Retirement feels far away until you ask yourself the real question: how much money do I need to stop working and live comfortably? The good news is there’s a simple way to estimate your “retirement number.” It’s not a crystal ball, but it gives you a concrete target to aim for — and having a target changes everything.
This is the first article in our Path to Retirement series. Next up: the inflation trap, the power of compound interest, and lifestyle creep.
The idea: your number depends on your spending, not your salary
Most people think about retirement in terms of how much they earn. But what really matters is how much you’ll spend per year once you’re retired. Your retirement number is the amount that, invested, lets you cover that spending without ever running out.
The 4% rule (and the 25x rule)
A widely used reference for estimating it:
- The 25x rule: you need to save roughly 25 times your expected annual spending in retirement.
- The 4% rule: once retired, you can withdraw about 4% of that total per year without running out too quickly.
They’re two sides of the same coin. Example: say you calculate you’ll spend $20,000 a year in retirement. Your number would be $20,000 × 25 = $500,000. Withdrawing 4% of that per year ($20,000) covers your spending.
How to calculate yours, step by step
- Estimate your annual spending in retirement. Start from what you spend today and adjust — you’ll probably spend less on some things (debts paid off, kids independent) and more on others (health care, leisure).
- Subtract other retirement income. If you’ll have a pension, rental income, or another income stream, subtract it — you only need your savings to cover the gap.
- Multiply that net spending figure by 25. That’s your approximate number.
- Compare it to what you already have and how many years you have left, to figure out how much to save per month.
Important caveats (read these)
These rules come from studies done in the United States, and they’re references, not guarantees. Before you take them literally:
- Inflation changes the math. What you spend today won’t be what you spend in 20 or 30 years. In countries with high inflation — common across Latin America — this matters enormously. We cover this in the inflation trap.
- They assume your money is invested, not sitting under a mattress. Without investment growth above inflation, the number doesn’t hold up.
- Pension systems vary by country. How much your local system contributes — or doesn’t — changes how much you need to save on your own.
- The 4% figure is a debated starting point. Some experts suggest being more conservative (3–3.5%) depending on the era and the country.
Why starting today matters so much
The most powerful factor isn’t how much you earn — it’s how much time you let your money grow. Thanks to compound interest, someone who starts early needs to contribute far less than someone who starts late. That’s the difference between a comfortable retirement and a tight one, and we dig into it in the power of compound interest.
In the meantime, two things are within your control right now: spending less than you earn (check out the budget calculator) and getting out of expensive debt, because every payment you free up is money that can go toward your retirement instead.
FAQ
Does the 25x rule work in Latin America? As a reference, yes — but adjust it. Higher inflation and different pension systems may mean you need a bigger cushion or a more conservative strategy.
What if I can’t save much right now? Start with what you can. Thanks to compound interest, small, consistent contributions made early can outpace large contributions started late. What matters is starting.
Does my home count toward my number? Owning your home reduces your future spending (no rent to pay), so it lowers your number. But it isn’t liquid cash you can live on day to day, so don’t count it as part of your retirement savings.
Should I pay off debt or save for retirement first? Expensive debt (credit cards) usually comes first, because its rate outpaces the expected return on investments. In parallel, even if it’s a small amount, start saving for retirement so you don’t lose time.
In summary
Your retirement number depends on your spending, not your salary: estimate your annual spending, subtract other income, and multiply by 25 as a reference point. Adjust for inflation and your local pension system. And above all, start early — time is the most powerful ingredient in retirement.
This guide is general information, not financial or investment advice. The 25x and 4% rules are references that originate in the United States; actual results depend on inflation, returns, taxes, and each country’s pension system. Consult your own situation before making decisions.