The retirement rule of 25 says you need about 25 times your expected annual spending saved before you can retire. That means if you plan to live on $50,000 a year, you should aim for a $1.25 million portfolio.
The math feels intimidating at first, but it comes from decades of withdrawal-rate research — and it is far more flexible than most people realize. The real problem is that savers often either panic at the total or assume it guarantees success.
In this guide, you'll learn where the retirement rule of 25 came from, how to calculate your number, when it works, when it fails, and how to adjust it for taxes, inflation, and your own timeline.
What Is the Retirement Rule of 25?
The retirement rule of 25 is a quick formula: multiply the amount you expect to spend each year in retirement by 25. The result is your target nest egg. It is the inverse of the famous 4% rule, which describes withdrawing 4% of your portfolio in year one of retirement and adjusting for inflation afterward.
The concept traces back to William Bengen's landmark 1994 research in the Journal of Financial Planning, which tested historical withdrawal rates against market data going back to 1926. Bengen found that a 4% initial withdrawal had survived every 30-year retirement in the historical record. Flip that fraction — 1 ÷ 0.04 — and you get 25.
Here's a quick scenario: a couple expects to spend $60,000 a year from their portfolio, after accounting for Social Security. Multiplying $60,000 by 25 gives them a target of $1.5 million.
How to apply this: Write down your estimated annual retirement spending and multiply it by 25 tonight. That single number turns a vague dream into a measurable goal, and it is the first step in using the retirement rule of 25 with confidence.
Where the Rule of 25 Comes From
The rule is not an arbitrary budgeting trick — it's built on the Trinity Study and Bengen's analysis of historical stock and bond returns. Researchers asked a simple question: what withdrawal rate would have kept a portfolio alive for 30 years in the worst market sequences on record?
The retirement rule of 25 is the practical answer that emerged from that work.
Key findings from that body of research:
- A 4% initial withdrawal rate succeeded in nearly all 30-year periods studied
- Higher withdrawal rates (6% or more) failed frequently in past markets
- Portfolios needed meaningful stock exposure — typically at least 50% — to keep pace with inflation
Fidelity Viewpoints, Fidelity's official education resource, explains that retirement savers should think in milestones rather than one final number, noting that saving roughly 10 times your salary by age 67 is a widely used benchmark. The retirement rule of 25 complements that: it converts your personal spending into a personal target, which is often more accurate than a salary multiplier.
How to apply this: Check whether your current savings multiple matches common milestones by age, using a free tool like Fidelity's retirement savings calculator.
How to Calculate Your Personal Number
The basic math takes two minutes, but doing it accurately takes a bit more care. The retirement rule of 25 only works when the inputs are honest, so follow these steps:
- Estimate annual retirement expenses, including housing, healthcare, travel, and hobbies
- Subtract guaranteed income sources like Social Security or a pension
- Multiply the remaining gap by 25
That third step matters more than most people realize. If Social Security covers $30,000 of your $60,000 spending, you only need the retirement rule of 25 applied to the $30,000 gap — a $750,000 target instead of $1.5 million.
| Input | Example | Action to take |
|---|---|---|
| Annual spending | $60,000 | Track current spending for 12 months |
| Social Security/pension | $30,000 | Get your estimate at ssa.gov |
| Income gap | $30,000 | Subtract income from spending |
| Nest egg target | $750,000 | Multiply gap by 25 |
One common scenario: a 55-year-old tracks a year of spending and discovers she spends $8,000 less annually than she assumed. That discovery alone shrinks her target by $200,000.
How to apply this: Log in to Empower's free dashboard to see your true net worth and spending in one place, then run the four steps above with real numbers.
Why the Rule Works: The 4% Withdrawal Connection
The retirement rule of 25 and the 4% rule are two sides of the same coin. If you withdraw 4% of a portfolio each year, adjusted for inflation, the math implies your savings must equal 25 times your annual draw. Understanding this connection helps you see the built-in safety margin inside the retirement rule of 25.
- Worst-case design: Bengen calibrated the rate to survive the Great Depression and 1970s inflation, not average markets
- Inflation protection: annual adjustments keep your buying power intact over decades
- Portfolio requirement: the rate assumes a balanced mix of stocks and bonds, not cash under a mattress
A common scenario is a retiree who holds everything in bonds "to be safe" — historically, that over-cautious mix has been the bigger risk over 30-year horizons than stock volatility.
How to apply this: Review your current asset allocation and confirm you have long-term growth assets, not just savings accounts, funding your retirement number.
When the Rule of 25 Falls Short
No single formula fits every retirement, and the retirement rule of 25 has well-documented blind spots. Knowing them keeps you from either over-saving in fear or under-saving in overconfidence.
- Early retirees: the rule was designed for 30-year retirements. Retiring at 40 means potentially funding 50 years, so many early retirees target 30x or more instead.
- Sequence-of-returns risk: poor markets in your first five years of retirement can damage a portfolio that the averages never reveal. Guardrails or a cash buffer help.
- Healthcare gaps: pre-Medicare health coverage and long-term care can consume far more than average spending models assume.
Morningstar's retirement research team has published updated guidance suggesting that starting withdrawal rates closer to 5% can be reasonable when retirement conditions allow — while also warning that rates must be recalculated each year rather than set once and forgotten. The takeaway: treat the retirement rule of 25 as a starting estimate, not a guarantee.
How to apply this: If you plan to retire before 60, rerun your target at 30x expenses instead of 25x and compare the difference in required savings.
Practical Ways to Hit Your Target Faster
Reaching 25 times your annual expenses is mostly a function of three levers: savings rate, time, and fees. Small improvements compound dramatically, and every one of them shortens the distance to your retirement rule of 25 target.
- Raise your savings rate by 1–2% each year. Automatic increases make this painless and often outpace market timing gains.
- Lower your future spending estimate. Paying off a mortgage before retirement directly shrinks your target.
- Minimize investment costs. Low-cost index funds keep more of your returns working for you.
- Use tax-advantaged accounts. 401(k)s, IRAs, and HSAs reduce the tax drag on every dollar saved.
Consider a saver who contributes $1,000 a month starting at 35 versus 45. At a typical long-run market return, the ten-year head start can roughly double the ending balance — time in the market is the most powerful lever you control.
How to apply this: Pick one lever — an automatic annual contribution increase — and set it up in your workplace retirement plan this week.
Frequently Asked Questions About retirement rule of 25
How does the rule of 25 differ from the 70% income replacement guideline?
The 70% guideline says you need 70% of your pre-retirement income; the retirement rule of 25 bases the target on actual planned spending instead. If you earn $100,000 but spend only $55,000, the 70% guideline suggests a much larger (and unnecessary) goal. The spending-based approach suits frugal savers; the income approach suits anyone unsure of future expenses.
Should I include my house equity in my rule-of-25 calculation?
Generally no — your primary residence doesn't produce withdrawable income unless you plan to sell, downsize, or use a reverse mortgage. One exception: if you genuinely plan to downsize, you can count the expected released equity as a one-time addition to your nest egg, not as part of the 25x base.
The retirement rule of 25 focuses on income-producing assets, so exclude home equity unless downsizing is genuinely part of your plan.
Does the rule of 25 account for taxes?
Not directly. Withdrawals from traditional 401(k)s and IRAs are taxed as ordinary income, so you must multiply your after-tax spending need by 25 — meaning the gross withdrawal may be higher. Roth accounts sidestep this because qualified withdrawals are tax-free, effectively lowering your required target.
What if I retire during a market crash?
A severe downturn early in retirement is the biggest threat to the retirement rule of 25, because withdrawals lock in losses. A common defense is a cash buffer of one to two years of expenses, letting you pause portfolio withdrawals until markets recover rather than selling shares at depressed prices.
Is 25x still the right multiple, or should I use 30x?
Twenty-five times remains a reasonable starting point for a traditional 30-year retirement with a balanced portfolio. If you retire early, expect high healthcare costs, or want a larger margin of safety, moving toward 30x annual expenses adds resilience. Run both numbers and decide which risk level you can live with.
Conclusion
The retirement rule of 25 turns an abstract goal into one clear number: 25 times your annual spending, adjusted for income sources and taxes. Key takeaways:
- Multiply planned spending by 25 — after subtracting Social Security or pension income
- Treat it as an estimate, not a guarantee — early retirees and market downturns require adjustments
- Savings rate, time, and fees are the levers that actually move you toward the target
- Recalculate yearly as your spending, health, and market conditions change
Your next step is simple: calculate your personal number today, compare it to your current savings, and set one automatic increase in motion. The retirement rule of 25 works best the moment you stop guessing and start measuring.
