Key Takeaways
- Most retirees need to replace approximately 70–80% of their pre-retirement income to maintain their lifestyle.
- The 25x rule provides a simple starting point: multiply your desired annual spending by 25 to estimate your savings target.
- Your actual number depends on Social Security, healthcare costs, longevity, inflation, and when you plan to retire.
- Retirement planning is dynamic — your target will evolve as your life circumstances change.
The Income Replacement Approach
One of the most common starting points for retirement planning is the income replacement ratio. Financial planners generally estimate that most retirees need to replace approximately 70% to 80% of their pre-retirement gross income to maintain a comparable standard of living in retirement.
The reason you may need less than 100% is that several expenses typically decrease or disappear in retirement: you are no longer saving for retirement, payroll taxes (Social Security and Medicare taxes on earnings) end, commuting and work-related costs go away, and your mortgage may be paid off. On the other hand, some expenses — particularly healthcare and leisure activities — often increase.
For someone earning $100,000 per year, the income replacement approach suggests needing $70,000 to $80,000 per year in retirement income. That income can come from a combination of Social Security, pensions, and personal savings withdrawals. The question then becomes: how large a portfolio do you need to generate the portion of income that Social Security and other guaranteed sources do not cover?
The 4% Rule Explained
The 4% rule is the most widely cited guideline for retirement withdrawals. Based on research by financial planner William Bengen, the rule states that if you withdraw 4% of your portfolio in the first year of retirement and adjust that amount for inflation each year thereafter, your portfolio has a high probability of lasting at least 30 years.
For example, with a $1,000,000 portfolio, you would withdraw $40,000 in year one. If inflation is 3%, you would withdraw $41,200 in year two, $42,436 in year three, and so on, regardless of what the market does. The research assumes a balanced portfolio of stocks and bonds.
The 4% rule is a useful starting framework, but it has limitations. It was developed using historical U.S. market data and assumes a 30-year retirement. If you retire early (before 60), you may need a lower withdrawal rate. If you retire later, a slightly higher rate may be sustainable. And the rule does not account for significant one-time expenses, such as a major home repair or long-term care costs.
The 25x Rule: A Quick Savings Target
The 25x rule is the mathematical flip side of the 4% rule. If you plan to withdraw 4% per year, you need 25 times your annual spending saved (because 1 ÷ 0.04 = 25). This gives you a straightforward savings target based on your expected annual expenses in retirement.
| Annual Spending Need | Savings Target (25x) | Monthly Spending |
|---|---|---|
| $40,000 | $1,000,000 | $3,333 |
| $60,000 | $1,500,000 | $5,000 |
| $80,000 | $2,000,000 | $6,667 |
| $100,000 | $2,500,000 | $8,333 |
| $120,000 | $3,000,000 | $10,000 |
Important: The "annual spending need" in this table refers to the amount that must come from your portfolio. If your total retirement spending is $80,000 per year and Social Security covers $30,000, you need your portfolio to generate $50,000 per year, which requires $1,250,000 in savings (25 × $50,000), not $2,000,000.
Factors That Change Your Number
Social Security. For most retirees, Social Security replaces a meaningful portion of pre-retirement income. The average benefit in 2026 is approximately $1,976 per month ($23,712 per year) for retired workers. A married couple could receive $40,000 or more annually from Social Security alone. Every dollar of guaranteed income reduces the amount your portfolio needs to generate.
Pension income. If you are fortunate enough to have a pension, this guaranteed income stream further reduces your savings target. A $20,000 annual pension effectively reduces the portfolio you need by $500,000 (at 25x).
Healthcare costs. Healthcare is one of the largest and most unpredictable expenses in retirement. Before Medicare eligibility at 65, health insurance can cost $15,000 to $25,000 per year for a couple. After 65, Medicare premiums, supplemental coverage, and out-of-pocket costs continue to add up.
According to recent estimates, a 65-year-old couple retiring today should plan for approximately $388,000 in lifetime healthcare costs not covered by Medicare. This includes Medicare premiums, supplemental insurance, copays, dental, vision, and hearing care. Long-term care costs are additional and can be substantial — the average annual cost of a private room in a nursing home exceeds $100,000. Planning for healthcare is one of the most important aspects of retirement preparation.
Longevity. A 65-year-old woman has roughly a 50% chance of living past age 87, and a 25% chance of reaching 94. For a married couple, there is a 50% probability that at least one spouse will live past 92. Underestimating your lifespan is one of the greatest financial risks in retirement. A plan designed for 25 years may fall short if you live 35.
Inflation. At just 3% annual inflation, the purchasing power of a dollar is cut in half in roughly 24 years. A retiree spending $60,000 per year at age 65 will need approximately $120,000 per year at age 89 just to maintain the same standard of living. Your savings target must account for this erosion of purchasing power.
Savings Milestones by Age
While the "right" number depends on your individual circumstances, the following milestones provide general benchmarks for tracking your progress. These guidelines assume a retirement age of 67 and a goal of replacing approximately 80% of pre-retirement income.
| Age | Savings Target | Example ($100K Salary) |
|---|---|---|
| 30 | 1× annual salary | $100,000 |
| 40 | 3× annual salary | $300,000 |
| 50 | 6× annual salary | $600,000 |
| 60 | 8× annual salary | $800,000 |
| 67 | 10× annual salary | $1,000,000 |
If you are behind these benchmarks, do not panic. There are many levers you can pull: increasing your savings rate, delaying retirement by even a year or two, optimizing Social Security claiming, downsizing housing, or adjusting your retirement lifestyle expectations. The important thing is to know where you stand and have a plan to close any gap.
Why "The Number" Is a Moving Target
Many people approach retirement planning as if there is a single, fixed dollar amount they need to reach. In reality, your retirement savings target is dynamic and changes over time as your income evolves, your spending patterns shift, market returns vary, tax laws change, and your health and family situation develop.
A 35-year-old's retirement projection is based on decades of assumptions that will inevitably change. A 55-year-old has much more certainty but still faces unknowns around healthcare costs, market performance, and longevity. Even at age 65, the plan requires ongoing adjustment.
The market returns you experience in the first few years of retirement have an outsized impact on whether your portfolio lasts. A significant market downturn early in retirement — combined with ongoing withdrawals — can permanently reduce your portfolio's ability to recover, even if markets later rebound strongly. This is why many advisors recommend maintaining one to two years of spending in cash or short-term bonds as a buffer, and why a dynamic withdrawal strategy that adjusts spending in down markets can meaningfully extend portfolio longevity.
This is precisely why financial planning is a process, not a one-time calculation. A good financial plan is stress-tested against multiple scenarios — market crashes, inflation spikes, early disability, long-term care needs, and the unexpected joys that cost money too, like helping a child buy a home or taking a trip of a lifetime. The plan is reviewed and updated annually, adapting to your evolving reality.
The most important step is not getting the number exactly right today. It is engaging in the planning process itself: understanding where you stand, defining your goals, and building a strategy that grows and adapts with you. Whether your target is $750,000 or $3,000,000, the path to getting there starts with clarity about what retirement looks like for you and a disciplined plan to achieve it.
This article is for informational purposes only and does not constitute investment or financial planning advice. All examples are hypothetical illustrations and not guarantees of future results. All information should be discussed with a qualified financial advisor before implementation.
← Back to Knowledge Center