How Much Do You Need to Retire? The 4% Rule and Compound Interest

Retirement planning produces some intimidating numbers. "You need 1.5 million to retire" is the kind of statement that makes people stop reading.

It becomes far more manageable once you understand the two pieces of arithmetic underneath it: the withdrawal rate, and inflation.

The 4% rule, explained properly

The 4% rule says you can withdraw 4% of your portfolio in your first year of retirement, then increase that amount with inflation each year, with a strong historical chance the money lasts 30 years.

Run it backwards and it becomes a target. If you want 60,000 a year from your savings, you need 60,000 ÷ 0.04 = 1.5 million. If you want 40,000 a year, you need 1 million. The rule of thumb is simply: multiply the income you want by 25.

It is a starting point, not a law. Retiring early means the money must last far longer than 30 years, which argues for a more conservative 3.5% or even 3%. Retiring later, with a state pension covering part of your spending, allows more flexibility.

The number you actually care about is smaller than it looks

Here is the part that changes how people feel about the figure.

Suppose a projection tells you that you will have 1.5 million at 65. That sounds transformative. But if that is 35 years away and inflation averages 2.5%, prices will have multiplied by about 2.37 over the period.

Divide 1.5 million by 2.37 and you get roughly 632,000 in today's money. At a 4% withdrawal rate, that supports about 25,000 a year in today's buying power — a comfortable supplement, but not the life the raw number suggested.

This is why any projection worth trusting shows you both figures. The future number tells you what the statement will say. The today's-money number tells you what it will actually buy, and that is the one to plan around.

Why starting early matters more than contributing more

Compound growth rewards time far more than it rewards size.

Money invested at 30 has 35 years to compound. At a 7% annual return it multiplies roughly tenfold. The same amount invested at 45 has 20 years and multiplies roughly fourfold. The early contribution is worth about two and a half times as much despite being identical.

The practical implication is uncomfortable but useful: contributing a modest amount in your twenties and thirties beats contributing aggressively in your fifties. If you are young and can only spare a little, the little is still worth a great deal.

Claim the employer match first

Before optimising anything else, contribute at least enough to capture your employer's full match. A 100% match is an immediate doubling of your money, which no investment strategy will replicate.

Declining it is turning down part of your salary. If your employer matches 4% and you contribute 3%, you are leaving 1% of your pay behind every single month.

Choose a return assumption you can live with

A long-run assumption of 6–7% a year before inflation is reasonable for a stock-heavy portfolio. Be conservative deliberately.

If you plan on 5% and earn 7%, you retire early or more comfortably. If you plan on 10% and earn 7%, you discover the shortfall at exactly the age when fixing it is hardest. The asymmetry is brutal, so aim low.

A simple way to stay on track

Rather than agonising over the target, do two things. Contribute at least enough for the full match, and raise your contribution rate by one percentage point every time you get a pay rise. You never feel the cut, because the money was never in your pay packet, and the rate climbs steadily toward the 15% figure often cited as a full-career target.

Project your own balance, in both future and today's money, with the Retirement Calculator. Change the retirement age to see what working three more years — or three fewer — actually costs.