What Is The 25x Rule For Retirement? (Easily Explained) | Wildchildretire

Key Takeaways:

• The 25% retirement rule allows you to calculate your retirement number by accounting for your annual expenses and times them by 25.
• It pairs very well with the 4% rule, where you withdraw 4% from your total nest egg in retirement.
• There are many benefits to the rule of 25, including that it helps you stay disciplined with your savings, accurately accounts for inflation, and is incredibly simple.

What is the 25x rule, you ask?

Well, let us explain!

Here we’ll show you exactly what the 25x rule is, the benefits, and more.

Let’s check it out!

The Rule of 25 For Retirement (You Need To Know)

Pure magic, that’s what it is. The Rule of 25 (popularized by Mr. Money Mustache) says you must save 25 times your annual retirement expenses. So, for example, if you spend $50,000 annually, you’ll need $1.25 million saved for retirement.

How did this magic number come about? It’s pretty simple. The rule is based on the 4% safe withdrawal rule, which says you can withdraw 4% of your retirement savings each year without depleting your principal.

Therefore, if you have saved $1 million, you can withdraw $40,000 per year ($1 million x 0.04 = $40,000), and your savings will last for an extended period.

The 4% rule is based on historical data and is quite accurate. However, it’s not set in stone – there’s always a chance that retirement could last longer than expected or that markets may not perform as well as hoped.

For this reason, the 25x rule is seen as a much more conservative approach, giving retirees a cushion of savings to fall back on. 

Of course, retirement planning is not just about having enough money saved. It’s also important to consider when you want to retire, your lifestyle, and how much you’ll need to cover medical expenses.

But if you’re looking for a simple rule of thumb to help you plan for retirement, the Rule of 25 is an excellent place to start (especially if you’re a military member currently saving those hard-earned paychecks.)

Awesome Benefits of The 25x Rule

Clear Financial Picture

This is probably one of the most helpful aspects of the 25x rule. It gives you a clear financial picture of what your retirement might look like. For example, let’s say you want to retire in 20 years and think you’ll need $50,000 per year to cover your expenses.

Based on the rule, you would need to have $1.25 million saved by the time you retire. This gives you a clear goal to work towards and can help you stay on track with your retirement savings.

It also helps to have a retirement number in mind regarding retirement planning and saving.

Too often, people have no idea how much they need to save for retirement, which can lead to retirement anxiety or even paralysis when it comes to saving.

The 25x rule gives you a retirement number to aim for, which can help ease some anxiety.

Simplicity

Another great benefit of the 25x rule is its simplicity. 

It’s a very straightforward rule that anyone can understand and apply to their retirement savings plan. You don’t need to be a financial expert to use the rule – all you need to know is your annual expenses and how many years you have until retirement.

You can calculate how much you need to save each year from reaching your retirement goal.

This simplicity is one of the reasons why the 25x rule has become so popular – it’s an easy way for people to plan for retirement without getting overwhelmed by the process.

Flexible for Inflation

The 25x rule also allows for inflation in its calculations.

The rule is based on the 4% safe withdrawal rate, which is a good rate of return over the long term. However, this rate may not accurately take inflation into account.

The inflation rate can significantly impact retirement savings, as it reduces the purchasing power of money over time. For example, due to inflation, $1 million today may only be worth $500,000 in 20 years. This means you would need to have $2 million saved by retirement to maintain the same standard of living.

The 25x rule accounts for this by giving you a retirement number that you can slowly adjust if necessary.

Helps You Stay Disciplined With Savings

When you have a retirement savings goal, staying disciplined with your savings can be easier. 

It’s too easy to dip into retirement savings for vacations or a new car. But if you know that you need to have $1.25 million saved to retire, it will be easier to resist this temptation and keep your retirement savings intact.

Of course, you can still use your retirement savings for things other than retirement. But knowing how much you need to have saved can help you make more informed decisions about when and how to use your retirement savings.

Builds Confidence in Your Retirement Planning

The 25x rule can also help build confidence in your retirement planning. 

When you know how much you need to have saved, you can have confidence that you’re on track to reach your retirement goals. This can give you peace of mind and help reduce stress levels as you approach retirement.

Often, folks give up because they have no detailed picture in sight. The 25x rule provides that picture and a level of confidence most people do not have.

Early Retirement

Last but not least, the 25x rule can help you retire early. 

If you want to retire sooner than 20 years, you’ll need to save more than 25x your annual expenses. For example, if you want to retire in 10 years, you’ll need to have saved 50x your yearly expenses.

This may seem daunting, but it’s possible to retire early if you’re willing to make some sacrifices. For example, you may need to live on a smaller budget or change your lifestyle. But if you’re willing to do what it takes, the 25x rule can help you retire earlier than you ever thought possible.

The 25x rule is a great retirement savings rule to live by. It’s simple, considers inflation, and can help you stay disciplined with your retirement savings. Plus, it can give you confidence in your retirement planning and even help you retire early. So if you’re looking for a retirement savings rule to follow, the 25x rule is a great option.

FAQ

Who is the rule of 25 good for?

The rule of 25 is good for people who want a retirement savings goal that is simple to calculate and easy to understand. But it’s also a good starting point for fine-tuning your FIRE number, financial goals, retirement funds, monthly expenses, annual spending, annual withdrawals, analyzing market conditions, adjusting to the inflation rate, and achieving financial freedom.

Can the rule of 25 be used for military members?

Yes, the rule of 25 can be used for military members. Same formula: Take the current amount of money they spend yearly, times that by 25, and you are ready to go.

Is the 25x rule related to the FIRE movement?

Yes. It was popularized by Mr. Money Mustachem, a “Founding Father” of the FIRE movement.

Is the 4% rule still valid for retirement?

Yes. The 4% rule is still valid for retirement. However, you will have a greater chance at success if you don’t look at it as a set fast rule. Use it as a base, be flexible with your current lifestyle, adjust your current expenses when it calls for it, be aware of stock market fluctuations, and get a part-time job if necessary. The amount of savings you have will help you enjoy the retirement age, as well as the subsequent years.

What is the biggest expense for most retirees?

For most early retirees, the biggest expense to their retirement income is health care, which can take a big chunk of their retirement portfolio, including social security. Also, because their annual income has taken a big hit during their golden years, some folks have to get part-time work to pay for that expense. 

Summary

Now that you know how to use the 25x rule, it’s time to implement it! This simple equation is the key to a comfortable retirement, and with some planning now, you can make your dreams of travel, relaxation, and spending time with family a reality. So what are you waiting for? Start crunching those numbers and see how much sooner you can retire using the 25x rule!

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What number did the 25% rule give you for retirement? We’d love to hear from you below!