How Retirement Savings Are Calculated: Compound Growth and the 4% Rule

The Two Components of Retirement Growth

A retirement projection has two separate parts that are calculated independently and then added together:

1. Growth of existing savings — money already saved compounds over time using the standard future value formula.
2. Growth of ongoing contributions — each new monthly contribution also compounds from the moment it is deposited. This is the future value of an annuity.

Formula 1: Growing Existing Savings

Where:

• FV = Future value (balance at retirement)
• PV = Present value (current savings)
• r = Monthly interest rate (annual rate / 12)
• n = Number of months until retirement

Example: $10,000 saved today, 35 years to retirement, 7% annual return:

r = 7% / 12 = 0.5833% per month. n = 35 x 12 = 420 months.

FV = $10,000 x (1.005833)^420 = $10,000 x 11.07 = $110,700

Formula 2: Future Value of Monthly Contributions

This is the future value of an ordinary annuity — a series of equal payments made at the end of each period.

Example: $500/month for 35 years at 7% annual return:

FV = $500 x [((1.005833)^420 - 1) / 0.005833] = $500 x 1,727 = $863,500

Total contributed: $500 x 420 months = $210,000. Investment growth: $863,500 - $210,000 = $653,500. Compound interest more than tripled the contributions.

The 4% Safe Withdrawal Rule

The 4% rule was established by financial planner William Bengen in a 1994 paper published in the Journal of Financial Planning. Bengen analyzed historical US market data from 1926 onward and found that a retiree could withdraw 4% of their portfolio in the first year of retirement, then adjust that amount for inflation each subsequent year, and the portfolio would last at least 30 years in every historical 30-year period tested.

Example: A $974,200 portfolio (the combined example above) at 4%:

Annual withdrawal = $974,200 x 0.04 = $38,968 per year = $3,247/month

The 4% rule is a planning guideline, not a guarantee. Subsequent research (including the "Trinity Study" updates) has found that a 3.3% rate may be more appropriate for 40+ year retirements given current market valuations and lower expected bond returns.

Historical Return Data

The assumed return rate is the most important variable in any retirement projection. Here are the documented historical figures:

Source: Damodaran Online (NYU Stern), Annual Returns on Stock, T.Bonds and T.Bills: 1928–2024.

The 7% inflation-adjusted figure is the most commonly used benchmark in retirement planning because it reflects real purchasing power. Past performance does not guarantee future results.

Contribution Limits (2025)

• 401(k): $23,500/year ($31,000 if age 50+). Source: IRS Notice 2024-80.
• IRA (Traditional or Roth): $7,000/year ($8,000 if age 50+). Source: IRS Notice 2024-80.
• SEP-IRA: Up to 25% of compensation, maximum $70,000. Source: IRS Notice 2024-80.