The Retirement Savings Rule That Only Requires One Simple Calculation

Many people overcomplicate retirement planning with endless calculators, spreadsheets, and conflicting advice, but one simple rule can cut through the noise. Known as the Rule of 25X, it boils retirement down to a single calculation, and it may be all you need for financial peace of mind. The idea is fairly straightforward: take your yearly expected expenses in retirement and multiply them by 25. The result gives you a rough idea of how much you should have stashed for retirement before leaving the workforce. For example, if you expect to spend $50,000 annually in retirement, you would need about $1.25 million in savings.

The rule, however, is not perfect. To begin, it takes a few liberties that, while common, might not apply to all individuals. For example, it assumes that individuals have their retirement savings invested in accounts such as a Roth IRA or Roth 401(k), or other vehicles where funds continue to grow, and that they will have a 30-year retirement and take a 4% withdrawal each year during retirement. Meanwhile, it does not account for other forms of savings like Social Security benefits, pensions, rental properties, or, if you're planning to retire early, making the rule not ideal for everyone.

One of the biggest oversights of the Rule of 25X is that it doesn't account for income outside of an investment portfolio. Social Security, pensions, and rental income can account for a large portion of retirement. In fact, according to the Federal Reserve, 77% of retirees get Social Security income, 56% receive money from a pension, and 48% have income from interest, dividends, or rental property/rental income.. With the average Social Security benefit totaling about $2,000, this can significantly reduce how much you may need to save before retirement. Likewise, traditional pensions can also provide a steady income for retirees, though they are less common today.

Calculating how much you will need for retirement with additional income sources is still simple with the Rule of 25X. To calculate your savings target, take your annual spending in retirement and subtract expected income from Social Security or other sources. For example, if you plan on spending $50,000 a year but expect $20,000 from other sources, you're left with $30,000. You then multiply that by 25 to see how much you need saved to retire. In this case, an individual would need $750,000. This adjustment can make retirement feel more achievable to many people. The key is to get realistic estimates of your additional income sources before incorporating them into your retirement plan.