Do you want to know how much money you need for (early) retirement? The rule of 25 is going to help you exactly how much you need to retire comfortably.
When you are striving for financial independence and early retirement, it is important to know how much money you need to retire. Preparing for retirement includes a definite savings plan and a retirement plan that everyone needs to follow. Retirement living will be so much easier because of this.
Having retirement goals in your savings plan will pay off handsomely when your expected retirement rears its head.
There are many things to consider when you’re planning for retirement and your retirement savings. To make things easier, let’s look at one widely used rule of thumb: the rule of 25. This is a retirement guide of sorts for those interested in having a good retirement.
Here’s what the rule of 25 is, how it works, and how you know how much you need to retire. Let’s take a journey to your financial future.
What Is FIRE?
FIRE stands for Financially Independence and Retire Early. Many people strive for financial independence, and some of them want to enjoy retirement early. Getting out ahead financially is mainly done by making extra money and living below your means. This is a sure-fire plan to meet your retirement plans.
While there are many reasons why people want to retire early, the most prominent reason for many is freedom. Do what they want to do, when they want to. For example, here’s what I plan to do when I am financially independent.
What Is The Rule Of 25?
The rule of 25 is a way to calculate how much money you need for (early) retirement. That amount is 25 times your expected expenses in retirement.
The multiply by 25 rule is a great way to know exactly how much money you need for early retirement or financial independence. This is your guideline on how to invest for retirement.
When you want to calculate your financial independence number, you must know approximately how much you want to spend in retirement. You won’t know exactly, but having a rough estimation will help when you’re working toward building that liquid net worth. This will help you in your income planning each month.
[Related Read: What’s The Average Net Worth In The Netherlands?]
How Does The Rule Of 25 Work?
Let’s put the rule of 25 in practice. If you want to spend $3,000 per month in retirement, that is $36,000 per year. $36,000 multiplied by 25 is $900,000. That means you would need $900,000 to retire comfortably and spend $3,000 a month.
This number does not consider any other sources of income, like rental properties, side hustles, or social security.
While $900,000 is a lot of money, it’s often less than people expect. When I started my own financial independence journey, I expected to need millions to retire comfortably. Given that I can live on minimal expenses per month, I personally aim for $300,000.
The less money you can live on per month, the earlier you will be able to retire. Here are some tips to save money:
- How I live on half my income – and you can too
- 25+ money-saving tips to try today
- Frugal living tips to make frugal life enjoyable and fun
- Find frugal and minimalist hobbies that you enjoy
How do we know you can safely withdraw $3,000 per month from a $900,000 portfolio and not run out of money? That’s thanks to the 4% safe withdrawal rate!
Linking The Rule Of 25 To The 4% Rule
Another rule of thumb in personal finance is the 4% rule. The 4% rule states that if you withdraw 4% of your portfolio annually, you can live on that portfolio for an indefinite amount of time. The probability of your portfolio running out of money is there since compounding the amount makes it bigger as the years go by, but it’s low. Over 98% of portfolios haven’t run out of money after 30 years.
The rule of 25 determines how much money you need to save to retire. The 4% rule defines how much money you can take from your portfolio annually to prevent running out of money.
To prevent yourself from running out of money in retirement, your money must be invested. The average annual stock market return is 7%, which is corrected for inflation. If you withdraw 4% annually, there is enough money left in your portfolio to live off for a long time.
Does The Rule Of 25 Work?
While the rule of 25 is a great rule of thumb to aim at, it is not the end all be all. It mainly gives you a starting retirement number to work toward
There are dozens of things that can change between the time you decide to retire and the time you start to plan for it. A couple of important things to ask yourself are:
- Where do I plan to live?
- What do I plan to do?
- What are my healthcare costs?
- Do I plan to have kids or pets?
Add all these plans up, and you will end up with a very rough estimation of what you will spend in retirement. Multiply that number by 25, and you get the amount that you need to retire.
Improve Your Chance Of Successful Retirement
When you’re working toward 25x times your yearly expenses, be aware of the fact that you have two options:
- You never want to work again. In that case, it may be best to add a little safety margin to your financial freedom number.
- You are flexible. If you are flexible, saving 25x your annual expenses is great. You don’t work as long, but you know there’s an opportunity that you need to pick up some gigs at times. Here are some tips if you need money now.
Whether you’re flexible in retirement or you never want to work again, there are some things you can do to improve your chance of a successful retirement:
- Pay attention to the first 10 years. The early years of retirement are important. If things aren’t going well early on, it impacts the rest of your retirement. When you notice things aren’t going as planned, you can decide what decision fits you best at this moment.
- Extra income. If you get just a little bit of active income from work, this goes a long way in retirement. Every dollar that you get in extra income will help you down the line.
- Reduce your costs. If you notice that your retirement isn’t going as planned, you can decide to reduce your costs for a while. You can do that by cutting back on certain expenses or move to a cheaper country. Correct allocation of your monthly income between your daily needs and retirement funds will help your plan to retire.
- Keep track of your finances. If your retirement plants are coming close, it is important to keep track of your finances. Know how your expenses have increased, what your buffer is, and how much you can spend per month in retirement. Budgeting has never hurt anyone. The amount of money you have earned, used, and saved is an important factor for the computation of your retirement calculator.
[Related Read: How Much Money Should You Save Every Month?]
We All Have To Start Somewhere
If your current situation is very far from where you want to be, know that here you are now in the perfect starting place. We all have to start somewhere. It’s important not to compare your chapter 1 with someone else’s chapter 20. Retirement planning should not be deferred as financial security should be part of everyone’s financial goals.
Because when you retire, your retirement needs will eat up your savings account.
Start from where you are now and start working on building that investment account. So get up and start your investment journey. I recommend you check out:
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Conclusion – The Rule Of 25
Not everyone can enjoy pension benefits. Most of us need to plan a retirement nest egg to enjoy a good retirement after years of living on payroll or being self-employed.
Do you want to know how much money you need in retirement? Check out the rule of 25. You will learn exactly how much you need to have to live comfortably when you’re older.
Fidelity to a retirement strategy can be challenging since there are many variables before your retirement date. But keeping your eye on the ball should be your central measuring stick to influence your day-to-day decisions.
Always remember: For my retirement! And this will help you and your account balance reach the nest-egg goals you have set for yourself.
If you start by investing a couple of dollars a month, that’s perfectly fine. Work your way up from there, and you’ll be surprised where you end up. It’s never too early to start planning and saving for retirement. So start now and reap the rewards when the time is perfectly right.