How to Calculate How Much You Need to Retire
A five-step guide to estimating your retirement expenses, calculating your FIRE number, accounting for Social Security, and finding your monthly savings target.
Step 1 - Estimate Your Annual Retirement Expenses
Start by listing your expected annual expenses in retirement. Begin with your current spending and adjust for expected changes. Housing costs may decrease if you plan to have a paid-off home by retirement. Healthcare costs typically increase significantly, especially before Medicare eligibility at 65.
Consider what your retirement lifestyle actually looks like. Do you plan to travel extensively? Stay close to home? Relocate to a lower-cost area? Each scenario implies very different spending levels. Being specific here produces a much more useful calculation than using a generic percentage of current income.
Include categories that are easy to forget: property taxes, home maintenance and repairs, insurance premiums, car replacement every 10 to 15 years, gifts and charitable contributions, and entertainment. Many people underestimate these categories and end up with a retirement budget that is too low to maintain their actual desired lifestyle.
Step 2 - Calculate Your FIRE Number
Take your estimated annual retirement expenses and multiply by 25. This is the 25x rule, based on the 4% safe withdrawal rate. The resulting number is the total investment portfolio you need to sustain your spending indefinitely.
For example, if you estimate $55,000 in annual expenses, your target portfolio is $55,000 times 25, which equals $1.375 million. This is your FIRE number — the amount you need in invested assets before you can retire without running out of money under standard planning assumptions.
If you plan to retire before age 65 and expect a longer retirement period, consider using a more conservative multiplier of 28 to 33 instead of 25. This corresponds to a 3% to 3.5% withdrawal rate and provides more safety margin for a 35 or 40-year retirement.
Step 3 - Account for Social Security and Pensions
Most people will receive some Social Security income in retirement. Estimate your expected monthly benefit by checking your Social Security statement on ssa.gov. This benefit reduces how much your investment portfolio needs to generate.
If your Social Security benefit will be $1,800 per month, that is $21,600 per year of inflation-adjusted income. Subtract this from your estimated annual retirement expenses to find the gap your portfolio must fill. If your expenses are $55,000 and Social Security provides $21,600, your portfolio only needs to generate $33,400 annually, reducing your required portfolio from $1.375 million to $835,000.
If you have a defined-benefit pension from an employer, factor its annual income the same way. Subtract the guaranteed annual pension income from your total spending need before multiplying by 25. Guaranteed income sources dramatically reduce the portfolio size required.
Step 4 - Calculate Your Gap
Compare your required portfolio size (after accounting for guaranteed income sources) to what you have saved today. The difference is your savings gap — the additional amount you still need to accumulate before you can retire.
Do not simply look at the gap in dollar terms and feel discouraged or encouraged. What matters is whether your current savings trajectory will close the gap by your intended retirement date. A $400,000 gap with 25 years remaining is very different from a $400,000 gap with 5 years remaining.
Use a compound interest calculator to project your current savings forward to your planned retirement date at a reasonable return assumption. Add in projected future contributions at your current savings rate. If the projected balance exceeds your required portfolio, you are on track. If not, you need to either increase savings, delay retirement, reduce planned spending, or some combination.
Step 5 - Find Your Monthly Savings Target
If your projection shows a shortfall, calculate the monthly savings rate needed to close the gap. A financial calculator or retirement planning tool can do this given your current balance, time horizon, expected return, and target portfolio.
The key insight is that small increases in monthly savings compound significantly over long periods. An extra $200 per month saved at 6% annual returns over 25 years adds approximately $138,000 to your portfolio. Finding ways to increase your savings rate by even 2% to 3% can dramatically change your retirement trajectory.
Set a target savings rate — ideally 15% to 20% of gross income including any employer match — and automate contributions to reach it. Revisit the calculation every three to five years and after any major financial changes. Staying informed about your progress allows you to make small adjustments along the way rather than facing a large correction close to retirement.