What Is the 25x Rule for Retirement Saving?

If you want to be sure you’re saving enough for retirement, the 25x rule can help.

This rule of thumb says investors should have saved 25 times their planned annual expenses by the time they retire, according to brokerage Charles Schwab.

Here’s what to know about this retirement guideline and whether it can work for you.

Understanding the 25x Rule

“The 25x rule is a very simple ‘back of the napkin’ rule to determine whether you have enough money to retire,” said Brian Sak, a certified financial planner and partner at Granite Harbor Advisors in Houston, Texas, in an email.

You can find that amount by multiplying your annual expenses by 25 to arrive at the total investment assets you’ll need to retire, Sak added.

[READ: Should Retirees Follow the 100-Minus-Your-Age Rule for Stock Allocation?]

Why 25x?

The 25x rule is a twist on an earlier retirement guideline called the 4% rule.

“This is the rate that financial advisor William Bengen came up with in 1994 as the ‘safe’ withdrawal rate without running the risk of depleting a portfolio during life expectancy,” Sak said.

Bengen analyzed historical market data and withdrawal rates to determine a sustainable rate at which retirees could withdraw funds from their retirement savings without running out of money.

He found that withdrawing 4% of one’s retirement portfolio annually, adjusted for inflation, had a high probability of lasting through a 30-year retirement.

The rule was then simplified to suggest that retirees should save 25 times their annual expenses to achieve financial independence, based on this withdrawal rate.

[READ: How Much Should You Spend in Retirement? Use the 4% Rule]

How the 25x Rule Is Determined

“This 25x rule is specifically tied to the cost of living and is the No. 1 reason why experts will continue to drive the point that living below your means is critical to building wealth,” said Mawuli Vodi, a financial educator at Financially Present in Centreville, Virginia, in an email.

In fact, the 25x rule is one of the original tenets of the financial independence, retire early (FIRE) movement, Vodi said.

“For example, if your living costs are $75,000 a year, multiply that by 25, and you have your retirement number, otherwise known as the number where you fire your boss,” he said.

That would bring the total to $1,875,000, factoring in sources of income such as liquid investments, savings, brokerage accounts, retirement accounts, pensions and annuities, among others.

“If you hit that goal in time, withdrawing 4% of that balance each year, in theory, can enable the money to last for another 30 years, even with inflation,” Vodi said.

Advantages of the 25x Rule

That quick bit of math illustrates one appealing part of the 25x rule: It’s easy to calculate.

“You do not need complex computer programs or Excel spreadsheets,” said Nancy Hite, a certified financial planner and retirement planning specialist in Boca Raton, Florida, in an email.

Hite noted another advantage of the 25x rule is that it allows savers to track their progress as they get closer to retirement.

“For example, if you are 65 years old and the 25x rule tells you that you need to save $1 million for retirement and you have only $800,000 saved, you know that you need to continue working and saving until you have saved an additional $200,000,” she said.

Vodi also pointed out the advantage of having clarity around retirement savings.

“One of the major reasons people stumble along the savings and investing path is because they don’t have their sights set on anything worth mobilizing,” he said.

“But if they knew they were only six years of aggressive saving behavior away from retiring early, it could change their outlook on life,” he said.

[READ: Can You Retire on $1 Million? Here’s How Far It Will Go.]

Limitations to the 25x Rule

The 25x rule can trip up investors who use gross income as their baseline, according to Charles Schwab. That’s because retirement contributions, which are part of gross income, won’t be a factor.

Also, it doesn’t factor in Social Security benefits in retirement.

“There is a ’25x rule’ for retirement saving, but it should actually be applied to how much you think you’ll need just from your portfolio in the first year of retirement,” wrote Chris Kawashima, senior research analyst at Charles Schwab in Phoenix, Arizona, and Rob Williams, managing director of the Schwab Center for Financial Research in Lone Tree, Colorado, in a 2023 blog post.

“Determining that amount can be challenging if you haven’t worked on a financial plan with a professional, which is why we recommend that people take that step,” they added.

Another flaw is that the rule doesn’t account for inflation, explained Troy Owens, a wealth planner at AlphaCore Wealth Advisor in San Diego, California, in an email.

“This is a pretty big flaw, especially for those that have retired in the last couple of years and have seen their housing, medical and insurance costs skyrocket,” he said.

“The reality is that things get more expensive over time so this should be baked into the calculation,” he added.

How to Effectively Implement the 25x Rule

To implement the 25x rule successfully, start by calculating your spending needs in retirement.

That sounds easy, but it can be tricky, as some pre-retirees underestimate what future spending will be, and fail to take inflation into account.

Once you arrive at that figure, multiply by 25 to determine your target retirement savings.

Invest in a diversified portfolio to achieve long-term growth while managing risk, then regularly review and adjust your investments to stay on track with your retirement goals.

It’s often helpful to seek guidance from financial advisors for advice tailored to your unique situation.

An Alternative to the 25x Rule

Another approach is the segmented or bucket approach. Using this method, investors segment cash they’ll need in the next 12 months, along with emergency funds, into a highly liquid asset class with low volatility. For example, a high-yield savings account would be safer than cryptocurrencies or meme stocks.

Segment 2, said Sak, consists of “funds to create a runway of five to seven years of need in stable value assets, generally bonds or bond alternatives, to live on in the event of an extended equity market downturn.”

Segment 3 would be money for use beyond seven years.

Sak said these funds can be allocated to a variety of growth-oriented asset classes, including private markets for accredited investors, to combat inflation. Other considerations would be long-term capital appreciation and legacy planning.

“The simple 25x rule tends to encourage retirees to consider the ‘just live on the interest’ approach, versus taking a total return approach incorporating yield and capital appreciation into their portfolio management decisions, which has the potential to lead to much better long-term financial outcomes,” he said.

Is the 25x Retirement Rule Right for You?

Every investor’s situation is unique, so it’s often difficult to know whether one approach to retirement saving and planning is best.

According to Hite, investors should only implement the 25x rule with the guidance and expertise of a financial planner.

“Since the 25x rule does not account for or adjust for the effects of increased longevity, inflation, stock market crashes or taxes, you need expert guidance to help you preserve and protect your retirement savings and to make adjustments to the 25x calculation,” she said.

Hite also recommended that investors consider other strategies in addition to the 25x rule.

A rule of thumb, said Owens, can be helpful but shouldn’t be the only thing investors base their decisions on.

“When we work with our clients, the No. 1 thing that we can do as advisors is to listen to what they want to do,” he said. “It’s then and only then that we create a dynamic financial plan to get them where they need to go.”

For example, he said, an investor may have a goal to spend all his or her assets down and have the last check bounce, a strategy known as “Die with Zero.”

“In that case, the 25x rule or 4% rule of thumb is much too conservative and does not match what the client’s goals are,” Owens said. “Any good financial plan is dynamic and has built-in spending scenarios that change with the client’s desires and is not set in stone.”

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What Is the 25x Rule for Retirement Saving? originally appeared on usnews.com

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