How Much Do I Need to Retire? The 25x Rule Explained | The Wealth Shelf

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How Much Do I Need to Retire? The 25x Rule Explained

Most retirement advice tells you to save “as much as possible.” The 25x rule gives you an actual number. Here’s where it comes from, how to calculate yours, and the limits you need to understand before relying on it.

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The most common retirement advice — “save as much as possible” — is technically correct and practically useless. It gives you no target, no way to measure progress, and no indication of when you might be done. The 25x rule exists to replace that vagueness with a specific, calculable number. It’s not perfect. It’s also far more useful than anything else available to the average investor without a financial planner.

The Formula

The 25x rule in one line

The 25x Rule

Annual expenses × 25 = Your retirement number

The portfolio size at which a 4% annual withdrawal is sustainable over a 30-year retirement horizon.

If you spend $50,000 a year, your retirement number is $1.25 million. If you spend $80,000, it’s $2 million. If you spend $40,000, it’s $1 million. The rule is a direct mathematical consequence of the 4% safe withdrawal rate — the finding from financial planner William Bengen’s 1994 research that a diversified portfolio could sustain annual withdrawals of 4% of the starting balance, adjusted for inflation, over any 30-year period in modern market history without being depleted.

The 4% rate becomes the 25x rule simply by inverting it: if you can safely withdraw 4% per year, you need a portfolio that is 25 times your annual withdrawal. 1 ÷ 0.04 = 25. That’s the entire derivation.

The most important implication

Your retirement number is determined by your expenses, not your income. Two people earning the same salary but spending different amounts have very different retirement numbers. Someone who earns $120,000 and spends $60,000 has the same retirement number as someone who earns $80,000 and spends $60,000 — and both will reach it significantly faster than someone who earns $120,000 and spends $100,000.

Calculate Your Number

Three examples at different spending levels

$750K

Annual expenses: $30,000

$30,000 × 25 = $750,000. Sustainable withdrawal: $30,000/year, growing with inflation. Achievable on a median income with a savings rate of 25–30%.

$1.25M

Annual expenses: $50,000

$50,000 × 25 = $1,250,000. The most commonly cited retirement target. At 7% real returns and a 20% savings rate, typically reachable in 32 years from a zero starting point.

$2.5M

Annual expenses: $100,000

$100,000 × 25 = $2,500,000. Higher lifestyle target. Requires either a very high savings rate, a high income, or a long accumulation period — or some combination of all three.

Notice what these examples make clear: cutting your annual expenses is not just about spending less. It directly reduces your retirement number. Someone who reduces their annual spending from $60,000 to $50,000 doesn’t just save $10,000 per year — they reduce their retirement number by $250,000 ($10,000 × 25), while also adding to their savings more quickly. The impact is double-compounding.

Where It Comes From

The research behind the 4% rule

The Bengen Study — and its successors

In 1994, financial planner William Bengen published research examining every 30-year retirement period in US market history back to 1926. His question: what annual withdrawal rate, as a percentage of initial portfolio value, would have allowed a retiree to maintain their spending (adjusted for inflation) without depleting the portfolio over any historical 30-year period?

His answer: 4% — later refined to 4.5% when he extended the analysis. The Trinity Study (1998) replicated and extended the finding, and it has held up through subsequent market cycles. The research assumes a diversified portfolio of roughly 50–60% equities and 40–50% bonds, though Bengen’s later work suggested a higher equity allocation supports higher sustainable withdrawal rates.

The 4% figure is not a guarantee — it is a historically supported probability estimate. In Bengen’s analysis, portfolios at a 4% withdrawal rate survived 100% of historical 30-year periods. This is the number that Collins, Bogle, and most FI writers use as the basis for the 25x rule.

The Honest Limitations

What the 25x rule doesn’t account for

It assumes a 30-year retirement horizon

Bengen’s research was designed for people retiring around 65 with a life expectancy into their 90s. If you’re planning to retire at 45 or 50, a 30-year horizon isn’t long enough — you’re planning for 40–50 years. The research on longer horizons suggests a lower safe withdrawal rate, closer to 3–3.5%. For early retirees, the 25x rule understates the required portfolio. A 30x or 33x rule is more conservative and more appropriate.

It doesn’t account for Social Security or other income

If you’ll receive Social Security, a pension, or rental income in retirement, those income streams reduce the amount you need to draw from your portfolio. The calculation should use your expenses minus guaranteed income sources, not your total expenses. A $50,000 annual spending target with $15,000/year in expected Social Security income means your portfolio only needs to produce $35,000/year — requiring $875,000, not $1.25 million.

Future market returns may be lower than historical averages

The 4% rule is based on US market history from 1926 onward — a period that included extraordinary equity returns. Many analysts expect lower real returns over the next few decades due to current equity valuations and interest rate environments. Vanguard and other institutions have published long-term return forecasts of 4–6% real for a balanced portfolio, compared to the 7–8% historical average. A conservative approach builds in a margin of safety: targeting 28–30x expenses rather than exactly 25x.

It doesn’t address sequencing risk

A large market decline in the first 3–5 years of retirement can permanently impair a portfolio even if the long-term average return is fine. This “sequence of returns” risk means the timing of market performance matters, not just the average. The 4% rule’s historical success rate accounts for this to some degree — Bengen tested against historical market periods that included early downturns — but it remains the primary source of risk in early retirement.

How to Apply It

Adjusting the rule for your situation

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Use 30x if retiring before 55

A 40–50 year retirement horizon warrants a more conservative withdrawal rate. 30x annual expenses (equivalent to a 3.33% withdrawal rate) provides substantially more buffer against long time horizons and adverse early returns.

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Subtract guaranteed income from the withdrawal target

Use (annual expenses − guaranteed income sources) × 25 as your portfolio target. This is the number your portfolio actually needs to produce. Guaranteed income — Social Security, pensions, annuities — reduces the required portfolio size dollar for dollar at the 25x multiplier.

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Use actual expected expenses, not current spending

If you’re 20 years from retirement, your spending will look different at 65 than it does today. Healthcare costs typically increase; commuting and childcare costs typically decrease. A realistic estimate of retirement expenses — not just your current spending — produces a more accurate target number.

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Build in a margin of safety

Given uncertainty about future returns and unknown personal circumstances, targeting 28x or 30x expenses rather than exactly 25x gives you meaningful additional runway without requiring dramatically more savings. Collins and most FI writers recommend this approach.

25 times your annual expenses — with adjustments for your timeline and other income sources.

The 25x rule is the most useful retirement planning tool available to investors who want a specific target rather than vague advice to save more. It is grounded in robust historical research, widely used by serious personal finance writers, and produces a number that is genuinely meaningful and trackable.

Its limitations are real and worth understanding: it assumes a 30-year horizon, it doesn’t account for Social Security, and future returns may be lower than the historical average that underpins it. Accounting for these factors — using 28–30x for longer horizons, subtracting guaranteed income, building in a margin — produces a more conservative and more reliable target without making the math significantly more complex.

The goal of the 25x rule is not mathematical precision. It’s to replace “save as much as possible” with a number you can actually work toward — and measure your progress against.