The Rule of 25: How Much Do You Need When You Retire?

It's one of the most common financial questions I get: how much should I have saved for retirement?

After all, if you're going on a long trip you want to make sure there's enough gas in the tank. So how much money needs to be in the "retirement tank" in order for us to feel confident we'll have enough?

The answer isn’t always straightforward, but let me share a simple rule of thumb that can help you gauge where you stand: the "Rule of 25".

Understanding the Rule of 25

The Rule of 25 is an easy way to estimate your retirement savings needs. The rule

states that you should aim to save 25 times your annual expenses. This means that if you

currently spend $60,000 per year, you should aim for a retirement nest egg of $1.5 million

($60,000 x 25). If your annual spending is $100,000, then your target should be $2.5 million.

The logic behind this rule comes from the widely used “4% rule” in retirement planning. The

4% rule suggests that if you withdraw 4% of your savings per year, your portfolio should last you throughout a normal retirement. And since 4% is equal 1/25th, you can see how these two rules go hand in hand.

How to Calculate Your Number

To determine how much you have saved in terms of years of spending, follow these steps:

1. Calculate your net worth (total assets minus liabilities).

2. Determine your annual expenses (how much you spend per year).

3. Divide your net worth by your annual expenses to see how many years’ worth of

spending you currently have saved.

For example, if your net worth is $500,000 and you spend $70,000 annually, you have about

seven years’ worth of spending saved. ($500,000 ÷ $70,000 = 7.14 years)

Some examples of the Rule of 25, image source: Forbes

Limitations of the Rule of 25

While this rule is a great starting point, there are several other factors to consider:

1. Retirement Income Sources – The rule assumes that your retirement savings are your

sole source of income. However, most retirees will have Social Security, pensions, rental

income, or other sources that reduce their reliance on savings.

2. Retirement Length – The rule is based on a 30-year retirement. If you plan to retire

early or expect to live longer, you may need more than 25 times your expenses.

3. Market Conditions – The rule assumes steady investment growth. If you are unlucky enough to retire just before a market downturn, you run the risk of depleting your savings faster than expected.

4. Spending Changes – The assumption is that your spending remains the same

throughout retirement. However, early retirement years may involve more travel and

spending, while later years may see higher healthcare costs.

Two Scenarios to Consider

The Smiths: Traditional Retirees

• Age: 64

• Monthly Spending: $6,500 ($78,000 annually)

• Social Security Income: $3,500 per month

• Pension: $1,000 per month

• Retirement Savings: $600,000

If we apply the Rule of 25 to their total expenses, they appear underfunded, needing $1.95

million ($78,000 x 25). However, since Social Security and a pension cover $4,500 per month,

they only need to withdraw $2,000 per month from savings to cover their spending. If we apply the Rule of 25 to just their income gap of $2000/mo means they need about $600,000 - exactly what they have saved!

The Joneses: Early Retirees

• Age: 50

• Spending: $200,000 annually

• Savings: $5 million

• No other current sources on income

The Rule of 25 suggests they need $5 million to retire comfortably. However, because they’re

retiring early and might need their savings to last 40–45 years, a more conservative 3%

withdrawal rate would be advisable. That means they should aim for closer to 33 times their

annual expenses, or $6.6 million. Without additional income sources, they may need to adjust their spending or save more before retiring.

Final Thoughts

The Rule of 25 is a great starting point for retirement planning, but it isn’t the full picture. Every situation is unique, and factors like income sources, life expectancy, and investment returns all play a role. If you're unsure about your retirement readiness, consider speaking with a financial advisor to create a plan that's customized to your situation.

Want to discuss your retirement savings? Feel free to schedule a call or

email me at info@nateskelly.com.