The formula
portfolio needed = annual spending ÷ withdrawal rate
Where it comes from
The sum does not depend on what you earn but on what you spend: the target is annual spending divided by the withdrawal rate. Cutting spending moves the number from both ends at once, because it lowers the target and raises what you can save, which is why it matters far more than a pay rise.
How to work it out by hand
- Work out what you spend in a year, not what you earn
- Divide it by the withdrawal rate as a decimal
- That is the target portfolio
- From what you already have and what you save each year, solve for the years left
What is worth knowing
The 4 % rule comes from the Trinity study, which found that a diversified portfolio survived thirty years of withdrawals across every period of the twentieth century. It is not a law of physics: it depends on the horizon, on what the portfolio holds and on the sequence of returns in the early years, which is the risk that hurts most. That is why many people use 3 % or 3.5 %, which demands a larger portfolio but survives longer horizons. And the savings rate matters more than the return: someone saving 50 % of their income gets there in about seventeen years, and someone saving 10 % takes over forty, at the same rate of return.