The 4% rule

There is a lot of discussion and advice on the internet about how much money to save for early retirement. A prominent example is the 4% rule: You should save as much money, such that you are consuming at most 4% of that stock. In other words: Your savings should be at least 25 times your yearly consumption. Note that there is quite some concern about the 4% rule, check e.g. here. It should be used as a rule of thumb.

In our example from the previous post, we save 1000 EUR of our income of 4000 EUR, so we are consuming 3000 EUR per month or 36000 EUR per year. The 4% rule then says we need to save up 25 times 36000 EUR: 900000 EUR, almost a million. Unfortunately, if we save 1000 EUR per month, that will take us 75 years. So it seems like a savings ratio of 25% is still not enough to retire early.


But what about my pension? In most developed countries, there exists a form of social insurance for retirement, even in the US. That income during retirement does not need to be covered by our savings. So we might need to use the 4% rule a bit differently.

In Sweden, we have a great tool for estimating our future pension. People working in Sweden can log in to, and check their pension savings. They can also calculate how much pension they will get if they retire earlier or later. Please note that there is a problem with the current version of For a retirement before the age of 65, the estimated pension is too high.

There are two main types of pension in Sweden: allmän pension and tjänstepension. As of 2019, allmän pension can be taken from the age of 65, while tjänstepension can be taken from 55 years.


Let us assume I want to retire at the age of 55. Say my estimation tells me that I will receive 2000 EUR in pension from 65 years, but only 1000 EUR between 55 and 64 years, due to the missing allmän pension. Using the 4% rule, I will need 300000 EUR to cover for the missing 1000 EUR between my pension and my planned consumption (3000 EUR). Also, for the 10 years prior to that, I need an additional 1000 EUR per month, amounting to 120000 EUR. So in total, I should have saved 420000 EUR at the age of 55. At a savings rate of 1000 EUR per month, this will take 35 years. Not entirely realistic, but we are getting closer.

A good way of making the numbers more favorable is to reduce consumption. If we calculate the example again for a monthly consumption of 2500 EUR, we find out that we need to save only for 15 years instead of 35 years. In this post, I discuss ways of reducing consumption.

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