The Multiply-by-25 Rule for Retirement Saving

This simple recommendation can make it easier to save for retirement

graphic showing two people on top of stack of books with a ruler and pencil. the words "financial rules of thumb" are in the middle

Whether retirement is right around the corner or a couple decades away, being prepared is key. It’s never too early or too late to contribute toward a healthy retirement. The multiply-by-25 (“25x”) rule of thumb is a simple way to estimate the amount of savings you’ll need to build based on the income you’d like to have.

Let’s dig deeper into the rule and find out why it works and how you can use it to calculate your ideal retirement savings amount.

Key Takeaways

  • The multiply-by-25 rule is a simple way to gauge the total amount of savings you should aim for before you retire.
  • Your retirement savings could last 30 years if you make equal withdrawals of 4% of the given savings amount each year.
  • The rule assumes a certain rate of return on your savings, so low returns may call for an increase in the amount you need to save.

How Does the 25x Rule Work?

In truth, there's no way to predict the exact amount of money you’ll need to have in stashed away in a savings account by the time you’re ready to leave the workforce for good. But that doesn’t mean you can’t come up with a target number. The 25x rule gives you a handy way to model your retirement savings plan by using your ideal income each year after you retire as a starting point.

The 25x rule is simple to apply.

  • First, think about your wants and needs after you retire. Will you live in much the same way you do now, or will it change? Will there be more costs or fewer? What level of comfort do you wish to have?
  • Next, figure out a rough budget for that future way of living. What will it cost each year? Use this figure to decide what salary you’d like to have in order to support the dream.
  • Lastly, multiply that amount by 25 to come up with an idea of the total amount of money you need to save by the time you retire.

For example, if you want to live off of $60,000 per year in retirement, you’d need $1.5 million saved by the time you retire ($60,000 x 25).

Based on research by Fidelity, most people will need 55% to 80% of their pre-retirement income after they retire. That means if you’re now making $100,000 each year, you’ll need between $55,000 and $80,000 each year when you retire.

Once you have a figure for your ideal retirement savings amount, you can work toward building up your savings. You might put more money away each month, or invest in a manner to reach that goal, or both.

Why the 25x Rule Works (Most of the Time)

The 25x rule provides a lump-sum amount that allows you to make steady withdrawals each year for a span of 30 years. This time frame is based on a 1994 study by financial advisor William Bengen, who wanted to create a simple tool that would work for almost everyone. This meant the rule has some factors, such as inflation, built-in. Bengen posited that taking out 4% of retirement reserves each year can lead to a 100% rate in funding a 30-year retirement. Though his faith may have led to a slight overstatement, the 25x rule of thumb does work in most cases. It works because it allows you to gauge your retirement needs without having to factor in a vast number of unknowns, and with a bit of cushion built-in.

It can be helpful to talk to a financial advisor at least once to map out a savings plan. You may want to discuss your current income and finances, how much debt you have now, or expect to have in the future, and what you'd like life to look like after you retire.

If the amount of savings you need per the 25x rule seems out of reach, know that you don’t have to save each dollar of your 25x amount yourself. If you have a 401(k), employer-matched contributions can be a major help. Any investment or account you have that earns compound returns will also count toward your 25x goal.

Take the 25x Rule With a Grain of Salt

Keep in mind that the 25x rule of thumb is based on an estimate of the amount that you can withdraw from your portfolio. For that reason, it does have limits as to how precise it is. The rule does not factor in other sources of income, like any pensions, rental properties, Social Security checks, side jobs, or other income. Fidelity estimates that most people only need to produce about 45% of their desired retirement income from savings, and the rest may come from other sources.

This rule of thumb also assumes that your savings will produce enough of a return to prevent having to dip into your principal before you die. In other words, it assumes that your 4% withdrawal each year will come from steady earnings rather than from the portion of your savings that will continue to make you money through interest.

To counter market risk after you retire, some experts suggest keeping most of your portfolio in safer assets like bonds, CDs, and cash, which tend to have lower returns. With this caution in mind, a 25x savings goal might not be enough to retire.

Since the 25x rule is based on a 30-year time span, it may not work for everyone. If you plan to retire early, or if you live much longer than most people, you may need to save more. By some counts, one out of every seven 65-year-olds lives to age 95.

The 25x Rule vs. the 4% Rule

The 25x rule comes from the 4% rule of thumb, which says you can withdraw 4% of your retirement savings each year and that it can last 30 years. To come up with the base value of a retirement that lets you withdraw 4% each year, multiply your yearly withdrawal by 25. Then, going forward, if you’ve used the 25x rule to save for retirement, following the 4% rule once you retire should allow you to live on your savings for 30 years. 

Article Sources

  1. Fidelity. "How Much Should I Save for Retirement?" Accessed Feb. 17, 2021.

  2. RBC Wealth Management. "Sustainable Withdrawal Rates in Retirement: Utilize as a Guide to Help Avoid Running Out of Money." Page 1. Accessed Feb. 17, 2021.

  3. Social Security Administration. "Retirement Information for Medicare Beneficiaries." Accessed Aug. 23, 2021.