

60657075808590

Age

Show the data

Age	Rigid spending	Travel paid from gains
60	100%	100%
65	100%	100%
70	100%	100%
75	99.2%	100%
80	96.4%	99.8%
85	93%	98.3%
90	89.9%	96.7%

The price of those seven points is giving up some or all of their travel in about eleven years out of thirty. Fignis puts that trade in front of you in­stead of hiding it in a per­cent­age.

Ask the ques­tion back­wards

Rather than guess­ing a number and check­ing whether it works, you can let Fignis search for it. You choose one thing it is al­lowed to change, such as the re­tire­ment date, the spend­ing level or the start­ing amount, and the suc­cess rate you want, any­where be­tween 50% and 99%. Ana and David could ask, for in­stance, what is the ear­li­est date we can retire with at least a 75% chance of keep­ing our es­sen­tials funded? Fignis tests each can­di­date against the same set of sim­u­lated mar­kets and then checks the winner against a fresh set.

The 4% rule was a clever ex­per­i­ment about an imag­i­nary Amer­i­can re­tiree, while your own re­tire­ment comes with a pen­sion date, a tax bill, a port­fo­lio, some spend­ing you could cut and some you could­n’t, and a hori­zon of its own. The rule is useful for get­ting a feel for the size of the number, but the plan that ac­tu­ally an­swers the ques­tion is the one built from your own.

Price one more year of workSee how an extra work­ing year changes sav­ings, the bridge, and the with­drawal rate at the same time.→ Plan the jour­ney to your targetCon­nect your re­tire­ment number with con­tri­bu­tions and the years needed to ac­cu­mu­late it.→