What to aim for

How much do you need saved for retirement? The question is scary, because you never have a number.

Yet four simple ideas are enough to build one. Your own.

First idea: the replacement rate. It is the pension compared with your last salary.

Say a last salary of two thousand five hundred euros a month, and a pension of one thousand five hundred. The rate is sixty per cent.

It varies a lot by country, job and career. Your pension statement gives you an estimate.

If you want to keep the same lifestyle, the difference is missing. That is what you need to fund.

In our example: thirty thousand euros of spending a year, eighteen thousand of pension. Twelve thousand euros a year are missing.

Second idea: the four per cent rule. It comes from an American adviser, William Bengen, in nineteen ninety-four.

He looked at the history of American markets. And worked out how much you could withdraw without ever hitting zero in thirty years.

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His answer: four per cent of the capital in the first year. Then the same amount, adjusted for inflation.

Even in the worst periods of his study, the capital lasted thirty years.

Hence the third idea, which follows from it: the capital you need is twenty-five times your yearly spending.

Twelve thousand euros to find each year, times twenty-five: three hundred thousand euros of capital.

Four per cent of three hundred thousand is indeed twelve thousand euros. The loop is closed.

But this rule has limits. It comes from the past of a single country, and it aims for thirty years, no more.

Which brings us to the fourth idea: how long will retirement last?

Life expectancy is an average. By definition, many people live beyond it. Roughly half.

Planning for exactly the life expectancy means accepting about a one in two chance of running out of money at the end.

The real risk is not dying too early with too much money. It is living a long time with too little.

For a longer retirement, you withdraw less. At three and a half per cent, you need a little under twenty-nine times your spending.

For our twelve thousand euros, that comes to about three hundred and forty-three thousand euros.

These numbers are not a promise. They are orders of magnitude, to know where you are heading.

Start from your spending, subtract the pension, multiply by twenty-five. A vague number becomes a goal.