You might remember a commercial from financial services giant ING that aired about 15 years ago. It featured people walking or riding bikes through a neighborhood, carrying giant orange numbers representing the amount of money they needed to retire comfortably.
Some people carried their numbers confidently, while others struggled and looked worried. That campaign addressed one of pre-retirees’ biggest questions: Have I saved enough?
A formula called the 25x rule attempts to answer that. It can help determine whether your savings can sustain your lifestyle in retirement. But is this rule useful, and does it apply to everyone’s financial situation?
Here’s a look at how the 25x rule works.
[Read: Guaranteed Income Strategies for Retirement]
What Is the 25x Rule?
The 25x rule is based on the premise that you must save 25 times your annual expenses to retire comfortably.
It’s related to the 4% withdrawal rule, which suggests retirees can safely withdraw 4% of their portfolio annually over a 30-year retirement. In theory, multiplying annual expenses by 25 would ensure savings large enough to sustain consistent 4% withdrawals while accounting for inflation and market fluctuations.
As with any retirement calculation, the 25x rule is an estimate of the amount any individual or couple should save. Financial planners factor in known future expenses, such as taxes, but also a new home, a new roof or a new vehicle. They also account for “wants,” such as travel and gifting money to family or charities.
“The 25x rule is meant to be one of those back-of-the-envelope calculations that can be helpful but not ideal for personal financial planning,” said Stuart Schiffman, founder of Compound Wealth Advisors in San Diego, in an email.
“While conservative, the 25x rule is dependent on when you retire, your lifestyle in retirement, your legacy goals and your health care expenses, to name a few,” he said.
Advantages of the 25x Rule
Despite its name, the 25x rule is more of a guideline.
“The advantage of the 25x rule is that it gives you a good baseline on what your retirement nest egg goal should be when you retire. It also helps you to measure if you are on track, behind or ahead of where you want to be in your current finances,” said Jordan Mangaliman, CEO at Goldline Financial Services in Fullerton, California, in an email.
That baseline can provide a good starting point for retirees and pre-retirees when evaluating their savings rate. “It gives a tangible number that can be a more realistic target and can be very motivating,” said Bobbi Rebell, a certified financial planner in Boca Raton, Florida, in an email.
“The psychology behind it can really move the needle for people who might otherwise not be as focused on their savings and investments and help them adjust their budget, including their spending, to better align with their goals,” she added.
[Read: How Long Will Your Retirement Savings Last]
Drawbacks of the 25x Rule
Because it’s an estimate, not an ironclad law, retirees should understand that the 25x rule has some limitations.
“Lifestyles can change and evolve over time,” said Constance C. Amstutz, a wealth advisor at JFS Wealth Advisors in Hermitage, Pennsylvania, in an email.
For example, she said that those in early retirement may travel more while they’re healthier but slow their pace as they age, which may decrease their expenses.
In addition, because the 25x rule is closely associated with the 4% rule, retirees need to take enough portfolio risk to generate an annualized return of at least 4%.
“In theory, if you can withdraw at a rate that your portfolio returns, you should continue to maintain the original principal dollars in your account, thus potentially never depleting the assets,” Amstutz said.
For example, if an investment portfolio returns 5% on average but a retiree withdraws 8% each year, that would drain both the earnings and the principal. That’s not sustainable.
[Read: How to Build a Balanced Retirement Portfolio]
Alternatives to the 25x Rule
Not every financial planner uses the 25x rule, as each client’s situation differs.
“Instead of a one-size-fits-all, sometimes a personalized strategy is a good approach even if it is more complicated,” Rebell said.
For example, account for the possibility of living longer with a target of 30x or even a 40x strategy. That’s a harder goal to achieve, but having more retirement savings is a positive.
“Conversely, instead of a never-changing 4% rule, it might make sense to withdraw money based on how the investments perform, and also withdraw a lower percentage as you age if the portfolio is underperforming in order to maintain enough principle,” Rebell said.
“It also makes sense to pay attention to the risk of your investments and consider adjusting that downward as you move through retirement to guarantee your nest egg stays healthy and provides a solid safety net,” she added.
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What Is the 25x Retirement Rule? originally appeared on usnews.com
Update 03/05/25: This story was published at an earlier date and has been updated with new information.
