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The “4%” and “Multiply by 25” Rules for Retirement

The prospect of retirement should bring feelings of excitement, but for many it stirs up worry and challenging questions: How much will you need in your nest egg? How long will the money last? And, how much will you be able to safely withdraw each year?

To answer these questions, you may have heard of the 4% Rule and the Multiply by 25 Rule. While they are sometimes confused with each other, they are separate guidelines that can help answer the questions above—or at least give you a broad goal to work and save toward.

The 4% Rule

The 4% Rule estimates how much you can withdraw from your portfolio each year in retirement to make it last for 30 years. As you may have guessed, it states you can withdraw 4% of your portfolio value your first year in retirement and then continue to withdraw the same amount, adjusted each year for inflation, for 30 years.

Let’s assume you have $1 million saved for retirement:

  • Year 1: You’d withdraw $40,000 from your savings (.04 x $1,000,000 = $40,000).
  • Year 2: You’d adjust your withdrawal to account for inflation (usually 2–3%). For example, if inflation is at 2%, your second-year withdrawal would be $40,800. ($40,000 x 1.02 = $40,800)
  • Year 3: If inflation goes up to 3%, you’d increase your withdrawal again ($40,800 x 1.03) to $42,024.

Limitations of the 4% rule:

While this rule on retirement withdrawals is based on solid academic research and previous economic and investment trends, it has its shortcomings:

  • It assumes a 30-year retirement. If your retirement stretches longer, you’ll need to either save more money or withdraw less each year. Conversely, if you work later into life and don’t plan on a 30-year or longer retirement, this rule may have you living so far below your means that you miss out on enjoying life in your golden years.
  • It assumes you have a portfolio split 50/50 or 60/40 between stocks and bonds. This mix made sense when the rule was first recommended in the 1990s—when bond yields were higher than in recent years. Your portfolio may need to have more stocks to produce the projected performance based on those ‘90’s numbers.
  • It does not consider other sources of income and when they become available in retirement—including Social Security, real estate investments, pensions, etc. It may make sense to withdraw more or less than 4% for a time.

The Multiply by 25 Rule

The Multiply by 25 Rule estimates how much you'll need in your portfolio when you retire to live at a determined income level by multiplying your desired annual income by 25.

For example, if you want to withdraw $40,000 per year from your retirement portfolio for 30 years, you’d calculate that you need $1 million dollars in your retirement portfolio ($40,000 x 25 = $1 million). If you want to withdraw $50,000 each year, you’d need $1.25 million.

Like the 4% Rule, this one also makes some assumptions:

  1. Stocks will produce annualized returns of roughly 7% in the long run (i.e. the next two to three decades).
  2. Inflation will hover around 3% each year, leading to…
  3. Your portfolio will generate an annualized real return of 4% per year (those numbers we crunched earlier to understand the 4% Rule).

Final word

Adhering to both of these rules as guidelines for how much to save and how much to withdraw in retirement is a good starting point. However, as you move toward retirement (but really, the earlier the better), it will be important to create a precise, personalized plan to meet specific lifestyle goals. Working with a certified financial planner can help you build more dynamic saving and withdrawal plans that can change with changing income, future market fluctuations, and cash flow from other sources.