Key ideas

1. Year one, withdraw 4% of your savings. On $650,000, that is $650,000 × 4% = $26,000 for the first year.
2. After that, raise the dollars for inflation. You don't recalculate 4% of the new balance. If prices rose 3%, Lena takes $26,000 × 1.03 = $26,780.
3. Your target is 25 times your gap. Divide by 4% or multiply by 25. A $26,000 yearly gap needs about $650,000 saved.

Vocabulary

Inflation

The rise in prices over time, which means each dollar buys a little less each year.

4% rule

A retirement rule of thumb: withdraw 4% of your savings in the first year, then raise that dollar amount for inflation each year after.

Stock

A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Bond

A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.

Index fund

A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.

Traditional IRA

An IRA where contributions may be tax-deductible now, and withdrawals in retirement are taxed as income.

Work it out

Lena wants to spend $50,000 a year in retirement, in today's dollars. Her Social Security estimate is $24,000 a year. She uses the 4% rule to set her savings target.

1. Yearly spending goal
2. Social Security
3. Gap from savings
4. Gap × 25
5. Savings target
6. Year 2 withdrawal (3% inflation)
7. Year 3 withdrawal (3% inflation)

Check yourself

1. You need $30,000 a year from savings. What target does the 4% rule suggest?

   • A. $300,000
   • B. $1,200,000
   • C. $750,000
   • D. $120,000

2. In year two of the 4% rule, how do you set your withdrawal?

   • A. Take 4% of the new balance
   • B. Raise last year's dollar amount for inflation
   • C. Take whatever the account earned
   • D. Take the same 4% of the original balance forever

3. How long a retirement was the 4% rule built for?

   • A. About 30 years
   • B. About 10 years
   • C. About 50 years
   • D. Forever

Your turn

Write down the yearly spending you'd want in retirement, subtract your Social Security estimate, and multiply by 25. Put that number into the calculator on this page to see the monthly saving that reaches it.