References & Methodology
The research and assumptions behind the calculator
The 4% Rule
The 4% rule is a guideline for retirement withdrawals that emerged from research by financial planner William Bengen in 1994, and was later validated by the Trinity study (1998) conducted by professors at Trinity University.
What the research found
Bengen analyzed historical market data going back to 1926 and found that retirees who withdrew 4% of their portfolio in the first year of retirement, then adjusted that amount for inflation each subsequent year, had a very high probability of not running out of money over a 30-year retirement.
The Trinity study expanded on this work, testing various withdrawal rates and asset allocations across rolling 30-year periods. They found that a 4% withdrawal rate with a 50/50 stock/bond portfolio had a 95% success rate historically.
Important caveats
- Historical data isn't a guarantee. Past market performance doesn't ensure future results. The next 30 years could look very different from the past 100.
- 30 years may not be enough. Early retirees might need their money to last 40, 50, or even 60 years. Some researchers suggest using 3.5% or even 3% for longer retirements.
- Sequence of returns matters. A market crash early in retirement is far more damaging than one later. The 4% rule accounts for this historically, but it's still a risk.
- Fees and taxes reduce returns. The studies used index returns; real-world portfolios have expenses that drag on performance.
Further reading
FIRE Philosophy
FIRE stands for Financial Independence, Retire Early. It's a lifestyle movement focused on extreme savings and investment to achieve financial freedom much earlier than traditional retirement age.
Core principles
- High savings rate. FIRE adherents typically save 50-70% of their income, far above the conventional 10-15% recommendation.
- Low-cost index investing. Most FIRE practitioners favor simple, diversified, low-fee index funds over active management or individual stock picking.
- Intentional spending. Cutting expenses isn't about deprivation—it's about aligning spending with values and eliminating waste.
- The 25x rule. A common FIRE target is saving 25 times your annual expenses (the inverse of the 4% rule). If you spend /year, you need to retire.
FIRE variations
- Lean FIRE: Retiring on a minimal budget, often under /year for a household.
- Fat FIRE: Retiring with a larger portfolio to maintain a more comfortable lifestyle, typically +/year in spending.
- Barista FIRE: Having enough saved that you only need part-time or low-stress work to cover remaining expenses.
- Coast FIRE: Having enough invested that compound growth alone will fund traditional retirement, even if you stop contributing.
The savings rate is everything
What makes FIRE different from traditional retirement planning is the emphasis on savings rate over investment returns. Someone saving 50% of their income can retire in roughly 17 years regardless of starting salary, while someone saving 10% needs about 51 years.
Real vs. Nominal Returns
This calculator uses a default 5% real return, which means the return after accounting for inflation. This is different from the nominal return you might see quoted in headlines.
Why it matters
If your investments return 8% in a year but inflation is 3%, your purchasing power only increased by about 5%. That 5% is your real return—the growth that actually improves your financial position.
Using real returns in projections gives you a clearer picture of future purchasing power. A projection showing " in today's dollars" is more meaningful than " in future dollars that might only buy half as much."
Historical context
The U.S. stock market (S&P 500) has historically returned about 10% nominally and 7% in real terms over long periods. However, a diversified portfolio including bonds typically returns less. Our 5% default assumes:
- A diversified portfolio (not 100% stocks)
- Some drag from fees and taxes
- A conservative estimate for planning purposes
You can adjust this rate in the calculator based on your own assumptions and risk tolerance. More aggressive investors might use 6-7%; more conservative planners might use 4%.
The power of compounding
Even at 5% real returns, compound growth is remarkably powerful over time. invested at 5% becomes roughly after 30 years—without adding a single dollar. Add regular contributions, and the growth accelerates dramatically.