How much do I need to retire?

Asking this question is a little bit like asking, “How much gain does an amplifier need?” or, “How much gas does it take to get to Tucson?” Without defining many other details, the questions can’t be discussed intelligently. But if enough other information is specified, you can come up with a reasonable estimate.
For retirement, people can use historical simulations or monte carlo simulations and examine how various investment portfolios (stock/bond allocations) would have performed over time. Such simulations include spending habits and inflation and can look at history and performance distributions in the US since 1871. (If you try to go back further than 1871, it’s hard to find useful and complete data.)

The short answer to the retirement question is that you will need investments (or present net worth of your investments if you have pensions, etc.) equal to about 25 times your current annual spending in order to survive the worst 30 year period in retirement history in the US. If you retired at the worst time in US history but withdrew only 1/25th of your investment portfolio that first year, then increased that withdrawal each year by the annual inflation rate, you would have been able to survive for 30 years without ever decreasing your lifestyle. There are a lot of assumptions about stock/bond allocations, rebalancing your investments, the future being no worse than the worst case past, etc. in that answer. But the answer gives a good first guess at your retirement needs. Notice that (1/25) is 4%. This general rule of thumb is sometimes referred to as the 4% Safe Withdrawal Rate (SWR) or the 4% rule.

If you are interested in running historical or Monte Carlo simulations to analyze your own situation, go to: http://www.golio.net/Chapter2.html

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