Early Retirement

Use The Rule of 25 to Calculate How Much You Need to Retire

What is The Rule of 25?

The Rule of 25, also know as the Multiply by 25 Rule, attempts to define how much money you’ll need to save for your retirement. Not surprisingly, based on the name of the rule, that amount is 25 times your annual expenses (not income).

How Does The Rule of 25 Work?

If you spend $50,000 per year multiply that amount by 25 and you’ll come up with a figure of $1,250,000.

In this example, our person would need to save up $1.25 million dollars to build a nest egg large enough to support their spending of $50,000 per year.

The Rule of 25 and The 4% Rule

By itself, the Rule of 25 is a useful model for retirement planners to use, but when combined with the 4% Rule, you get FIRE!

FIRE seekers use these two rules to figure out not only how much they need to have saved and invested in order to retire, but also how much can be withdrawn annually from your retirement portfolio so that you don’t run out of money and go broke in retirement.

For this to happen your Rule of 25 money must be invested in order to grow and outpace inflation. Low cost index fund investing is the most popular investment strategy you’ll hear about in the world of FIRE. All examples you see in this article are assuming that your money is invested in the US Stock Market.

Rule of 25 plus 4 Percent Rule

Together, the Rule of 25 and the 4% Rule give you clear goals and expectations that you can use to design your early retirement.

The Rule of 25 and Early Retirement

The Multiply by 25 rule has been made popular by the FIRE movement; people seeking Financial Independence and Early Retirement.

Using math from the 4% Rule and Rule of twenty five we can calculate exactly how much of your portfolio that $100 per month will account for.

There are two formulas you can use to get that number.

  1. Annual expense divided by 0.04 (in the case of our $100 cell phone bill, that’s ($100 * 12)/.04 = $30,000
  2. Annual expense multiplied by 25 (again, using our cell phone bill, that would be ($100*12)*25 = $30,000

Or you if you don’t want to do any math you can use this calculator:

True Retirement Cost of Anything Calculator

Takes an additional retirement balance of $91,310.63

  • To use the calculator start by entering the amount of your expense in question (by default this is $100).
  • Next, use the drop down menu to choose whether this expense is daily, weekly, monthly or yearly.
  • Finally, use the slider at the bottom of the calculator to choose your safe withdraw rate. 4% is the default, but some plan on withdrawing more or less from their portfolio. Pick the SWR that works for you.

By Ty Roberts

Ty Roberts is the founder of Camp FIRE Finance, and a husband and father of four living in the Seattle area. He's a fan of the 4% rule, 80s movies and music, dad jokes and cast iron cooking.

6 replies on “Use The Rule of 25 to Calculate How Much You Need to Retire”

Very helpful tool and article. I’m assuming these thoughts are primarily directed at those that must build their own retirement as opposed to someone who has an employer-mandated retirement, such as with teachers. With state jobs in Oregon, you must participate in the retirement program and have the option of taking the lump sum or a monthly amount for life. The benefit with the monthly amount is that it continues to be paid to you even if you use more than what your lump sum would have been, and you’ll get it until you pass away. In that regard I’m very lucky with my job.

That’s good information that you would need to have 25 times your yearly income for retirement. I feel like that would last you a good amount of time. Hopefully, if you spend it right then you could make it last the rest of your life.

I assume this tool assumes a (1) number of years of retirement (90-65 = 25), (2) an estimated rate of return on funds and (3) the 4% withdrawal rate subject to an estimated increase for inflation?
What are those variables in the model? Knowing these factors I could perhaps flex the assumptions

The calculator takes the annual expense divided by the withdrawal rate as a percentage to get the true retirement cost of anything. It’s not based on the number of years of retirement.

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