The first step in planning for early retirement is to determine how much income you want your portfolio to be able to safely and reliably generate for you. This is also one of the hardest steps: Lifestyles and priorities change, so a figure that you might be comfortable with now might look quite different from one you imagine in a few years. (Maybe you bought a boat.) There may also be some assumptions built into the figure. For example, you may have paid off your home loan by the time you retire, which is likely to drop your expenses significantly. So, it's up to you how much effort you want to spend figuring out your target income; just getting it in the vaguely right ballpark is a good start.

The second step is to settle on a withdrawal rate. The withdrawal rate is the percentage of your investment portfolio that you intend to withdraw each year. The higher the withdrawal rate, the faster your portfolio decreases in value, and the more likely it is that you will run out of money. That's where the safe withdrawal rate (SWR) comes in.

The safe part of the SWR implies that you can safely withdraw a particular percentage of your portfolio each year, without running out of money by the time you die. This, of course, depends on a lot of factors (like, how long are you planning on living for?). For a typical thirty-year retirement, and for an investment portfolio consisting mainly of stocks and varying proportions of bonds, an SWR of 4% is often used.

If you're looking at a longer time horizon (perhaps you're planning to retire particularly early, and so need your money to last for fifty or sixty years, rather than twenty or thirty), it's common to see SWRs closer to 3.5%, and some as low as 3%.

The implication of a lower SWR is that you'll need more money in your portfolio. And the difference between 3% and 4% can be really significant. For example, if you plan for an income of $40,000, with a SWR of 4% your target number is $1M. But if you're using a SWR of 3%, that increases by over $300,000.