Rule #4: 25x Rule…How much do you think you need?

So we have now touched on the 50/30/20 rule, which is focused on budgeting plans, the rule of 72 to help you see where your investments can go, the 4% rule, to understand how much you may be able to withdraw in retirement, and now…the age-old question, how much do you need?  That is where the 25x Rule comes into play.

For background, the 25x rule comes from Bengen’s 4% rule and the Trinity study.  In that study, both have a few differences, but without going into details, the idea was to find out a “safe” withdrawal rate to determine the ratio of success. Similar to what I showed last week, outlining historical S&P returns to show success at various withdrawal rates.  The big difference is that Trinity and Bengen both add bonds to the mix to help offset risk in the market, which ultimately reduces returns, but offsets losses at the same time.  The idea is to get to a safe withdrawal rate that wins 100% of the time over a 30+ year period.

So…how do you figure it out?  Real simple…Expected yearly expenses x 25 = What you need to retire and live off of for the next 30 years and sometimes more.

What are your expenses going to be?  Use 50/30/20 and then do some forecasting. When you retire, will some of those expenses go down, or will they grow?  What is going to be the cost of healthcare? Will you have a mortgage/rent?  What do you plan to do?

These are all things that a financial planner will walk you through to help figure out what the right mix is for your life.

25x is simply a reverse of Bengen and the Trinity study.  If you assume 4% of your nest egg and want $40,000 a year in retirement, then $40,000 x 25 = $1,000,000.  Pretty simple math.  FIRE (Financial Independence, Retire Early) movement followers strive to minimize expenses as much as possible to make their money last as long as possible.  My direction to you, start to think through those years and lay out a realistic monthly budget. Take your budget today, make modifications for how it will change in the future, multiply it by 25, and that is your rough target. If you are in your 20s or 30s, you may want to run some inflationary projections to determine what is right for you.  Here is a quick table to help lay out some thoughts.

NOTE: I took 10% for taxes based on an article from ThinkAdvisor, but this will vary greatly depending on how your retirement assets are situated between brokerage accounts, 401K/403b, Roth, Pensions, and Social Security. Tax expectations are something you should talk through with a tax professional to help you get a realistic picture, since it gets complicated for some in retirement.

(https://www.thinkadvisor.com/2020/09/01/how-much-do-retirees-really-pay-in-taxes/)

If you need help thinking it through, I’m happy to put some numbers together with you and work through a budget with you, but if you need deeper insights, it might be time to engage with a financial planner.