Financial planner William Bengen analyzed what is the maximum withdrawal rate such that the portfolio would have survived all rolling 30-year periods in modern market history? He determined that the maximum Safe Withdrawal Rate (SWR) was 4%. In 2018, it was confirmed that 4% SWR is still valid no matter what stock allocation was chosen.36
When you retire, you can take 4% of your portfolio value as your investment income. You adjust that initial withdrawal amount by inflation every year. If you follow this rule, then you have a very high probability that you won’t run out of money during a 30-year retirement. This is a rule of thumb, not a law of nature. It is a good starting point, but you should adjust it based on your personal circumstances. For example, if you retire early or want to be on a safe side, you might want to use a lower withdrawal rate and as such larger saving goal.
Two cautions keep the 4% rule honest. First, it is valuation-sensitive: the safe rate is not a constant of nature but a function of what you pay for your assets. Retire when markets are cheap and 4% is conservative; retire at the top of an expensive market — the moment most likely to tempt you, since that is when your portfolio looks largest — and the historically safe rate has been closer to 3–3.5%. Second, the rule is deliberately rigid: it raises your withdrawal by inflation and ignores how the portfolio actually performs. Dynamic withdrawal strategies, such as the Guyton–Klinger spending guardrails, cut withdrawals after bad years and permit raises after good ones — letting you start somewhat higher in exchange for a paycheck that varies. Use 4% as the anchor for the savings target below and as a starting point, not a promise, for spending; revisit the rate as the actual retirement date comes into view.
This rule gives us a guide for how much to save for retirement: just multiply the portion of your retirement income that comes from investments by 25 (). Save that much, and keep your spending below the SWR, and you can be reasonably confident that you won’t run out of money. E.g. if you spend $150,000 a year, you need $3,750,000 saved for retirement.
In order to calculate 25 times your retirement income (what you need to have accumulated in order to retire), you have to know your retirement income.
Your total retirement income should cover both your non-discretionary expenses, which include essential costs like rent and food, and your discretionary expenses, such as dining out and vacations.
Remember that you only need to save 25 times that portion of your retirement income that comes from investments, since the rest comes from guaranteed sources such as social security or pensions.