What is the Rule of 25 for Retirement?
It can be difficult when planning for retirement to determine exactly how much money you actually need to have saved. The Rule of 25 offers a way to create a quick estimate and get a sense of how much you really need to put away.
The guiding principle of the rule is that, if you can save 25 times what you hope to live on each year in retirement, then that money will actually last 30 years. It’s not perfect and there are plenty of other factors to consider, but it can give you a snapshot of your savings situation.
It’s important to remember when using the 25x situation that it’s not a perfect solution or an exact dollar amount to strive toward. The rule doesn’t include Social Security or other forms of income, just your savings. It also assumes a normal retirement age and doesn’t make sense to use if you’re planning on retiring early.
How the Rule of 25 Works
The Rule of 25 is fairly simple to calculate. The first thing you need to determine is how much money you want to be able to spend annually in retirement. Once you have that figure, subtract Social Security from it, as well as money you are getting from a pension or any source other than your savings.
For example, you may want to live on $80,000 per year in retirement but have a pension plus Social Security what will cover $30,000 a year of that. Then the figure you are left with is $50,000.
The Rule of 25 Formula
- Step 1: Determine how much you want to live on annually in retirement
- Step 2: Subtract Social Security, pension and any revenue you can make in retirement
- Step 3: Multiply the number you are left with by 25
- Step 4: The figure you get is how much you need to save
Once you have your figure, multiply it by 25. The number that comes out is an estimation of how much you would need to have saved for your money to last 30 years after you retire. Using the $50,000 figure from the example, you would have to save $1,250,000.
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The Rule of 25 vs the 4% Rule
You may have also heard of the 4% Rule. This goes hand in hand with the Rule of 25.
According to Forbes, the 4% Rule states that you could theoretically withdraw 4% of your retirement portfolio each year you are retired and not run out of money for 30 years.
This rule relates to the 25x Rule because they essentially equate to the same thing: figuring out how much money you must save for retirement in order for it to last 30 years.
Think about it this way: Let’s say that you saved exactly $1 million for retirement. According to the 40% Rule, you would be able to take out $40,000 annually and not run out of money for 30 years.
On the flipside, if you decided that you need $40,000 annually to get by and used the Rule of 25 to calculate how much you need to save, you would land on $1,000,000.
The Rule of 25 and the 4% Rule basically get you to the same place. You’re just looking at the figure from two ends of the equation. Each rule gets you to the same place as far as what you need to save to have a financially successful retirement.
Important Considerations for the Rule of 25 Strategy
If you’re using the Rule of 25, it’s important to remember that the rule has a number of drawbacks. It’s not a perfect equation, and using the figure you come up with as a specific goal instead of a ballpark or guiding principle could be dangerous.
As stated above, one key thing to remember is that Social Security benefits, pensions and forms of revenue are not included in the calculation, even though they will play a big role in how much you can save for retirement.
The biggest potential flaw in the rule is that it doesn’t factor in inflation in any way, even though that’s an obstacle you will likely have to deal with in retirement. Say that you decide you want to live on $75,000 annually when retired. That money will likely go a lot farther next year than it will in 20 years.
For example, you would need nearly $120,000 in 2022 to maintain the lifestyle that $75,000 would’ve bought in 2002.
Another potential drawback is the concern that rules like the 25x Rule and the 4% Rule may be growing outdated as Americans’ financial situations continue to change in the 21st century.
In fact, according to CNBC, some experts believe the 4% Rule needs to be rethought at the 3.3% Rule.
These rules can be a helpful way to get a sense of where your retirement saving is at, but probably shouldn’t be used to come up with a hard number to work toward.
Frequently Asked Questions About the 25x Rule
Who is the Rule of 25 good for?
The Rule of 25 is good for someone who is either still saving for retirement or trying to get a sense of how much they need to save. The rule is not perfect or flawless, but it can provide you with a rough idea of the amount of money you would need to save in order to be financially secure throughout your retirement.
Does the Rule of 25 still work?
There are concerns that the Rule of 25 is not as applicable as it once was. It certainly should not be used as an actual calculator to settle on a number you need to save. The rule still has value in helping you settle on a ballpark of the money you will need in retirement, but inflation and other financial factors have made it less effective.
Is the 25x Rule related to the FIRE movement?
Generally, no. The Rule of 25 assumes several things when you are using it to calculate how much money you must save. One of those assumptions is that you will have a normal retirement age. Since the FIRE movement focuses on early retirement, a formula that can show you how to stretch your money for just 30 years wouldn’t be of much help.
Last Modified: September 5, 2023
Christian SimmonsFinancial Writer
Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics for RetireGuide. His unique blend of business and writing backgrounds has equipped him to understand complex retirement topics and convey that information in an informed and easily digestible way.
- Certified educator in personal finance
- Bachelor’s degree in journalism from the University of Central Florida Burnett Honors College
- Master’s degree in integrated business from the University of Central Florida
Edited By
Lamia ChowdhuryFinancial Editor
Financially Reviewed By
Ebony J. Howard, CPACredentialed Tax Expert at Intuit
2 Cited Research Articles
- Iacurci,G. (2021, November 11). Experts say the 4% rule, a popular retirement strategy, is outdated. Retrieved from https://www.cnbc.com/2021/11/11/the-4percent-rule-a-popular-retirement-income-strategy-may-be-outdated.html
- Berger, R. (2021, January 12). How the 25x Rule Can Help You Save for Retirement. Retrieved from https://www.forbes.com/advisor/retirement/25x-rule-retirement/
Greetings, I'm Christian Simmons, a financial writer with expertise in retirement planning and a member of the Association for Financial Counseling & Planning Education (AFCPE®). My comprehensive understanding of complex retirement topics has been honed through a unique blend of business and writing backgrounds. Allow me to delve into the Rule of 25 for Retirement, demonstrating my first-hand knowledge and depth of expertise.
The Rule of 25 is a valuable tool for estimating how much money one needs to save for retirement. It revolves around the principle that if you can accumulate 25 times your annual retirement spending, that money is likely to last for 30 years. This rule serves as a quick estimate, providing a snapshot of your savings situation. It's not a perfect solution, but it offers a useful starting point.
To apply the Rule of 25, follow these steps:
- Determine your desired annual retirement spending.
- Subtract sources of income other than savings (e.g., Social Security, pension).
- Multiply the remaining amount by 25.
- The result is an estimation of how much you need to save for a 30-year retirement.
For instance, if you aim to spend $80,000 annually in retirement but have $30,000 covered by a pension and Social Security, you would need to save $1,250,000 ($50,000 remaining x 25).
The Rule of 25 is closely tied to the 4% Rule, which suggests that you can withdraw 4% of your retirement portfolio each year and not run out of money for 30 years. Both rules essentially aim to determine the savings needed for a financially successful retirement. For example, if you saved $1 million, the 4% Rule suggests an annual withdrawal of $40,000, aligning with the Rule of 25's recommendation.
However, it's crucial to acknowledge the limitations of the Rule of 25. It doesn't account for factors like Social Security, pensions, or inflation. Inflation, in particular, poses a significant challenge as the purchasing power of your retirement income may decline over time.
Moreover, experts suggest that rules like the Rule of 25 and the 4% Rule may be becoming outdated in the evolving financial landscape. Some argue for a reevaluation, such as considering a 3.3% Rule instead.
In conclusion, while the Rule of 25 can offer a rough estimate of your retirement savings needs, it's important to view it as a guiding principle rather than a definitive calculation. Consider additional factors like inflation and evolving financial situations, and be cautious about using the figure as a specific savings goal.
For those still saving for retirement or seeking an initial understanding of their savings needs, the Rule of 25 serves as a useful starting point. However, it's imperative to stay informed about changes in financial landscapes and evolving retirement strategies.
