What Is the Rule of 25?

Most personal-finance concepts are vague. "Save more." "Invest for the long term." "Plan for retirement." The Rule of 25 is different: it gives you a single, specific number to aim for. Multiply the annual spending your portfolio must fund by 25, and you have a rough estimate of the portfolio you'd need if you planned to withdraw 4% in the first year.

That simplicity is why the Rule of 25 became one of the most repeated ideas in the Financial Independence and FIRE community. It turns a vague ambition — "become financially independent" — into an engineering problem you can plan against and measure progress toward.

This guide walks through the Rule of 25 from the ground up: where it comes from, why it works, how it connects to the 4% Rule, what its limits are, and how to apply it to your own plan without over-relying on it.

The Rule of 25 is a shorthand for estimating your Financial Independence (FI) Number — a rough portfolio target based on a 4% starting withdrawal-rate assumption.

The rule in one sentence:

Need your portfolio to fund $30,000 a year? That implies roughly $750,000 invested. $60,000? Around $1,500,000. $100,000? About $2,500,000. That number is a planning estimate, not proof that the portfolio will last for life.

It's not a magic figure. The 25× part is simple arithmetic; the 4% assumption behind it draws on historical withdrawal studies, which are covered below.

The 25× relationship is arithmetic: 25 is the inverse of 4% (1 ÷ 0.04 = 25). If you plan to withdraw 4% of your portfolio in the first year, the portfolio needs to be 25 times that withdrawal. Whether that starting withdrawal, subsequently adjusted for inflation, will last through retirement is a separate question. Historical studies tested this under specific assumptions; the arithmetic alone cannot answer it.

In 1994, William Bengen tested withdrawals against historical U.S. data, using portfolios of common stocks and intermediate-term U.S. Treasuries. With a 50/50 mix, a 4% starting withdrawal adjusted for inflation lasted at least 30 years in every historical period he tested.

Source: Bengen (1994), “Determining Withdrawal Rates Using Historical Data”.

The later Trinity Study tested five stock/bond mixes with a different bond series and reported historical success rates. Here, "success" means the portfolio still had money left at the end of the period. For a 50/50 portfolio, a 4% starting withdrawal subsequently adjusted for inflation succeeded in about 95% of the tested 30-year periods, not all of them.

Source: Pfau (2015), “Sustainable Retirement Spending with Low Interest Rates: Updating the Trinity Study”; original study: Cooley, Hubbard & Walz (1998), “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,” AAII Journal, February 1998.

These are results from past data under specific assumptions, not forecasts or estimates of the probability of future success. They don't guarantee that a 25× target will fund future retirement spending.

The Rule of 25 and the 4% Rule are two ways of expressing the same underlying idea.

• The 4% Rule answers: How much can I withdraw each year?
• The Rule of 25 answers: How large does my portfolio need to be?

They are mathematically linked: a 4% first-year withdrawal implies a portfolio 25 times that withdrawal, because 1 ÷ 4% = 25 and 1 ÷ 25 = 4%.

Whenever you see the 4% Rule mentioned, you can translate it into the Rule of 25 in your head — and vice versa. If you'd like to test both perspectives against your own numbers, the Financial Independence Target Calculator lets you flex the withdrawal rate and see how the target portfolio changes.

To use it well, start with realistic yearly household spending in retirement — housing, food, transport, insurance, healthcare, travel, and a buffer for irregular costs like home repairs or replacing a car. Include expected taxes on portfolio withdrawals once. Then subtract reliable outside income after its relevant costs and taxes; do not also count those deducted taxes in your spending. The remainder is the annual amount your portfolio must fund.

A cleaner version of the formula

Reliable income from outside the portfolio — such as Social Security or a pension — can reduce that amount for the years when it applies. Use the amount available after relevant costs and taxes. Include part-time work or rental income only to the extent it can reasonably be relied on:

This adjustment applies only to income available during the years the estimate covers. Income that begins later — for example, a pension or Social Security that starts years after an early retirement — doesn't reduce what the portfolio must fund before it begins. Different income phases need separate planning; this shortcut does not model the transition.

Here's how the Rule of 25 scales across different lifestyles. All figures assume the annual spending the portfolio must fund, in today's dollars; the targets are in the same dollars.

The pattern is linear. Every extra $1,000 of annual spending the portfolio must fund adds $25,000 to your target portfolio. That's why cutting recurring expenses is so powerful in FIRE planning — and why the Financial Independence Target Calculator lets you test different spending scenarios side by side.

• Simple. One multiplication gives you a target you can memorise and revisit anytime your expenses change.
• Grounded in history. The 4% assumption behind it was tested against historical market data — useful evidence, though not a forecast.
• Motivating. It transforms a vague goal into a specific number you can track progress against year by year.
• Flexible. The same arithmetic applies whether you plan for Lean FIRE, traditional retirement, or Fat FIRE. The multiplier follows from the withdrawal rate you choose, not from how much you spend — it doesn't show that the same rate suits every plan.

The Rule of 25 is a starting point, not a finish line. It deliberately ignores several factors that matter in a real retirement plan.

• Retirement horizon matters. The 25× arithmetic itself has no time horizon. The 30-year historical findings discussed above do not establish that a 4% starting withdrawal, subsequently adjusted for inflation, will last through a 40–60-year retirement.In Morningstar's 2025 forward-looking model, using fixed inflation-adjusted withdrawals and a 90% modelled success threshold, the highest starting rates across the tested allocations were 3.9% for 30 years, 3.5% for 35 years and 3.3% for 40 years. The model excludes taxes and investment fees. These findings depend on the model's assumptions; they are not personal success probabilities or recommendations for horizons beyond 40 years. Source: Morningstar (2025), “The State of Retirement Income: 2025”, Exhibit 6, page 9.
• Doesn't model taxes. Taxes on withdrawals depend on account type and jurisdiction. Include expected withdrawal taxes in the annual amount the portfolio must fund, without counting taxes already included in the estimate twice.
• Doesn't model fees. Investment fees reduce the portfolio's net returns. They're a portfolio cost, not household spending, so multiplying spending by 25 doesn't account for them.
• Ignores sequence-of-returns risk. A bad market in your first few years of retirement can damage the portfolio more than the average return suggests.
• Doesn't adapt to your life. Real spending isn't flat — healthcare, children, moves, and career changes all shift the picture.

None of these break the Rule of 25 — they simply mean it should be treated as a planning anchor, not a promise.

Using take-home pay instead of expenses

The Rule of 25 is applied to what you spend, not what you earn. Using income inflates the target unless your savings rate is very low.

Forgetting inflation

Keep spending and the target in the same dollar terms — usually today's purchasing power. The 25× arithmetic contains no inflation model; the historical withdrawal method described above adjusts withdrawals after the first year for inflation. If prices rise, the same purchasing-power target will require a larger nominal amount in the future.

Ignoring healthcare costs

Early retirees in particular often underestimate healthcare before Medicare eligibility. Add a specific line item rather than trusting a generic "misc" bucket.

Treating 25× as a hard cutoff

Reaching 25× is a meaningful milestone, not a guarantee. You might choose to add a cash reserve, keep some part-time income, or wait longer before relying fully on the portfolio — these are planning choices, not requirements.

Not revisiting the number

Your annual expenses evolve. Recalculate your FI Number every year or after any major life change — a move, a new child, a switch in career — so the target reflects reality.

Applying the Rule of 25 is a five-step process.

• 1. Estimate realistic annual household spending. Housing, food, transport, insurance, healthcare, travel, and a buffer for one-off costs. Include expected taxes on portfolio withdrawals once.
• 2. Subtract reliable outside income after relevant costs and taxes, for the same years — such as a pension or Social Security once it begins. Do not also count taxes deducted from that income in your spending estimate.
• 3. Multiply the remainder by 25. That's your baseline FI Number.
• 4. Compare withdrawal-rate assumptions. Recalculate the target using illustrative starting rates such as 3.5% (about 28.6×) or 3% (about 33.3×). This shows how the target changes; it does not test whether the portfolio will last through retirement.
• 5. Track your progress. Compare your current net worth to the target and revisit annually.

To make this concrete, run your numbers through the Financial Independence Target Calculator. If you're earlier in the journey, the same calculator's Coast capability shows how much you'd need invested today to reach that FI Target without any further contributions. Revisit the Financial Independence Target Calculator to see how each year of progress moves the target.

The Rule of 25 shines when it's used for what it is: a fast, honest, first-pass estimate. It's most useful when you:

• Want to set an initial long-term savings target without building a complex model.
• Need a quick way to compare lifestyle scenarios ("what if I spent $10k less per year?").
• Are planning a roughly 30-year retirement with a diversified stock-and-bond portfolio.
• Want a shared benchmark to discuss with a partner, a planner, or the wider FIRE community.

It's less appropriate as your only planning tool if you're retiring very early, relying heavily on non-US markets, or planning around unusually variable income. In those cases, use it as the starting number and refine with more detailed withdrawal modelling.

The Rule of 25 is one of the simplest heuristics in Financial Independence planning. It turns a withdrawal-rate assumption into one line of arithmetic and gives you a concrete target to plan against.

Use it to set your first FI Number. Then refine it with the 4% Rule, real tax modelling, and calculators that account for your specific circumstances. Simplicity is a feature — but so is knowing where the simplicity ends.

Once you have your target, the rest of the journey is consistency: save what you can, invest with discipline, and revisit the number as your life evolves.