25x Retirement Rule: How Does It Work?


You may be familiar with the Rule of 25x as a method for estimating how much you will need to save for your retirement. But most of us don’t really know what the Rule of 25x is or how it works. Is it still useful in today’s retirement world? 

At its simplest, the Rule of 25x says, if you save 25 times what you would like your annual income in retirement to be, that sum could last for 30 years.

As with every retirement rule, whether it’s the three-legged stool for retirement income or the Rule of 120, the Rule of 25x is imperfect. It’s good to remember these imperfections when using the Rule of 25x for planning your retirement.

This article will examine how the Rule of 25x works, some of its problems, and alternative ways that you can work to ensure that you will have enough lifelong income in retirement.

What Is the Rule of 25x?

Retirement planning is hard enough, but if you need a way to quickly estimate how much money you need for retirement, the 25x rule gives a simple way to do that. Basically, the Rule of 25x says that at retirement, you should have 25 times your planned annual spending saved.

That means if you plan to spend $50,000 in your first year in retirement, you should have $1,250,000 in retirement assets when you walk away from your job. The idea is that when you have saved up to 25 times of the annual income that you hope to live on in retirement, it will be enough money to last you for 30 years.

Of course, that can seem hard to reach, especially as retirement planning jives with other financial priorities, such as raising a family, helping pay for college, or running a business. But a bigger annual payment requires bigger savings. These numbers, by the way, can be very helpful in curbing unnecessary expenses. Hitting an ambitious target requires serious discipline in spending as you go along.

That being said, it’s also good to remember that the Rule of 25x isn’t perfect. One enduring complication to the rule comes into play once you start spending down those assets in retirement. There are many unknowns in the picture, such as not knowing exactly how long your retirement might last.

We will see this a little bit later when we look at the Rule of 25x in relation to another similar rule, the 4 percent rule.

How to Calculate Your Retirement Savings Using the 25x Rule

1. Determine the amount of annual income that you will need in retirement.
2. Subtract any Social Security payments, pension income, or any other “predictable” income sources from that figure.
3. Multiply that number by 25.
4. This final figure will be the amount that you should have, according to the Rule of 25x.

Using our earlier example of $50,000, if you multiplied that by 25, again you would need to have saved $1,125,000. That is a rough, back-of-envelope calculation for, again, how much money you would need to last you three decades or so in retirement.

The Rule of 25x and the Four Percent Rule

If you have heard of the Rule of 25x, then chances are you have heard of the 4 percent withdrawal rule as well.

The 4 percent rule says that you withdraw 4 percent of your invested savings during your first year of retirement. Each year after the first, you use that same percentage as a baseline for drawing out of your remaining funds. It might be a little clearer if you think:

  • Retirement savings $10,000
  • First year withdrawal $400
  • Balance is $9,600
  • Second year withdrawal is $380
  • Balance is $9,220

You can also adjust the 4 percent withdrawal rule depending on inflation for the year. For example, your financial professional might assume a long-term average of 3% inflation. Then for each year, they would account for that cost of living increase by raising your yearly withdrawal amount accordingly.

One crucial thing to keep in mind is that the 4 percent rule focuses on your invested and static investment dollars. Since those assets are invested, you can expect some growth each year, although you also face the risk of loss as well.

The 4 percent rule stems from some late 20th century economic research that tested several withdrawal strategies against actual historical market performance. Four percent tended to perform well against those historic numbers. You, however, may want to be more or less conservative than the 4 percent rule, depending on your existing investments, risk tolerance, and what the market is doing at the time of your retirement.

Now, back to both of these rules. Again, the most important thing is that neither of these rules is foolproof. Nor, frankly, is any other “infallible” retirement rule.

The Rule of 25x and the 4% rule, both make assumptions about you and the markets that may or may not be true at any given time. And, even if the assumptions they make are true, there are definite problems with the rules.

Problems with the 25x Rule

There are a number of shortcomings to the Rule of 25x which need to be calculated into your planning.

30 Years Isn’t Enough

The rule assumes you will only live for 30 years after you retire. However, US life expectancy (leaving aside the impact of COVID-19) has increased for decades, while retirement age continues to fall. A couple today consisting of a 62-year-old man and woman has a nearly a fifty-fifty chance of living to the age of 90.

If you retired at 55, the Rule of 25x is going to leave you with some very lean years. Obviously, you can adjust your planning to reflect this longer retirement, but you and your financial professional need to consciously do so. One of the issues to consider early in your discussions with your financial professional is when you plan to retire and how many years you want to plan to need funds for.

Earlier Isn’t Better Under the Rule

If you are planning to retire early, you will need to accommodate those extra years as well. Whatever age you retire, assume that you will live for more than 30 years. Having too much money won’t likely be an unbearable problem for you in retirement.

Don’t Forget About (High) Inflation

For many years, the US economy saw low inflation. However, inflation has skyrocketed in the early 2020, and the outlook isn’t clear as to how long it might continue. For context, we saw an inflation rate of 1.4 percent in 2020, 7 percent in the next year, and 6.5 percent in 2022.

If inflation is 6.5 percent and you can only withdraw 4 percent from your retirement assets in the year, inflation is actually eating into your income. And you would need to find an additional 2.5 percent in assets to add back to your total just to break even.

Social Security and Other Income Aren’t Considered

The Rule of 25x only applies to your invested assets. On the other hand, many retirees have additional income even after they officially retire. Some take on new freelance or contractor positions, some have pensions or annuities, and most have Social Security income.

Counting in that income lets you reduce the target figure, but you should only do so if you are absolutely sure that you will receive the extra income. It’s far better to have “too much” money than to have too little.

An Expected Rate of Return

The rule assumes that your assets are invested and that those holdings will offer a certain rate of return. Neither you nor anyone else can predict what your assets will actually earn, but underperformance will have to be made up.

In 2020, the Dow returned over 20 percent. In 2022, between inflation and the market, people lost out on both performance and inflation. There is no way to predict which will be the fate of your assets in any given year.

This is what financial experts call “sequence of return risk.”

Counteracting the 25x Rule’s Problems

There are steps you can take to make the unknowns of the Rule of 25x, and retirement in general, a little bit more tamable.

Create Your Own Guaranteed Income

Consider an annuity for some of your assets. Unlike the stock market, a fixed or fixed index annuity doesn’t put your principal at risk of loss (unless the life insurer goes down, but generally it doesn’t happen very often).

You can work with an insurance professional to structure an annuity that provides the base income you need. If necessary, add-on benefits to the contract, in the form of riders, can make the annuity fit your needs very closely. Be sure to ask your financial professional to thoroughly explain any annuity rider benefit options.

Your guaranteed income is based on the financial strength of your insurance company and your compliance with the annuity contract terms. All of that said, an annuity, and the guaranteed income stream it pays, can be a crucial defense against market risk when you are in retirement.

Do That Job You Have Always Dreamed of

Many retirees are seeing retirement as the chance to try out those jobs they always wanted to do but couldn’t for one reason or another.

As we become more of a gig economy, you have the chance to try out contractor positions or to serve as a consultant in the field where you worked full-time for decades. In these situations, you essentially control the hours you work, but can add significantly to your cash-flow.

Some Final Thoughts on the 25x Rule – and Other Rules

In the end, all retirement savings rules are guidelines, not “rules” to be followed without question. Your best retirement strategy is to find an experienced, qualified financial professional whom you trust and with whom you are comfortable.

You can check on the licenses they hold and therefore the kind of financial guidance they can give you. Anyhow, your financial professional can help you determine how to structure your investments, annuities, savings, and income for the kind of retirement you have always dreamed of.

There are no failsafe guarantees in the financial world, but this approach is definitely a good, practical option. Get started by planning for retirement today! If you are looking for an experienced, independent financial professional to assist you, many independent financial professionals are available here at SafeMoney.com.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial meeting that is complimentary and in which you can discuss your goals, needs, and situation. Should you want a personal referral, please call us at 877.476.9723.

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