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The Simple Math to Retirement

Saving for retirement can often feel like an intimidating, confusing, and never-ending endeavor. Even after you’ve learned about all the advantages of investing in low-cost index funds and the differences between Roth and traditional 401Ks and IRAs, there’s one big, lingering question. The good news is that it’s not all that complex, there is simple math to retirement.

How much money do you really need to save before you can afford to retire? If you listen to well-known financial experts, you may have heard you’ll need $5 million. That a gigantic number for someone who plans to work until a traditional retirement age.  For anyone working toward financial independence with a goal of retiring early in their 30s, 40s, or 50s, hitting that kind of number might be impossible. 

You wouldn’t be alone if you wondered where they came up with such ridiculously high figures, but there’s no need to panic. Chances are, you won’t need anywhere near that amount. The simple math to retirement might surprise you. You won’t need to review actuary tables to predict how many more years you’ll live, or try to guess what percentage of your current income you might need.

To understand the simple math to retirement, there are just two things you need:  your annual expenses and the 4% Rule.

Table Of Contents

Your Annual Expenses

The online calculators base their retirement estimates on a combination of your age and income. But they make one huge and erroneous assumption: that your income and expenses are proportionally and irrevocably linked.

How much money you’ll need to retire is directly correlated with how much you spend, not how much you earn. For those on a traditional retirement path, income and expenses can be closely related.

When you are on the path to FI, your spending is more intentional. You aren’t trying to keep up with the Joneses living next door and your savings rate is high. In other words, there is a significant gap between what you earn and what you spend.

Listen: Back to Basics: Getting Started With FI

Adding it Up

The first step in calculating how much you need to save is to add up what your actual annual expenses are. If you don’t already have a solid monthly budget, then you’ll want to track your spending for at least a month.

Include everything you spend in the month, whether you use credit, debit, non-investment paycheck deductions, cash, etc.

Life is lumpy and spending is rarely the same from month to month. One month will give you a ballpark, but try tracking it for several months for even better fidelity.

Don’t forget about those once-per-year and other in-frequent expenses, like holiday spending, and homeowner’s insurance or property taxes if they aren’t included in your mortgage payment.

Once you’ve got your monthly number, it’s as simple as multiplying it by 12 to get your annual expenses.

For example, if your monthly expenses add up to $5,000, then your annual expenses are $60,000.

$5,000 x 12 = $60,000

In retirement, it doesn’t matter if your income during your working years was $90,000 or $150,000. Your $60,000 in annual expenses is a much better predictor of your retirement needs thanks to the 4% Rule.

The 4% Rule

The second step in the simple math to retirement is the 4% Rule. The rule comes out of a paper written by three professors of finance from Trinity University. This 1998 paper, commonly referred to as the Trinity Study, sought to calculate what would constitute a safe withdrawal rate from retirement portfolios containing stocks and bonds.

In simpler terms, the study wanted to determine how much money retirees could withdraw from their portfolios every year and not worry about running out.

What the Trinity Study concluded was this: beginning with the first year of retirement, 4% can be withdrawn from investment portfolios  and retirees can be reasonably confident that the principal and interest earned on the remaining balance will continue to allow for 4% withdrawals each year for the rest of the retirees’ lives. 

Note the caveat “reasonably confident”. That’s because even the 4% Rule isn’t foolproof. When withdrawing 4% from your portfolio, there is a 90-99% chance you will never run out of money. While it’s not a 100% guarantee, the odds are heavily weighted in your favor. 

Listen: Sequence of Return Risk

The Simple Math to Retirement Equation

With your annual expenses in hand, you can calculate how much you’ll need in investments and be able to safely withdraw 4% per year. To do that, it’s simply your annual expenses multiplied by 25. Why 25? It’s the inverse of the 4% Rule. 100% divided by 4% is 25.

You will need to have 25 times your annual expenses saved to safely withdraw 4% of the balance each year.

Using the example above, someone with annual expenses of $60,000 will need $1,500,000 to be reasonably confident they can withdraw $60,000 each year and never run out of money.

$60,000 x 25 = $1,500,000

It’s as easy as that. The simple math to retirement is an elementary school multiplication equation. And the result is a much more attainable number to hit and dramatically less than the $5 million some financial experts recommend.

The Two-Fold Benefit of Spending Less

First, the more you can reduce your spending, the less you need to save for retirement. In fact, for every $100 a month you cut from your expenses is $30,000 less you need to save.

To illustrate using the example, reducing monthly expenses from $5,000 to $4,900, lowers annual expenses to $58,800. When multiplied by 25, the new FI or retirement number becomes $1,470,000.

$4,900 x 12 = $58,800

$58,800 x 25 = $1,470,000

If you can reduce your spending by $1,000 a month, that’s $300,000 LESS you’ll need to retire.

When keeping up with the Joneses has become a vicious cycle in society, your effort to spend less is the exact opposite. It’s a powerful virtuous cycle.

During your working years, the less you spend, the more money you can save toward retirement. And then, the lower your annual expenses are, the less you need to save for retirement.

This fact cannot be stressed enough. Whether working toward a traditional retirement or financial independence, it’s not how much you make, it’s how much you spend. Spending less speeds your path to FI.

Retirement as an Expense

If you’re looking for a unique way to convince others to join the financial independence movement, first tell them about the simple math to retirement. Then show them these two reasons why thinking about retirement as an expense could be helpful. It might even help motivate you.

Looking at Retirement as an Expense is a Tangible Goal To Chase

It’s no wonder that many people struggle to follow the traditional advice of saving 10% or 15% towards retirement. It doesn’t tap well into the goal-oriented part of the mind.

Why do people enjoy saving up for a kayak, vacation, car, or a down payment on a house? Because they’re able to come up with a tangible number to save towards.

Set a Retirement Number

Use simple math to retirement’s equation based on the 4% rule, or another method you wish  to follow, and calculate out exactly how much you need to have saved before you can retire.

And then you start saving toward that “expense” every year.

Thinking of retirement as an “expense” helps to activate the goal-oriented portion of the brain. It reframes how you think about retirement

Finding your retirement number is the first step towards looking at retirement as an expense. But simply coming up with a retirement number isn’t enough on its own to get you excited about saving.

Set a Retirement Date

When you want to buy a house or a car or anything else, you generally have an idea when you want to make that purchase. And it’s the time factor–the deadline–that gets you even more motivated to save larger chunks of money each month.

Setting a retirement date can have a similar psychological effect on savings for retirement.

If you are just starting on your journey to FI, or haven’t begun to save for retirement, it can help to think about it like this. Retirement is an expense that you need to pay off in the future. If you start now, it makes it easy. It only gets exponentially more difficult each year you delay.

Track Your Retirement Goals

Keep track of this retirement “expense” savings yourself, using a homemade spreadsheet or an online tool, such as Personal Capital.

After using the simple math to retirement and calculating your FI number, another big thing that people do when paying off debt is to create “debt art”. It can be something like a thermometer that they color in as they track their progress. The same can be done with your FI number.

Regardless of what tool you use, make sure your goal includes both a retirement number and date. Then you’ll know exactly how much you need to save each month. And each month that you save more will give you the satisfaction of knowing that you’re making it possible to retire even earlier.

Related: Personal Capital: The Ultimate Net Worth Tracker

Looking at Retirement as an Expense Helps to Recognize the Money Saved by Starting Early

Many people get super-motivated to pay off debt. Yet those same people may struggle to get serious about investing and retirement savings.

It may seem like a strange phenomenon, but there’s a theory for why this happens. Debt is a figure that can be tracked and it visibly  shrinks as it’s paid off.

Getting Excited About Debt Payoff

It’s satisfying to see debt shrink each month. But there may be another reason why many people find it easier to stay focused on debt reduction than retirement savings.

They get excited about debt payoff because they realize that every extra dollar put towards debt, saves interest payments. It’s easy to justify throwing extra money at credit card debt or mortgage principal.

You can run a mortgage calculator or debt snowball calculator and see exactly how much interest you’ll save by putting a little extra money towards the debt today.

This is exciting and motivating. And you know the longer you wait to pay it off, the more money you’re going to lose overall.

People get so excited about saving interest on their debt, they’ll use tools like the debt reduction calculator from Vertex that tell them whether or not they should choose the debt snowball or debt avalanche method.

You’ll see many go to great lengths to save on interest during the debt payoff phase. Yet once the debts are paid off, they’ll hold off for a  time before transitioning into saving for retirement.

Related: Debt Snowball Vs. Debt Avalanche–Does It Really Matter

Think Of Retirement Saving Like Debt Payoff

While you may not think about it in the same way, retirement savings works the same way as debt payoff.

The major difference is that instead of saving more interest, you’re earning more interest by “paying” more early on. And you’re giving yourself more time for interest to compound.

With a mortgage calculator, you can see how much “out-of-pocket” money you’ll save by paying your home off early. And with a retirement calculator, you can see how much “out-of-pocket” money you’ll save by investing earlier.

Related: 5 Retire Early Calculators to Get You on Track for FI


Even if you aren’t working toward FI or early retirement, the day is coming when you can’t, or no longer want to work.

While saving for retirement may feel like a monumental task, being intentional with your spending puts you in the driver’s seat. Having a realistic goal to track and treat like a necessary expense, helps to diffuse the complex mix of emotions retirement planning often brings.

The simple math to retirement gives you hope and reaching your number is something to get excited about. It doesn’t matter  how late of a start you may think you are getting. The important part is that you take action today.

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