How to Plan for Retirement: Savings Targets, Accounts & the 4% Rule

Most people have a vague idea that they should be saving for retirement. Far fewer have worked out the specific number they need, the savings rate required to get there, or what accounts to use. This guide gives you a concrete framework — not a general principle, but a sequence of steps you can apply to your actual numbers.

Step 1: Estimate retirement spending

A common starting point is 70–80% of pre-retirement income. The reasoning: you no longer pay payroll taxes on work income, no longer save (you're drawing down), and some work-related expenses disappear (commuting, work wardrobe). However, healthcare costs often rise significantly, travel spending may increase in early retirement, and housing costs depend heavily on whether you own your home outright.

A more accurate approach: track your actual current spending and subtract what disappears in retirement (commuting, work lunches, childcare after kids are grown) then add what increases (healthcare, leisure).

For this guide, we'll work with an example: a couple planning to spend $70,000/year in retirement, in today's dollars.

Step 2: Determine your FIRE/retirement number

Using the 4% withdrawal rule (see our FIRE guide for the full explanation): multiply annual spending by 25.

$70,000 × 25 = $1,750,000 target portfolio.

If you're planning for a very long retirement (40+ years), use 28–33× for a 3–3.5% withdrawal rate. If you have a defined-benefit pension covering part of your spending, subtract that from the spending that needs to come from your portfolio first.

Accounting for Social Security / state pension / CPP

If you expect $20,000/year from Social Security (US), the basic state pension (UK), CPP (Canada), or the Age Pension (Australia), your portfolio only needs to support $50,000/year: $50,000 × 25 = $1,250,000. These government benefits are essentially an annuity — treat them as a floor, not a plan.

Step 3: Project forward

The compound interest formula tells you how much any existing savings will grow, and the annuity formula tells you what new contributions will accumulate. The key inputs are:

• Current savings — what you have invested today
• Annual contribution — how much you save per year
• Expected real return — historically 5–7% for a diversified equity portfolio after inflation; use 5% for conservative planning
• Years to retirement — your timeline

At 6% real return, $200,000 today + $18,000/year in contributions for 25 years accumulates to approximately $1,687,000 — close to the $1,750,000 target. Increasing contributions to $20,000/year hits the target almost exactly.

Step 4: Choose the right accounts

United States

• 401(k) / 403(b): employer-sponsored, pre-tax contributions reduce taxable income. 2025 limit: $23,500 + $7,500 catch-up if 50+. Always contribute at least enough to get the full employer match — that's a 50–100% instant return.
• Traditional IRA: pre-tax if income is below the deductibility limit; 2025 limit $7,000 (+$1,000 catch-up). Taxed on withdrawal.
• Roth IRA: post-tax contributions, tax-free growth and withdrawals. 2025 limit $7,000 (same as Traditional). Income limits apply ($161,000 single / $240,000 MFJ phase-out). Preferred for those who expect higher tax rates in retirement.
• HSA: if you have a high-deductible health plan, an HSA triples as a healthcare account, short-term savings, and retirement account (withdrawals for any purpose after 65 taxed as ordinary income). 2025 family limit: $8,550.

United Kingdom

• Workplace pension (auto-enrolment): employer contributes at least 3% of qualifying earnings; employee contributes at least 5%. Total minimum 8%. Many employers match above minimum — always take the full match.
• SIPP (Self-Invested Personal Pension): flexible personal pension with a wide range of investment options. 2025/26 annual allowance: £60,000 (or 100% of earnings, whichever is lower).
• Stocks & Shares ISA: £20,000/year, all returns CGT-free and dividends tax-free. Crucially, ISA money can be accessed at any age (unlike a pension, locked until age 57). A Stocks & Shares ISA running alongside a pension is a powerful combination.

Canada

• RRSP (Registered Retirement Savings Plan): pre-tax contributions, tax-deferred growth. 2025 limit: 18% of prior year income up to $32,490. Ideal when your current marginal rate exceeds your expected retirement rate.
• TFSA (Tax-Free Savings Account): post-tax contributions, but all growth and withdrawals are entirely tax-free. 2025 contribution room: $7,000 (plus any unused room from prior years since 2009). Unlike an RRSP, withdrawals don't affect government benefit eligibility.
• FHSA (First Home Savings Account): for first-time home buyers, offers $8,000/year ($40,000 lifetime) in pre-tax contributions that can be withdrawn tax-free for a qualifying home purchase.

Australia

• Superannuation (Super): compulsory employer contributions (11.5% in 2025, rising to 12% in 2025/26). Concessional (pre-tax) contributions taxed at 15%; non-concessional (post-tax) contributions tax-free inside super. 2025/26 concessional limit: $30,000; non-concessional: $120,000. Super cannot be accessed until preservation age (~60).
• Salary sacrifice into super: contributing extra above the employer minimum reduces your taxable income and is taxed at just 15% inside super — a powerful strategy for high earners in the 37–45% bracket.
• ETF/shares outside super: for early retirees who need access before preservation age, building wealth outside super (in a tax-efficient low-cost index fund) is essential.

Step 5: Set a savings rate target

The savings rate that gets you to your number depends on your timeline and starting point. As a rough guide, for someone starting from $0 at various ages targeting $1.75M at 65 (at 6% real return):

• Starting at 25: need to save ~$8,500/year (~7% of $120,000 income)
• Starting at 35: need to save ~$19,500/year (~16% of $120,000)
• Starting at 45: need to save ~$50,000/year (~42% of $120,000) — extremely challenging from zero

These numbers underscore the importance of starting early. At 45 with nothing saved, the target needs to shrink — either reduce retirement spending, work longer, or accept government benefits as a larger part of the plan.

Step 6: Manage sequence-of-returns risk in drawdown

A portfolio that earns an average of 7% over 30 years can still fail if the first five years are deeply negative. This "sequence-of-returns risk" is the primary risk in the withdrawal phase.

Common mitigations:

• Cash / short-term bond buffer: keep 1–3 years of expenses in cash or stable assets so you don't sell equities at depressed prices during a crash
• Flexible spending: reduce discretionary spending by 10–15% in down years; increase it in up years
• Bond tent: hold a higher bond allocation in the years just before and just after retirement, tapering back toward more equities as the portfolio recovers

Common mistakes

• Waiting to start. Every year of delay requires meaningfully higher contributions. Start with anything — even $50/month establishes the habit and begins compounding.
• Not taking the employer match. A 50% employer match is a 50% instant return on your contribution. No investment can reliably beat it.
• Using nominal rather than real returns in projections. At 3% inflation, a $2M portfolio in 30 years is worth only ~$820,000 in today's purchasing power.
• Ignoring fees. A 1% annual fund fee compounds over 30 years to a 23% reduction in final portfolio — roughly the difference between a comfortable retirement and having to work longer.