The 25x Rule for Early Retirement

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If you're considering an early retirement — or if you just want to be extra prepared for your golden years — you need a plan to get you and your money to a place where it can support you without a full-time job.

There's something called the “25x rule” that comes up often when talking about big-picture retirement planning. It's especially popular among those in the FIRE community. These are the folks who plan to leave work way earlier than 65 years old.

Can the 25x rule help you figure out how much money you'll need to retire early?

What Is FIRE?

FIRE stands for financial independence, retire early and is defined as both a lifestyle and a financial goal. The idea is to shorten the number of years you need to spend working by living drastically under your means. FIRE adherents try to build enough in savings, investments and possibly passive income that they can become financially independent of work.

To put it another way, with FIRE, you build enough in financial reserves that you no longer need to trade time for money.

For many reasons, there has been a small explosion of people interested in this path over the last few years. Some people come to the FIRE lifestyle because they're burned out at work. Others want to be able to spend more time with their children or aging parents, rather than at a desk.

Regardless of what brings you to FIRE, you first need to come up your FIRE number. What is the amount of money you need in savings and investments to leave full-time work?

What Is the 25x Rule?

Here's where the 25x rule enters the equation. Broadly put, the rule of thumb for retirement planning of any type (but especially FIRE) is to save 25 times your expected annual retirement expenditures.

If you plan to spend $30,000 annually in retirement, you'd need $750,000 in your portfolio. If you plan to spend $50,000 annually, you'd need $1.25 million.

There are a few very important details to the 25x rule:

  • It does not factor in your Social Security, pensions, or any type of earned income in retirement (such as a part-time job or a rental property).
  • Also, it assumes a 7% annual return on stock investments.
  • It estimates only how much you need in your investment portfolio to retire, not how much you can withdraw during retirement.
  • It doesn't include inflation, so you'll have to manually include those calculations.

Does the 25x Rule Work?

You should consider the 25x rule as a goal-setting tool, rather than a precise prediction. Since it's not very specific, it can give you a starting retirement number to work toward.

The 25x rule can help you refine your retirement plans. But you probably shouldn't hang your entire retirement on this formula alone.

What to Consider in Your Retirement Planning

Start by thinking big picture and then circle in on more of the details.

Big-picture questions you can ask yourself might be:

  • Will I live in the same area and home I'm in now, or will I move in retirement?
  • Do I plan on having children?
  • What will my healthcare plan cost? How much will I need in order to pay costs not covered by it?
  • Will I travel in retirement or spend more time at home?

These questions will start you on the road toward forming a retirement plan and coming up with an idea of what your spending will be.

Right now, your life may not be a good reflection of what it will be like in 60 years.

If you have a house right now, you're probably making mortgage payments. If you pay off the mortgage before you retire, that would probably lower your spending numbers significantly. And that means your 25x number can be lower as well.

Add up what you expect to spend each year in retirement. Then multiply that number by 25 to get your specific 25x number.

Now that you have your 25x number, you can work backward from there and decide which retirement investing accounts you'll need to fund and by how much. Remember to include any additional income that you expect in retirement, such as Social Security and pensions.

Healthcare Costs

Here is a big retirement consideration for anyone in the United States: healthcare costs. Healthcare costs in retirement are very hard to predict. As such, they can throw a huge wrench into your retirement planning.

While it may not be exciting, the more research you can do into your state's healthcare policies, as well as federal policies, the better off you'll likely be. Finding out if you'll qualify for any subsidies or if you'll be able to participate in specific plans can save you, big time.

Another good tactic is to take your estimated healthcare costs and double them. As we age, our bodies tend to require more care. Add in inflation, as well as rising healthcare costs, and it's a good bet that health care in the future will cost more than it does now. So, to get the most accurate idea of your spending as possible, pad your healthcare numbers before you implement the 25x rule.

The Final Word

Start preparing for your golden years now. The 25x rule helps you know what to aim for. The sooner you get started, the better. Even just a few dollars a week if that's all you can afford now.

Kara Perez

Kara Perez is a freelance personal finance writer. She is the founder of, a company that connects women and money. Kara lives in Austin, TX and believes in the power of budgeting and peanut butter.

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