A retirement projection turns four guesses (how much you save, what it earns, how fast prices rise, how much you spend) into one confident-looking number. This article works through those guesses with our savings and retirement planner, shows how much the answer moves when each one changes, and explains the two effects that matter most: compounding and inflation. It is arithmetic on assumptions, not financial advice.
Compounding: slow, then fast
Put 5,000 aside and add 300 a month for 20 years at 6% a year, compounded monthly. You deposit 77,000 in total. The balance after 20 years is 155,163.29: more than half of it is growth, not deposits. Most of that growth arrives late, because each year's return is earned on everything accumulated before it. The same habit over 10 years ends at 58,260.79: well under half of the 20-year result, for half the deposits.
The other side of this is that starting late is expensive. Reaching 100,000 in 10 years from 10,000 already saved, at 6%, needs 499.19 a month. Saving 500 a month from the same 10,000 reaches 100,000 in exactly 120 months. A goal that is easy over 20 years is hard over 10.
Inflation: the number that shrinks your number
That 155,163.29 is in the money of 20 years from now. At 3% inflation, prices rise by 1.03^20 = 1.806 over that time, so it buys what 85,910 buys today. The 6% return was really 1.06 ÷ 1.03 − 1 = 2.91% in purchasing power.
Over a working life the effect is large. In the planner's default retirement example (age 30 to 65, 20,000 saved, 500 a month at 6%), the savings reach 874,826.18 at 65. In today's money, at 3% inflation, that is 310,898.70: about a third. Any plan written in future amounts without this conversion looks three times more comfortable than it is.
Spending it: the 4% rule
The usual starting point for retirement spending is the "4% rule": in the first year withdraw 4% of the savings, then raise that amount by inflation each year regardless of how markets do. It comes from US studies of historical stock and bond returns, which found that this pattern lasted at least 30 years in the periods they examined. It is a rule of thumb from one country's history, not a law; studies of other countries' markets generally find lower "safe" rates.
With the default figures, 4% of 874,826.18 is a first withdrawal of 2,916.09 a month, rising 3% a year, while the rest earns 4%. The money lasts 352 months, 29 years 4 months, to about age 94. Withdrawing 5% instead (3,645.11 a month) shortens that to 272 months, 22 years 8 months.
How much the answer moves
Change the assumptions, not the plan, and look at the range:
| Scenario | Return before / after | Inflation | At 65 | In today's money | Lasts |
|---|---|---|---|---|---|
| Pessimistic | 4% / 3% | 4% | 537,780.86 | 136,281.99 | 22 years 10 months |
| Expected | 6% / 4% | 3% | 874,826.18 | 310,898.70 | 29 years 4 months |
| Optimistic | 8% / 5% | 2.5% | 1,472,792.24 | 620,592.04 | over 40 years |
The same person, saving the same 500 a month, ends up with between 136,000 and 621,000 in today's money depending on two percentages nobody can know in advance. That spread is the honest answer. A single figure hides it.
Sequence risk: the order of returns
Before retirement, the order of good and bad years does not change the result: 20% down, then 10% up, then 25% up ends in the same place as the reverse, because multiplication does not care about order. Start with 100,000 and no withdrawals, and both orders end at 110,000.
Withdrawals change that. Take 10,000 out at the start of each year:
- Bad year first (−20%, +10%, +25%): 72,750 left after three years.
- Bad year last (+25%, +10%, −20%): 82,200 left.
Same returns, same withdrawals, 9,450 difference, because in the first case you sold more of the savings while prices were low. A projection with a constant return cannot show this; it is the main reason to plan with a margin.
Common mistakes
- Planning in future money. Always convert to today's money before deciding whether an amount is enough.
- Using a gross return. Fees of 1% a year compound too. Enter the return you expect after costs.
- Treating the 4% rule as a guarantee. It is a historical observation from US markets, with a 30-year horizon.
- Ignoring other income. Pensions and social insurance reduce what the savings must cover; subtract them from your spending before testing a withdrawal.
- Running one scenario. Run a pessimistic one too, and plan for the range.
- Forgetting that the rate matters most late. Small changes in return have their largest effect in the final decades of saving and the first years of retirement.
For a single sum or a regular deposit without the retirement phase, the compound interest calculator shows the year-by-year table and the effect of compounding frequency.