The Multiply-by-25 Rule for Retirement Saving

This simple recommendation can make it easier to save for retirement

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

Let’s dig deeper into the rule, 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 calculate the total retirement savings you should aim for.
  • Your retirement savings will last 30 years if you make equal annual withdrawals of 4% of the retirement savings amount.
  • Low annualized returns on retirement savings could increase the amount you need to save.

How Does the Multiply-by-25 Rule Work?

It’s difficult to know the exact amount of money you’ll need to have in your retirement account by the time you’re ready to leave the workforce for good. That doesn’t mean you can’t come up with a target savings amount. The multiply-by-25 rule gives you a starting point for your retirement savings by using your ideal annual retirement income.

The multiply-by-25 rule is relatively straightforward to apply. First, figure out what annual salary you’d like to have during retirement. Then, multiply that amount by 25 to determine the total amount you need to save up for retirement. 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).

Fidelity estimates most people need 55% to 80% of their pre-retirement income after they retire. If you’re currently making $100,000 each year, you’ll need between $55,000 and $80,000 each year when you retire.

Once you calculate your ideal retirement savings amount, you can work toward building your retirement savings and investments to reach that goal.

Why the 25x Retirement Rule of Thumb Generally Works

The multiply-by-25 rule provides a lump-sum retirement amount that allows you to make regular annual withdrawals for 30 years, a timeframe based on a 1994 study by financial advisor William Bengen, who posited that withdrawing 4% of your retirement reserves and adjusting for inflation each year was 100% successful in funding a 30-year retirement. The 25x rule of thumb works because it allows you to make a comfortable estimate of your retirement needs without factoring in different variables.

It can be helpful to talk to a financial advisor at least once to map out a retirement plan based on your current financial future, expected debt, and retirement expectations.

You don’t necessarily have to save every dollar of your 25x amount yourself. Employer-matched contributions to your 401(k) and compound interest on your investments will count toward your 25x goal, too.

Grain of Salt

This rule of thumb is based on an estimate of the amount that you can withdraw from your portfolio and, therefore, it’s somewhat limited. It does not factor in other sources of retirement income, like any pensions, rental properties, Social Security, or other income. Fidelity estimates you’ll need to generate only 45% of your retirement income from savings.

This rule of thumb also assumes your savings will produce enough of a return that your annual 4% withdrawals will not deplete your principal before you die. To counter market risk, some experts suggest retirees keep most of their portfolio in safer investments like bonds, CDs, and cash, which tend to have lower returns. This means a 25x retirement savings goal may not be enough.

Since the 25x rule is based on a 30-year withdrawal period, you may need to save more, particularly if you plan to retire early. One out of every seven 65-year-olds lives to age 95, according to the Social Security Administration.

Multiply-by-25 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 it will last 30 years. To get to the original value of a retirement that lets you withdraw 4% each year, multiply the annual withdrawal by 25. If you’ve followed the multiply-by-25 rule to save for retirement, following the 4% rule should allow you to live on your retirement savings for 30 years.