Your FI number (25× annual spending) is not a measurement. It is a historical anecdote about what survived in the past. Actuaries use a different number, one that measures your present. It is called your funded ratio. It will change how you think about every dollar you own.

You Are Asking the Wrong Question

The entire FIRE community starts from the same question: "How much do I need?"

The standard answer: annual spending × 25. The Trinity Study. The 4% rule. Your "number."

$40,000 × 25 = $1,000,000. Done.

But that number is not a measurement of you. It is a backward-looking observation that a 60/40 portfolio survived 30 years of withdrawals about 95% of the time, in a specific set of US market conditions, during a specific era of interest rates and inflation. It does not know your age, your Social Security entitlement, the inflation sensitivity of your portfolio, or the duration of your spending.

It is a study of the past, not a measurement of your present.

An actuary asks a different question: "What is the present value of everything I owe, and do my assets cover it?"

That question produces a single number. Not a probability. Not a Monte Carlo cone. A measurement.

Your funded ratio = your assets ÷ present value of your lifetime spending.

CalPERS reports it: 79% funded at 30 June 2025. The UK's Universities Superannuation Scheme reports it. It is the standard measure of whether a defined-benefit promise is covered, and the funds that use it disagree about almost everything else, including, as Post 12 shows, the discount rate. You should use it too.

Three Things the 4% Rule Cannot See

1. Your biggest asset is missing

Social Security, for a median American earner claiming at 67, is worth roughly $232,000 in present value. That is the benefit discounted at the rate you can lock in real purchasing power (the current 10-year TIPS yield, about 2.4%), weighted by the probability you are alive at each age to collect it.

The 4% rule ignores it. It counts only what's in your brokerage account.

A 55-year-old with $700,000 in savings, planning to retire at 60 on $80,000 a year, has 35% of her $2M FI number. Her funded ratio, including Social Security, is 76%. She can fund $61,200 per year of the $80,000 she planned. The gap is not "$1,300,000 more to save." The gap is $18,800 per year she cannot yet afford. That is a different conversation entirely.

The funded ratio measures your wealth in the units that matter: years of spending covered. Not dollars in an account. Not a net worth number. How many years of the life you want are already paid for. Jane Austen described Mr. Darcy not by his capital but as "ten thousand a year." She understood what the 4% rule does not.

2. Your portfolio has the wrong duration

Your retirement spending stretches 20, 30, perhaps 40 years into the future. Every dollar of it is real: you buy groceries at future prices, not today's. Your consumption liability is 100% inflation-linked, with a duration of 15–20 years.

Now look at what you own. A typical 60/40 portfolio: nominal bonds (duration ~5 years, eroded by inflation), equities (volatile, and when you need them to hedge your consumption liability, exactly when inflation spikes or real rates move, they don't), and cash (maximum reinvestment risk, because if real rates fall your sustainable income falls with them).

The effective liability-hedging duration of your portfolio is perhaps 3–5 years. Your spending liability is 15–20 years. That 12–15 year gap is the structural risk in your retirement plan. Not "sequence of returns." Not "market volatility." The mismatch between the character of what you own and the character of what you owe.

The 4% rule cannot see this. The funded ratio can, because it forces you to compare asset duration against liability duration, and to ask whether your portfolio hedges the risks that actually move your retirement spending.

3. Not all losses are the same

The FIRE community knows "sequence of return risk." What it does not know is that portfolio losses come in two structurally different kinds, and they have completely different implications for a long-horizon investor.

John Campbell and Tuomo Vuolteenaho decomposed this in 2004:

  • Good beta: discount-rate risk. The market falls because expected future returns have risen. Prices are lower today; future returns are higher. For a long-horizon investor, this is self-correcting. You ride it out.
  • Bad beta: cash-flow risk. The business is actually worth less. Earnings are permanently impaired. The money is gone and it is never coming back.

Broad index funds are mostly good beta: recessions end, markets recover. But REITs in a credit crisis? Private credit in a liquidity freeze? Concentrated positions? That is bad beta. Permanent impairment. The phrase "I can ride it out" does not apply.

Your 4% rule simulation does not distinguish between a portfolio entirely composed of good beta and one laden with bad beta. The funded ratio framework does, because it asks not just "how much do I have?" but "what are the risk characteristics of what I have, relative to the risk characteristics of what I need?"

Why 2%, Not 7%

Here is the question a careful reader will ask: "Why discount my future spending at 2% when my portfolio earns 7%?"

Because you cannot eat expected returns. You can only eat realised cash flows. And the rate at which you can guarantee a real cash flow, the price at which the liability can actually be settled, is the TIPS yield, not the equity risk premium.

The present value of your future spending represents money you will certainly need: groceries, rent, healthcare, every year until you die. The rate at which you discount a certain obligation is the rate at which you can guarantee its delivery. That rate is the TIPS yield (about 2% real, as of this writing) because a TIPS bond contractually delivers a known amount of real purchasing power at a known future date.

Pete Adeney (Mr. Money Mustache) built one of the most influential posts in FIRE history around what he called "the shockingly simple math behind early retirement." The math assumes a real return of roughly 5–7% on invested capital. That number is the average historical outcome of a risk portfolio. It is not the price at which you can fund a guaranteed obligation. The distinction is not academic: it determines how much capital you actually need. At MMM's 5% real return, $80,000/yr costs $1,600,000. Priced instead at the no-arbitrage TIPS yield of 2.37% (July 2026), over the same horizon and on the same basis, it costs $1,720,000, 7% more. The math is shockingly simple. The discount rate is doing work nobody checked.

Be careful comparing that to Step 3 below, because the two numbers answer different questions. The $1,720,000 assumes you spend every year to 95 with certainty. The $1,148,000 in the worked example weights each year by the probability you are alive to spend it, which is the honest number for one household, and it is lower than MMM's figure, not higher. Mortality weighting cuts the liability by more than the lower discount rate raises it. The lesson is not "the number is always bigger." It is that a return assumption and a funding price are different things, and only one of them is observable in the market today.

Discounting your spending at your portfolio's expected return is like valuing your mortgage at the expected return on your stock portfolio. You cannot extinguish a certain obligation with an uncertain asset at a discount. The market does not allow it. This is not conservatism: it is the price at which the liability can actually be settled.

If that makes your liability look bigger than expected, good. It should. You have been discounting a real obligation at a fantasy rate.

Who This Is For (and Who It Isn't)

A necessary clarification. As Peter Mladina (executive director of portfolio research at Northern Trust, professor at UCLA, and one of the most rigorous ICAPM practitioners alive) put it on the Rational Reminder podcast: "Ultra-high-net-worth investors tend to fully hedge consumption goals and hold surplus assets in the return-seeking portfolio. Mass-affluent investors are often compelled to take risk to fund retirement."

If you are ultra-wealthy, with consumption fully funded, surplus invested for legacy, and borrowing against the portfolio for spending to defer capital gains tax indefinitely (the buy-borrow-die strategy), you are playing a different game. Your problem is tax-efficient wealth transfer. The funded ratio is not your tool.

If you are in the FIRE community (building toward financial independence, making trade-offs between saving more and retiring sooner, wondering whether your portfolio can actually fund the life you want), you are Mladina's "mass-affluent investor compelled to take risk." The funded ratio is precisely your tool. It tells you how much of your consumption is hedged and how much is exposed. Every post in this series is written for you.

Your Funded Ratio in Three Steps

These are the numbers the calculator on this site returns for a 55-year-old retiring at 60 on $80,000 a year, with $700,000 saved, priced at a 10-year TIPS real yield of 2.37% (July 2026). Run it yourself and you will get these figures, moved by however far the real yield has travelled since. That is the point: the number is supposed to move when the price of funding your life moves.

Step 1: Your liability. $80,000/year in today's dollars from age 60 to the planning horizon at 95, discounted at that 2.37% real yield, weighted by the probability you are alive at each age to spend it: $1,148,000.

Step 2: Your state pension. Social Security of $25,792/year from 67, mortality-weighted and discounted the same way: $232,000. That is netted off the liability (it retires part of the obligation rather than adding to your capital), bringing the net liability your savings must cover to $916,000. (UK State Pension: ~£128,000. AU Age Pension: varies with the means test.)

Step 3: Your funded ratio. $700,000 in savings ÷ $916,000 net liability = 76% funded. You can afford $61,200 of your $80,000 plan. The shortfall is $216,000, about 2.7 years of spending, or $18,800 a year you cannot yet fund.

You are not "35% of the way to your FI number." You are 76% funded for lifetime consumption, counted in years of income, after including the six-figure asset the 4% rule throws away.

Change the retirement age and the answer moves a long way: the same woman retiring at 65 instead of 60 is comfortably over 100% funded, because five more years of saving meets five fewer years of spending. That sensitivity is not a flaw in the measurement: it is the measurement telling you which decision actually matters.

What the Institutions Know That You Don't

None of this is new. Campbell and Viceira published Strategic Asset Allocation in 2002. Robert Merton described lifecycle consumption optimisation in 1969. Institutions that have to pay a promise manage to a funded ratio. They measure the present value of their liabilities, calculate their hedging gaps, and build portfolios that match the character of their assets to the character of their obligations.

What is new is that no one has shown this to you. The retail finance industry gives you Monte Carlo simulations: 10,000 random walks through historical data, producing a "probability of success" that depends entirely on which historical window you draw from. No institution prices a promise that way. Not because it is wrong, exactly, but because it answers the wrong question.

The right question is not "what's the probability I run out of money?" The right question is: "How much of my consumption is hedged, and how much is exposed?" For the hedged portion (assets whose duration and inflation sensitivity match your spending), sequence of returns is irrelevant by construction. For the unhedged portion, your funded ratio tells you precisely how much risk you are carrying, what kind it is, and where to look.

A measurement of your present. Not a study of the past.

Right now, if you are in a target-date fund (and 60 million Americans are), your portfolio has a liability-hedging duration of about 4 years, and your spending stretches 15–20 years into the future. That gap is your actual retirement risk. It is invisible to the 4% rule.

Next in the series: "Why Monte Carlo Is Theatre", on why 10,000 simulations tell you less about your retirement than one balance sheet. It is already live.

This is Post 1 of The Funded Ratio — a series on amifunded.com applying actuarial principles to individual retirement portfolios. Built on the Campbell-Viceira (2002) intertemporal asset allocation framework and the lifecycle consumption theory (Merton, 1969; 1971) used by pension funds, endowments, and other long-horizon institutional investors. No financial advice is given. All methods use publicly available academic research and market data.