How much do you need to retire, and are you behind?
Where the retirement number comes from and how to work out your own, what the savings-by-age milestones are really measuring, what a 401(k) does and what becomes of it when you leave, whether a late start still works, and what retiring early would actually take.
How much money do I need to retire?
A common starting figure is about 25 times what you expect to spend in a year once you have stopped working, which is where the idea that a portfolio can support withdrawals of roughly 4% a year comes from.
The number people want is a lump sum, and the only honest way to reach one is to start from spending rather than from income. Two people on identical salaries can need retirement pots that differ by a factor of two, because one of them will own their home outright and spend forty thousand a year and the other will still be paying rent. Work out the annual spending first; the multiple is arithmetic after that.
Where the 25 comes from is the 4% rule — research into how much could be drawn from a mixed portfolio each year, rising with inflation, without exhausting it across a thirty-year retirement. It is a rule of thumb built on one country’s market history over one span of decades, and it is treated with far more reverence than its authors ever claimed for it. Read it as an order of magnitude: you need somewhere near a million to spend forty thousand. Not as a promise.
Subtract before you multiply, because this is where most people’s number gets smaller. Whatever Social Security or state pension you will receive, and any workplace pension paying an income rather than a pot, are spending you do not have to fund yourself. Somebody expecting twenty-four thousand a year from those and spending forty is funding sixteen — a four-hundred-thousand problem rather than a million-dollar one.
The figure moves every time your life does, so it is not worth agonising over to two decimal places at thirty. What it is worth is a direction. Recalculating it every few years is the difference between saving towards something and saving because somebody told you to, and only one of those survives a bad year.
How much should I have saved for retirement by 30, 40 or 50?
The milestones most often quoted are about one year’s salary saved by 30, three years’ by 40 and six by 50, and they are useful as a direction of travel and close to useless as a verdict on any particular life.
Those multiples are back-solved from a single set of assumptions: a steady career, contributions starting in your early twenties, a long run of average returns and retirement at around 65. Change any one of them and every milestone moves. Somebody who spent their twenties in education, or raising children, or earning very little, is not behind a schedule — they are on a different one, and measuring themselves against a chart built for a life they did not live tells them nothing they can act on.
The question underneath this one is almost never about the number. It is “am I behind?”, and the honest answer is that most people are, by these charts: median balances at every age sit well below the milestones. That is a fact about how much the median household can spare rather than a fact about you, and being in the middle of a distribution that is broadly under-saved is not the same as having done something wrong.
If the answer does come out low, the lever is the contribution rate, and it is very nearly the only lever. You cannot control returns, you cannot recover the years, and you can decide what percentage of your pay goes in. The most reliable version of this is to raise that percentage every time your pay rises: the increase never reaches your account, so it never becomes a standard of living you would have to give up again.
The milestone worth watching is your own trajectory — this year against last year, and the contribution rate against the one before it. A chart cannot see your pension, your partner, a house that will be paid off, or the fact that you intend to work until 68. Your own numbers can.
What is a 401(k), in plain English?
A 401(k) is a retirement account offered through an employer that takes money out of your pay before you see it, invests it in a short list of funds you choose from, and leaves it untaxed until you draw on it decades later.
Three things are doing the work, and they are worth separating. It is automatic: the money is deducted at source, so saving it is not a decision you have to keep making and keep winning. It is tax-advantaged: contributions to a traditional 401(k) come out of pay before income tax, so the tax on them is deferred until you retire. And many employers match some of what you put in, which is the part that matters most and is covered properly in the investing answers.
The most important thing to understand is what a 401(k) is not: it is not an investment. It is a container, and what is inside it is whichever funds you selected — or whatever the plan’s default was, if you never selected anything. Money sitting in a 401(k) in a cash-like default option for a decade is far more common than people expect, and it is the difference between a retirement account and an expensive savings account.
Traditional or Roth is the choice most plans now offer, and it is a question about when the tax is paid rather than whether. Traditional saves you tax now and is taxed on the way out; Roth is funded with money already taxed and comes out untaxed. Neither is universally right — it turns on whether your tax rate in retirement will be higher or lower than it is today, which is genuinely unknowable, which is why holding some of each is a defensible answer.
The catch is real: this money is for retirement, and taking it out early generally costs income tax plus a penalty on top. There are narrow exceptions. Treat the balance as unavailable, because functionally it is — which is also why a 401(k) is not a substitute for an emergency fund, and why filling one before you have any cash set aside tends to end with the cash coming back out at the worst possible price.
What happens to my 401(k) when I leave my job?
The balance stays yours and stays invested when you leave — you choose whether to leave it in the old plan, move it into the new employer’s plan or roll it into an IRA — and cashing it out is the one option that costs you a large part of it.
Everything you contributed is yours from the moment it went in. What can be forfeited is the employer’s share, which many plans vest over a few years — some in steps, some all at once on a cliff date. If you are within a few months of a vesting date, that is worth knowing before you hand in your notice. It is one of the few facts in a job move that is entirely under your control.
The three options that keep the money invested differ mostly in tidiness and in choice. Leaving it where it is costs nothing and is perfectly fine, provided the plan’s fees are reasonable and you will remember it exists. Moving it into the new employer’s plan keeps everything in one place. Rolling it into an IRA gives you the widest choice of funds and usually the lowest costs, which is why it is where most people end up. Move it directly between providers rather than via a cheque made out to you, which triggers withholding.
Cashing out is the expensive one, and it is expensive twice. You pay income tax on the whole amount plus, generally, an early-withdrawal penalty, so a substantial slice never reaches you. The larger loss is the one that never appears on a statement: that balance had decades of compounding ahead of it, and a modest sum taken out in your thirties is a considerable sum missing at 65.
Small balances get moved without you. Below certain thresholds a plan may cash you out or roll you into an IRA of its own choosing once you have left, which is one of the ways people end up with a trail of forgotten accounts across five employers. Consolidating them as you go is worth a couple of hours: an account nobody is looking at is not invested the way you would choose, and frequently is not really invested at all.
Is it too late to start saving for retirement at 40 or 50?
No — a later start means the money has less time to compound and therefore has to be larger, but a forty-year-old still has decades of growth ahead and usually a higher income to feed it with than they had at twenty-five.
Two things go right for a late starter and almost nobody mentions them. Earnings usually peak in the forties and fifties, and the costs that dominated the earlier years — childcare, the expensive first years of a mortgage, student debt — are frequently falling away across the same decade. Saving 20% at 48 is often more achievable than 10% was at 28, and each of those years is doing more work than the intuition suggests.
The rules also bend in your favour. Most retirement systems allow larger contributions once you pass a certain age, existing specifically so that somebody in this position can catch up faster than the standard limits would allow. If you are starting late, finding out what those higher limits are is the first hour of work, because they change what is possible rather than merely what is advisable.
What not to do is reach for more risk to buy back the years. A late start makes a bad decade more expensive rather than less, because there is less time left to recover from it. The levers that actually work are unglamorous and reliable: a higher contribution rate, a lower-cost fund, and fewer years of spending to fund at the far end.
That last one is the strongest single lever anybody has. Working two years longer adds two years of contributions, removes two years the pot has to pay for, and gives everything two more years to grow — three effects all pushing the same way. It is not the answer anybody wants to hear, but for somebody starting at 50 it moves the arithmetic further than any fund choice will.
What is FIRE, and what would retiring early actually take?
FIRE is the practice of saving a very large share of your income — often half or more — until investments can cover your spending indefinitely, and the variable that decides how long that takes is the savings rate rather than the salary.
The arithmetic is the interesting part, because it is not intuitive. Saving 10% of your take-home pay takes something like four decades to reach financial independence; saving half takes something closer to fifteen years; saving two thirds takes under a decade. The rate works from both ends at once — a higher rate puts more in and simultaneously proves you can live on less, which lowers the pot the whole plan has to reach. That is why it matters more than the salary does.
Most people who use the idea never retire at 40, and it still changes what they do. Coast FIRE is the version worth knowing: enough invested early that, left completely alone, it grows into a retirement number without another contribution — after which you are free to take the interesting job that pays less. Barista FIRE is the same instinct with part-time work covering the gap. The useful part of the movement is the number, not the finish line.
The honest caveats are three. Health cover before retirement age is a genuine and expensive problem in some countries and a non-issue in others. A withdrawal rate designed for a thirty-year retirement is being asked to survive sixty, which is a materially harder question than the one it was tested against. And a bad run of returns in the first few years of drawing down does far more damage than the same run later, so two plans that look identical on a spreadsheet are not equally safe.
Take the savings rate even if you take nothing else from it. It is the number that decides everything, it is far more under your control than returns are, and it is one of the few figures a budget can actually tell you.