Type "how much do I need to retire" into a search engine and you'll find confident answers: $1 million. $1.5 million. Ten times your salary. The problem is that none of these numbers know anything about you — and the right answer can differ by hundreds of thousands of dollars between two households with identical incomes.
The Employee Benefit Research Institute's long-running Retirement Confidence Survey keeps finding the same gap: most workers feel at least somewhat confident about retirement, yet far fewer have ever actually calculated what they'll need. Here's how to do the calculation the confident-sounding headlines skip.
Start with spending, not savings
Your retirement number is driven by one input above all others: what you plan to spend each year. Two people earning $120,000 can need wildly different nest eggs if one spends $50,000 a year and the other spends $95,000.
A practical way to estimate it:
- Take your current annual spending — not your income. Bank and card statements from the last 12 months are more honest than any budget.
- Subtract costs that end at retirement: commuting, payroll taxes, retirement contributions themselves, and (for many) a mortgage that will be paid off.
- Add costs that begin or grow: health insurance before Medicare at 65, higher travel spending in early retirement, and eventually long-term care.
What the 4% rule actually says
The often-quoted "4% rule" comes from research on historical U.S. market returns. It found that retirees who withdrew 4% of their starting portfolio in year one, then adjusted that dollar amount for inflation each year, historically avoided running out of money over 30-year retirements in most scenarios.
Flipped around, it gives the familiar shortcut: multiply your annual spending gap by 25. If you need $40,000 a year from your portfolio (after Social Security and any pension), the rule of thumb suggests roughly $1 million.
Two important caveats:
- The "gap" is what your portfolio must cover — not your total spending. A couple with $35,000 of combined Social Security and $60,000 of spending only needs the portfolio to produce $25,000, implying roughly $625,000, not $1.5 million.
- The rule assumed a specific mix of stocks and bonds and a 30-year horizon. Retire at 55, hold mostly cash, or face a bad market early on, and the math changes meaningfully.
The costs people forget
When retirement plans go wrong, it's rarely because someone forgot groceries. The usual culprits:
- Healthcare before 65. If you retire at 60, you may need five years of private coverage. Premiums plus out-of-pocket costs can easily run $10,000–$20,000 per year for a couple.
- Taxes on withdrawals. A $1 million traditional 401(k) is not $1 million of spendable money. Withdrawals are taxed as ordinary income, and required minimum distributions eventually force the issue.
- Inflation. At 3% inflation, $60,000 of spending today becomes roughly $81,000 in 10 years and $108,000 in 20.
- Long-term care. Genworth's Cost of Care Survey has tracked a private nursing-facility room at well over $100,000 per year in much of the U.S. Not everyone will need it — but a plan that assumes nobody will is a hope, not a plan.
A worked example
Say a couple, both 62, spends $70,000 a year. Their combined Social Security at full retirement age will be $38,000. Their portfolio gap is $32,000 a year. Multiplying by 25 suggests roughly $800,000 — before adjusting for the three years of health coverage they'd need if they stop working now, and for taxes on their traditional IRA withdrawals. A more realistic target for them might be $900,000–$1 million.
Notice how different that is from a couple with the same income but $95,000 of spending and smaller Social Security benefits — their target could easily exceed $1.8 million.
The real question isn't the number — it's your readiness
A target number is only one piece. Whether you're ready also depends on how your money is invested, how you'll create monthly income from it, what you've decided about Social Security timing, and whether your plan survives a bad market in the early years.
Common questions
Is $1 million enough to retire?
For a household spending $55,000 a year with $30,000 of Social Security, comfortably — the portfolio only needs to produce $25,000. For a household spending $110,000 with the same benefits, almost certainly not. The number is an output of your spending, not a universal threshold.
Does the 4% rule still work?
It remains a reasonable planning anchor, not a guarantee. Researchers debate whether future returns support 4% or something closer to 3.5%, and flexible spending — trimming withdrawals after bad market years — improves the odds more than arguing over the decimal.
Sources
- Retirement Confidence Survey — Employee Benefit Research Institute
- Genworth and CareScout Release Cost of Care Survey Results — Genworth Financial
- Retirement Age and Benefit Reduction — Social Security Administration
- 5 Ways Financial Planning Can Help (Modern Wealth Survey) — Charles Schwab