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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rules to figure out not only how much they need to have saved and invested in order to retire, but also how much can be withdrawn annually from your retirement portfolio so that you don’t run out of money and go broke in retirement.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.
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.
- Annual expense divided by 0.04 (in the case of our $100 cell phone bill, that’s ($100 * 12)/.04 = $30,000
- 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:
- 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.
This post was originally published on Camp FIRE Finance and is republished here with permission.