What is the 25x rule for retirement?

If you’ve been looking into the FIRE movement or retirement planning, you’ve probably come across the 25x rule.

The 25x rule can help you figure out how much money you’ll need to save up for retirement, especially if you want to retire early. Among the FIRE movement, this is also sometimes known as your FIRE number.

How does the 25x rule work?

The 25x rule for retirement works simply by estimating your annual retirement income – ie the amount of money you think you’ll need to live off each year – and multiplying it by 25.

So if you estimate you’ll need an annual income of $40,000 to fund your retirement lifestyle, the 25x rule says you’ll need to have saved/invested $1 million in order to be able to withdraw that annual $40,000.

The 25x rule doesn’t factor in things like pensions, social security and inflation, so you can use it as a loose tool and factor in those other things while doing your calculations.

It’s a good way to get started when looking into your retirement plans and setting savings goals.

You should also take into account your current outgoings might be significantly higher than that you expect to pay out in retirement. For example if you’re currently paying off a mortgage, that may be fully paid by the time you retire, so that monthly expense can be left out of your expected retirement costs.

How does the 25x rule relate to the 4% rule?

The 25x rule and the 4% rule go hand in hand. The 4% rule is a widely accepted rule that suggested retirees are able to safely withdraw 4% of their savings in the first year of retirement and so on, adjusting for inflation, for at least the next 30 years.

Multiplying 4% of a number by 25 gives you 100%, hence the 25x times rule. You now have your total amount of retirement savings needed to be able to safely withdraw 4%.

Drawbacks to the 25x and 4% rule

Whilst these calculations are a great starting point when it comes to retirement planning, they don’t account for every individual circumstance. There are unpredictable situations, such as unforeseen future medical expenses, market fluctuations affecting investments and all kind of things that could have varying effects on individual’s retirement funds.

These figures were also originally calculated based on a traditional retirement age. If you are aiming to retire particularly early, you may want to to consider that your retirement portfolio has to last longer, meaning the 25x rule might not be enough.

Should I use the 25x rule to plan my retirement?

The 25x rule is a good base point for starting retirement planning calculations, but should not be considered a hard and fast rule that works in any and every situation.

Always take into consideration your individual financial situation and adjust for things the 25x rule doesn’t account for, such as additional income, pensions, social security, and so on.

One the whole, the 25x rule is a great rule of thumb that allows anyone to work out a quick and simple overview of how much money they need for retirement.