How Much Do You Need to Retire? The 25x Rule

Summary

There is no magic retirement number. One million dollars is a popular headline, but the amount you need depends mostly on how much you plan to spend in retirement and how much income you will have from other sources, such as Social Security or a pension. Inflation and the length of your retirement keep moving the target, too. In this video, Michael, a former financial advisor, builds an estimate in three steps.

Step 1: Estimate your yearly spending. A common starting point is the replacement ratio: many planners use 70% to 80% of your income before retirement. Some costs go away, such as commuting, saving for retirement and payroll taxes, while others, like health care, travel and hobbies, can go up. A retirement budget built from your own expenses is always better than a ratio.

Step 2: Subtract other income. For most Americans, the biggest source is Social Security. According to the Social Security Administration, it replaces roughly 40% of pre-retirement earnings for an average earner. Your benefit depends on your work history and the age you start collecting, and you can see your own estimate with a free account at ssa.gov. Add any pension, annuity, rental income or part-time work. What is left is the yearly gap your savings need to fill.

Step 3: Multiply the gap by 25. This 25x rule of thumb gives a rough savings target. A $40,000 yearly gap points to about $1 million; a $20,000 gap points to about $500,000.

The 25 comes from the 4% rule. In the 1990s, financial planner William Bengen studied historical U.S. stock and bond returns. Withdrawing about 4% in the first year, then adjusting that dollar amount for inflation each year, would historically have lasted at least 30 years in the periods he studied. One divided by 4% is 25. It is a guideline, not a promise: the future may look different, poor returns early in retirement (sequence of returns risk) can do lasting harm, an early retirement may need to last longer than 30 years, and fees, taxes and how you invest all change the math. Money in a traditional 401(k) or IRA is usually taxed when you withdraw it.

Inflation matters as well. At 3% a year, a lifestyle that costs $60,000 today would cost about $108,000 a year in 20 years.

In a hypothetical example (not a real person), “Alex” earns $80,000, estimates spending of $60,000 a year (75%) and has a hypothetical Social Security estimate of $24,000. The $36,000 gap times 25 gives a rough, pre-tax target of about $900,000, and 4% of $900,000 is $36,000 in the first year.

Key takeaways

• There is no single retirement number. Your spending, your other income, inflation and the length of your retirement drive it.
• A rough estimate: (yearly retirement spending − other income) × 25.
• The 25x rule is the flip side of the 4% rule, a guideline based on past U.S. markets, not a promise.
• Do your planning in today’s dollars, and revisit your estimate every year or whenever your life changes.
• You can see your own Social Security estimate for free with a my Social Security account at ssa.gov.

Frequently asked questions

How much do you need to retire?

There is no single number. A simple rough estimate: estimate your yearly spending in retirement, subtract the income you expect from sources such as Social Security or a pension, and multiply the remaining yearly gap by 25. Treat it as a starting point, not a promise.

What is the 25x rule?

The 25x rule is a rule of thumb: multiply the yearly gap your savings need to cover by 25 to get a rough savings target. For example, a $40,000 yearly gap points to about $1 million, and a $20,000 gap to about $500,000.

What is the 4% rule?

In the 1990s, financial planner William Bengen studied historical U.S. stock and bond returns. Withdrawing about 4% of a portfolio in the first year, then adjusting that dollar amount for inflation each year, would historically have lasted at least 30 years in the periods he studied. It is a guideline based on the past, not a guarantee.

Do you really need $1 million to retire?

Not necessarily. Depending on how much you plan to spend and how much income you will have from other sources, your number could be a lot less, or a lot more.

Official sources

• my Social Security account
• SSA: Plan for retirement benefits and Retirement Estimator
• IRS: Traditional IRAs
• IRS: 401(k) plans

External links open official sites. Listing is not an endorsement.

For educational purposes only. Not financial, investment, tax, or legal advice. Consult a qualified professional.

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