25x Rule for Retirement

Do you ever find yourself at work scrolling through FIRE Subreddits dreaming of the day you can hand in your two week notice and give your boss the proverbial finger?  If so then you might want to consider the 25x Rule which is simple formula that can help get you there.

Today we’ll discuss what the 25x Rule is, if it actually works and some common pitfalls to avoid.

What is the 25x Rule for Retirement?

Put simply, the 25x Rule is just the inverse of the 4% Rule.  With the 4% Rule, you live off of 4% of your investment portfolio in hopes of having your starting balance stay the same or even grow.

With the 25x Rule, you start with your yearly expenses, then save up 25x this amount and then live off of this amount.

4% Rule

The Difference Between the 4% Rule and the 25X Rule

25x Rule Example:

$500,000 x 4% = $20,000

$20,000 x 25 = $500,000

In the end, they are both formulas that amount to the exact same thing but have a difference in mindset.  With the 25x Rule, you are starting with your expenses first.  This can be helpful because you’re taking a cold hard look at how much you spend and can try to reduce this number as much as possible so that you won’t need to save as much to achieve financial independence retire early.

With the 4% Rule, you are essentially trying to save as much as possible and then hopefully be happy living off of 4% of your nest egg.  The 25x Rule reverse engineers the whole process and can be a great hack to achieving Financial Independence and Retiring Faster.

Calculating Your Expenses for the 25x Rule

Start by tracking all of your expenses for a couple of months and then see if there’s anything that you can eliminate.

Factors like housing, healthcare and leisure activities will play a huge part in your yearly expenses and you may be able to reduce these expenses in a low cost of living country with ExpatFIRE.  If you live in the US or another higher income country you can also reduce your expenses by eliminating unnecessary expenses:

Car Payment – Either buy a used car in cash or sell your car and ride a bike.

Rent Payment – House hacking is a great way to reduce or completely eliminate your rent or mortgage payment.  This can be done in a lot of different ways like buying a duplex and renting out the other half.  Renting out bedrooms in your house, or reversing this situation and renting a room in someone else’s house.

“But, Mike.  I’m 40 years old, I don’t want a roommate” 

“Roommate or a job, take your pick!”

Now that you have cut out all of your necessary expenses, take your yearly expenses and multiply them by 25.

Challenges and Pitfalls to Avoid

While the 25x rule provides a solid framework, challenges may arise. Market fluctuations, changes in lifestyle and unexpected expenses can impact savings. Being aware of these challenges allows for better preparation and adjustments to the plan. 

Remaining both flexible and diversified is a great anecdote to most of the problems that live can throw at you and it is especially important in FIRE where you no longer have an income.

If you are pursing FIRE and want to try out the 25x Rule, be sure to be honest when you estimate your expenses and have some extra money set aside for emergencies and Black Swan events.

Building a 25x Rule Portfolio

For most people, choosing to retire means investing some of your nest egg and this inherently brings on some risk.  Paradoxically not investing some of your nest egg also has risk as it can slowly but surely be eroded away by inflation.  So the key is to find a portfolio balance that works for you.

Conventional wisdom states that having your portfolio percentage allocated to bonds equal your age is usually a safe bet.  For example, if you are 40 years old, then this would amount to a 40% Bond and 60% Stock Portfolio.

My 25x Rule Portfolio and Personal Experience

My portfolio consists of about 70% Stocks (S&P 500 Index Fund) and 30% Cash.  Most of the cash is in a money market fund that is currently (as of Nov 2023) earning 5%.  This has given me a large amount of flexibility and so that I can take advantage of dips in the stock market, sell stocks and have liquid cash set aside for other investments (real estate, websites, etc).

What I have found is that the most important factor with my own portfolio is having a sense of peace and being able to sleep well at night.  When I first sold my business, I was way underinvested and had a sense of FOMO.  I wanted to get into the stock market but I was also afraid to do lump sum investing.

Over the next few months I allocated larger chunks of my portfolio to stocks and finally arrived at an equilibrium where I am happy if the stock market goes up and I am okay with it going down, because I have enough invested in it to see the positive returns if it increases and enough on the side lines to take advantage of dips or corrections.