What is the 25x Rule for Retirement?

Fri , June 9, 2023

Many factors impact retirement planning, such as your desired lifestyle, location, taxes, the economy, etc. These factors may make it hard to set an exact number to strive for.

One rule of thumb some use is the 25x rule. Under this rule, you strive to save 25 times your planned annual retirement spending by retirement age.

This article will explain how the 25x rule works, then cover some pros and cons of following this rule as you save for retirement.

How Does the 25x Rule Work?

The 25x rule states that you should save 25 times your planned annual spending by the time you retire.

For example, imagine you plan to spend $50,000 yearly in retirement. Multiply $50,000 by 25 according to the 25x rule to get $1,250,000. Under the 25x rule, you must accumulate $1,250,000 in retirement assets by the time you retire.

The 25x rule comes from the 4% rule, which states you should have enough in your retirement fund to withdraw 4% each year. Multiplying 4% by 25 gets you 100%, hence why this rule is called the 25x rule.

Pros of the 25x Rule

The 25x rule offers several advantages when planning for retirement:

Simplicity

Following the 25x rule is simple because it gives you one number to work towards. This helps you streamline retirement planning by working backward from your planned spending.

Flexibility

The 25x rule gives you room to decide on your retirement lifestyle so you can make adjustments now to meet those goals.

For example, if you want to travel more and enjoy a higher-end lifestyle, you can simply adjust your 25x number upwards and save more. On the other hand, if you plan on downsizing and living a simpler lifestyle, you can change your 25x to be lower and not have to save as much.

Can Result in Additional Financial Security

The 25x rule assumes that you’ll retire in 25 years. Retiring at 65 means the funds could last until age 90 — well above the US life expectancy.

Furthermore, the 25x rule excludes Social Security, pensions, and other income streams.

As a result, you could potentially end up with more than you need, giving you additional security and making retirement more comfortable.

Cons of the 25x Rule

The 25x rule isn’t perfect. Here are some drawbacks to keep in mind:

It’s Not Specific

The 25x rule is not specific retirement savings advice. It can be a good starting place, as 25x your annual spend means you would theoretically have enough to live a 25-year retirement.

However, it’s only a starting point. It does not consider your investment preferences, such as risk tolerance. It also does not account for other matters, like estate planning, taxes, and potential end-of-life expenses.

Doesn’t Account for Inflation or Market Fluctuations

Although the 25x rule gives you a target amount based on your desired living expenses, you must account for how inflation could impact your ability to save between now and retirement. Furthermore, you must consider how inflation could impact your assets once you retire.

Market fluctuations are another aspect the 25x rule doesn’t consider. Your assets could increase or decrease depending on markets or the economy.

It may Not Help with Early Retirement

Having 25x your planned retirement income could potentially be enough if you retire on time. However, if you leave the workforce earlier, you may need more funds.

In this case, you should consider raising your target to greater than 25 times your annual spending.

The Bottom Line

The 25x rule is a great starting point for retirement planning. You can calculate a total savings amount by picking your desired annual retirement income. Then, you can work backward to estimate how much you must save each month.

However, this rule may not meet your unique circumstance exactly. Once you calculate your 25x number, speaking with a financial advisor is vital. They can discuss your desired retirement lifestyle to adjust your target number and create a plan to get there.