Retirement Planning Basics

Retirement planning is not about stopping work—it is about achieving financial independence, the point where working becomes a choice rather than a necessity. The goal is to build a nest egg that generates enough passive income to cover your living expenses forever.

1. The Rule of 25

How do you determine your retirement target? The standard financial model is the Rule of 25. First, estimate your expected annual expenses in retirement. Multiply that annual spending by 25. The result is your target safety nest egg.

For instance, if you expect to spend $48,000 annually, your target safety nest egg is $1,200,000.

2. The Safe Withdrawal Rate (4% Rule)

The Rule of 25 is based on the 4% Safe Withdrawal Rate rule. In your first year of retirement, you withdraw 4% of your nest egg. In subsequent years, you increase the withdrawal amount only to match inflation. According to extensive historical backtesting, this strategy has a near-100% chance of lasting at least 30 years without running out of money.

3. How to Bridge Your Savings Gap

If your projected nest egg falls short of your target, do not panic. Small changes today make massive differences over time due to compounding. Increasing your monthly savings by even a small percentage or pushing your target retirement age out by a few years can completely close your savings shortfall.