About the retirement calculation
Retirement planning has one counterintuitive property: the target is not your current expenses, it is your current expenses inflated to the day you stop working, then multiplied by roughly twenty-five. Both steps are large, and skipping either produces a number that looks reassuring and is badly wrong.
Formula
Expenses at retirement = today × (1 + inflation)^years
Corpus = (monthly at retirement × 12) ÷ (withdrawal rate/100)
A 4% withdrawal rate implies a corpus of 25× annual expenses.Worked example
50,000 a month today, retiring in 20 years, 6% inflation: expenses become 160,357 a month. At a 4% withdrawal rate the corpus needed is 160,357 × 12 ÷ 0.04 = about 48.1 million.
Frequently asked questions
Where does the 4% rule come from?
From US studies of historical portfolio survival, which found that withdrawing 4% of the starting balance, adjusted for inflation, lasted 30 years in almost all historical periods. It is a rule of thumb from one market and one era, not a law. Many planners now use 3 to 3.5% for longer retirements.
Why is the corpus figure so large?
Because it has to fund decades without a salary while prices keep rising. The two compounding effects — inflation before retirement and inflation during it — multiply. This is exactly why starting early matters far more than saving intensely later.
Does this include a pension or state benefits?
No. If you expect a pension, employer scheme or state benefit, subtract that monthly income from your expenses before entering the figure. The corpus only needs to cover the shortfall.
What return should I assume?
Be conservative, and remember the assumption should fall as you approach retirement and shift toward safer assets. A single constant rate across 30 years overstates what a de-risking portfolio actually achieves.
Sources
- Bengen WP — Determining withdrawal rates using historical data (1994)
- Trinity Study — Retirement savings: choosing a withdrawal rate (1998)