Two Words Explain Why Your ‘Retirement Number’ Is Probably Wrong

Ask people how much they need to retire, and there is a good chance they can throw out a number almost instantly. Maybe it is $1 million because that is what they have always heard, or $2 million because some calculator somewhere told them that is a good number.

You could also say $3 million, because it sounds safer than $2 million. But in a real sense, none of it matters. All of these figures sound concrete, and that is precisely what makes them dangerous. Most retirement numbers rest on an assumption so flawed it can quietly invalidate the entire calculation.

Those two words are “spending rate.” Not investment returns, not portfolio size. The number you actually need in retirement is almost entirely determined by what you plan to spend. Most people either significantly underestimate that figure or borrow it from a generic formula that has nothing to do with their real lives.

Where the Standard Formula Breaks Down

The 4% rule is the most widely cited framework in retirement planning. Financial planner Bill Bengen developed it in 1994 after analyzing U.S. market data going back to 1926. The rule holds that withdrawing 4% of your portfolio annually gives the money a reasonable chance of lasting 30 years, so $1 million supports roughly $40,000 a year in withdrawals, $2 million supports $80,000, and so on.

The rule has been updated and debated many times since. Morningstar’s December 2025 research set 3.9% as the safe starting withdrawal rate for retirees in 2026, up from 3.7% the prior year, based on forward-looking return and inflation projections targeting a 90% success rate over 30 years with a balanced portfolio. Retirees willing to adopt flexible withdrawal strategies, adjusting spending up or down with market conditions, may start as high as 5.7%. Bengen himself has revised his estimate upward, most recently settling on 4.7% as the historical worst-case safe rate.

The deeper problem is that the rule says nothing about whether the resulting dollar amount is actually enough. It tells you only how long the money will last at a given withdrawal rate. If your real spending is $120,000 a year, a $1 million portfolio does not fund your retirement under the 4% rule. A $3 million portfolio does. The formula is only useful once you have honestly solved for spending first, and most people skip that step entirely.

Standard formulas also struggle to absorb the structural cost shifts of recent years. Broad inflation cooled from its 2022 peak of 9.1%, then reignited in 2026. The consumer price index ran at 4.2% in May 2026, the highest reading in more than three years, driven largely by an energy price surge tied to the Iran conflict. June brought a sharp reversal: CPI fell to 3.5% as energy prices dropped 5.7% for the month, offering some relief as geopolitical tensions temporarily eased. That kind of volatility makes projecting a stable retirement budget harder, and it reinforces why baseline costs for essential services, property insurance, auto premiums, and medical care matter so much. Many of those costs have settled at a permanently higher floor regardless of month-to-month swings. A retirement spending plan built on pre-2022 historical baselines can be underfunded from day one.

The Spending Number Most People Get Wrong

Two common mistakes come up when people estimate retirement spending. The first is assuming they will spend less than they do now. Sometimes that is true: the mortgage may be paid off, the kids are gone, and commuting costs disappear. But healthcare spending rises sharply with age, travel often increases in the early retirement years, and lifestyle costs do not evaporate just because a paycheck does.

The healthcare line deserves its own spotlight. According to Fidelity Investments’ 2025 Retiree Health Care Cost Estimate, a 65-year-old retiring in 2025 can expect to spend an average of $172,500 on healthcare and medical expenses over the course of retirement, not counting long-term care. That figure is up more than 4% from the 2024 estimate of $165,000, and it has more than doubled from Fidelity’s inaugural $80,000 estimate back in 2002. For couples, the total reaches roughly $345,000. Medicare helps, but it does not eliminate out-of-pocket costs: the standard monthly Part B premium reached $202.90 in 2026, a nearly 10% increase from the 2025 premium of $185.00, according to the Centers for Medicare and Medicaid Services. The annual Part B deductible also rose to $283 in 2026, up $26 from the prior year.

Lifestyle inertia compounds the underestimation problem. Digital subscriptions, recurring service fees, and daily routines that fill the hours once occupied by a commute can match or exceed what working life cost in operational expenses. These costs are real but easy to overlook when building a spending projection.

The second common mistake is forgetting to account for inflation across a long retirement. The average U.S. retirement age is around 62, according to multiple recent surveys, and many people exit the workforce earlier than planned. The Employee Benefit Research Institute’s 2026 Retirement Confidence Survey found that 46% of retirees left the workforce ahead of schedule, often due to health problems, layoffs, or family care responsibilities. In 76% of those involuntary exits, circumstances outside the worker’s control drove the decision. That same survey found that just 64% of Americans feel confident they have enough money to live comfortably throughout retirement, down from the prior year, with worker confidence falling a steeper six percentage points to 61%, the lowest level since 2017. A typical retirement horizon stretches 25 years or more, and a spending level that feels comfortable at the start can become genuinely strained a decade in, especially when the portfolio is not built to keep pace with rising costs.

Why the Number Feels Right Until It Isn’t

The retirement number problem is insidious because it stays invisible for years. You save toward a goal, hit it, and feel a genuine sense of arrival. Then you retire, and sometime in year two or three, the math does not work the way you assumed. By that point, the options for correcting course are narrower and less comfortable than they would have been with more careful planning upfront.

This pattern is especially common among people who anchor to a round number like $1 million or $2 million without ever working backwards from actual spending. The number feels ambitious enough to be credible, so the harder question never gets asked: what does my life actually cost, and what does it cost to fund that life for 25 or 30 years? Anchoring to a figure without grounding it in real spending is not planning. It is a well-intentioned guess.

Beyond Fixed Math: The Retirement Smile Curve

Actual retirement spending rarely follows a straight line. Financial researcher David Blanchett coined the term “retirement spending smile” in a 2014 Journal of Financial Planning paper to describe the pattern his research revealed across thousands of retiree households. In the active “go-go” years of early retirement, spending tends to spike as travel, hobbies, and delayed lifestyle goals take center stage. That phase transitions into more moderate “slow-go” middle years as daily activity naturally slows. Then the “no-go” later years bring a fresh surge in costs, driven primarily by healthcare, specialized support, and assisted living needs.

Linear drawdown rules often overfund the quiet middle years while leaving the late-stage bookend exposed to compounding medical costs. Morningstar’s research reinforces this point: acknowledging the spending decline that typically occurs in middle retirement can increase a retiree’s sustainable starting withdrawal rate by roughly one percentage point. Recognizing the curve, rather than assuming a flat spending trajectory, gives a more honest picture of where the money actually needs to go.

How to Build the Right Number Instead

The correct sequence is the reverse of how most people approach it. Start with spending, not savings. Build a detailed picture of what your retirement actually looks like: where you live, how often you travel, what healthcare will cost, what you want to leave behind. Then price it out honestly. From there, work backwards to determine the portfolio size needed to fund that life at a withdrawal rate you are comfortable sustaining.

If you need $100,000 a year and use a conservative 4% withdrawal rate, your number is $2.5 million. Preferring the extra cushion of a 3.5% rate brings it to roughly $2.86 million. Neither figure is a generic answer. Both are built from your actual life. To navigate shifting spending phases, many modern plans use dynamic guardrails, adjusting annual distributions up or down based on real portfolio performance rather than a fixed index. That flexibility can improve both sustainability and spending confidence over a multi-decade retirement.

The retirement number is not a savings milestone. It is a spending problem. Solve for spending first, and the number will follow.

Editor’s note: This version adds context on the Iran conflict as a driver of the May 2026 energy price surge and the subsequent June reversal, incorporates the EBRI 2026 Retirement Confidence Survey finding that worker confidence specifically fell six percentage points to 61%, the lowest since 2017, and notes the 2026 Medicare Part B annual deductible increase to $283.

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