25x Retirement Rule: How to Calculate and Examples

Planning for retirement could be complex, but the 25x retirement rule can simplify it. This guideline suggests that you need to save 25 times your annual expenses to retire comfortably. It’s a straightforward calculation that gives you a clear target for your savings.

A financial advisor can help you develop a comprehensive retirement plan that fits your budget needs and goals.

What Is the 25x Retirement Rule?

The 25x retirement rule suggests saving 25 times your annual expenses for a comfortable retirement. It is based on the assumption that a 4% annual withdrawal rate from your savings will sustain you throughout retirement without depleting your principal.

The rate is often used because it is considered safe enough to maintain your savings over the long term, as long as your investments can yield a consistent average annual return of 4%. You should note, however, that market fluctuations and economic conditions could impact returns, so make sure you review and adjust your investment strategy regularly.

Inflation and longevity are two other factors that can impact the effectiveness of the 25x retirement rule. Inflation can eat into your purchasing power over time, meaning that your expenses will increase as you age. Additionally, as people live longer, your retirement savings may need to last more time, perhaps even several decades.

How to Calculate the 25x Retirement Rule and Examples

To use the 25x retirement rule, start by estimating your expenses in retirement. This includes everything from housing and healthcare to travel and leisure. Once you have a clear picture of your yearly costs, multiply that number by 25.

For example, if you anticipate needing $40,000 per year, you would want to aim to save $1 million for retirement ($40,000*25). This would go up to $1.75 million to cover annual costs of $70,000, and $2.5 million for yearly expenses of $100,000.

The 25x retirement rule can offer you a target savings goal to establish financial security. But, it may need adjustments based on your individual circumstances.

Pros and Cons of the 25x Retirement Rule

One of the main benefits of the 25x retirement rule is its simplicity. It offers you a clear target that makes it easy to set financial goals and track your progress.

The rule takes a personalized approach to retirement planning, aligning your savings with estimated retirement expenses. Additionally, it uses the well-known 4% withdrawal rate, which has historically been considered a safe withdrawal rate for many retirees.

But, like other financial rules, the 25x retirement rule has limitations. It assumes a consistent rate of return on investments, which may not account for market volatility or economic downturns. And this can lead to a shortfall when your investments underperform.

The rule does not account for inflation either, and may leave you short on savings if you plan to retire early or expect a longer lifespan.

While the 25x retirement rule offers a straightforward approach to retirement planning, you should aim to balance its simplicity with precision. You can do this by incorporating other financial planning tools and retirement strategies to create a comprehensive plan.

Consider, for example,using detailed budget forecasts that project changes in spending over time, or simply create separate estimates for healthcare, travel and living expenses as you get older.

Additionally, you might also consider integrating tools like Monte Carlo simulations to assess the probability of different investment outcomes, so you could adjust your savings rate or asset allocation in response to potential market volatility.

Rule of 25 vs. 4% Rule

A woman evaluating the benefits and drawbacks of using the 25x retirement rule.

When planning for retirement, the rule of 25 and the 4% rule are two common strategies that serve different purposes within your financial plan.

The rule of 25 focuses on the accumulation phase, recommending that you save 25 times your annual expenses to help maintain financial stability for retirement. This guideline provides a target for how much to accumulate before retiring, but does not account for personal variables such as unexpected health expenses, lifestyle changes, or the possibility of early retirement.

The 4% rule, by comparison, addresses the distribution phase. It suggests withdrawing 4% of your retirement savings annually from a balanced portfolio of stocks and bonds. This withdrawal strategy aims to maintain an investment balance over 30 years. It is based on the assumption that 4% will allow your investments to continue growing, while offsetting withdrawals and inflation.

The 4% rule, like with the rule of 25, could be compromised by fluctuating market conditions and changes in personal financial needs, which may diverge from historical market averages. So, while both rules offer a framework for preparing and executing a retirement strategy, they require flexibility and regular adjustments.

How Taxes Affect the 25x Rule

The 25x retirement rule gives you a quick estimate of how much to save, but it doesn’t factor in taxes, and that can make a big difference in how far your money actually goes. The taxes you owe on withdrawals depend on where your retirement savings are held: in pre-tax, Roth, or taxable accounts.

Pre-Tax Accounts (Traditional IRA, 401(k))

Withdrawals from pre-tax accounts are taxed as ordinary income. This means the amount you can spend in retirement will be less than your account balance suggests.

For example, if you need $80,000 per year and plan to withdraw from a traditional IRA, you may need to save more than 25x to cover taxes. Perhaps closer to 28x–30x your annual spending, depending on your tax bracket.

Roth Accounts (Roth IRA, Roth 401(k))

Roth withdrawals are generally tax-free, provided you meet IRS rules for qualified distributions. This makes the 25x rule more accurate for Roth accounts, since what you see is what you can spend. If you plan to rely mainly on Roth funds, the traditional 25x multiple could be sufficient.

Taxable Investment Accounts

With taxable accounts, you’ll owe capital gains taxes on profits when you sell investments. However, these rates are usually lower than ordinary income tax rates at either 0%, 15%, or 20%. This means the tax impact will fall somewhere between a Roth and traditional account, depending on your mix of assets and income level.

Blending Accounts for Tax Efficiency

Most retirees will draw income from a mix of these sources. Coordinating withdrawals across account types can help reduce your tax burden and make your savings last longer. For example, one strategy involves tapping taxable accounts first, followed by tax-deferred accounts, while allowing Roth funds to continue growing tax-free.

Bottom Line

The 25x retirement rule offers a simple way to estimate how much you may need to save by multiplying your expected annual expenses by 25. It is based on the idea that withdrawing about 4% of your portfolio each year can support roughly 30 years of retirement under average market conditions. While this rule can help set an initial target, it works best as a planning reference rather than a fixed answer, and it is often paired with a broader review of income sources, taxes and withdrawal timing.

That flexibility becomes more important as your situation changes over time.

“The 25x retirement rule can be a great starting point to figure out how much you should be aiming to save for retirement, especially in your 20s and 30s. But as you get older, it’s important to re-evaluate the numbers. Not only do market conditions impact its effectiveness, but so do your personal circumstances, such as lifestyle costs where you live, your health, and the timing and source of other income you’ll have in retirement, like a pension or Social Security,” said Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Retirement Planning Tips

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