The Rule of 25: Building Wealth to Fund Your Retirement Lifestyle

Don't chase checks, chase freedom

Want to retire? Know this one number.

Here’s a simple truth most people don’t learn until it’s too late: you don’t need millions to retire—you just need to know your number.

That number? It's your annual expenses × 25.

This is the Rule of 25, and it’s the foundation of retirement planning for early retirees, FIRE followers, and smart savers alike. Whether you're 25 or 55, this rule gives you a clear target for building wealth that supports your ideal retirement lifestyle—without guesswork or complex spreadsheets.

Let’s break it down step-by-step.

What Is the Rule of 25?

As a professional overthinker I get all consumed with projections, assumptions, and variables. The Rule of 25 completely changed how I think about retirement planning. Instead of randomly picking a number like "I need a million dollars," it works backward from your actual spending.

Here's how it works: Take what you spend each year and multiply it by 25. That's your magic retirement number. If you spend $50,000 a year, you need $1.25 million saved up. If you only spend $40,000, then $1 million does the trick.

This rule comes from the famous 4% safe withdrawal rate study. The idea is that you can withdraw 4% of your retirement savings each year without running out of money over a 30-year retirement. So if you have 25 times your annual expenses saved, that 4% withdrawal covers your living costs perfectly.

Why it’s popular in the FIRE (Financial Independence, Retire Early) movement

What I love about this approach is that it's based on YOUR lifestyle, not some financial advisor's cookie-cutter plan.

When I first calculated mine, I was shocked - I thought I needed way more money than I actually did because I'd been focused on replacing my income instead of my spending.

The FIRE movement has made this rule super popular because it shows people they might not need to work until 65. I've had a wake up call when I realized I could retire at 45 just by being more intentional about my expenses and savings rate.

It's pretty eye-opening when you run the numbers yourself.

How to Calculate Your Retirement Number

Getting your retirement number right starts with honest tracking of what you actually spend - not what you THINK you spend. Don't be the one to learn this lesson the hard way when you estimated $45,000 annually but were actually spending $58,000.

First, track every expense for at least three months. The longer the better. I use a simple spreadsheet and my banks integrated dashboard, but apps like Mint work too. Don't forget those sneaky annual costs like car insurance, property taxes, and Amazon Prime subscriptions.

Adjust for future lifestyle (travel, healthcare, downsizing, etc.)

Then comes the tricky part - adjusting for retirement lifestyle changes. Will you travel more? That's extra money. Planning to downsize your house? That saves money. Healthcare costs typically go up, especially if you're retiring before Medicare kicks in at 65. I usually add 20% to current healthcare expenses just to be safe.

Here's a simple example, let's call this person Sarah: She spends $52,000 now but wants to travel extensively. She bumped her retirement spending to $65,000 to account for those extra trips. Using the Rule of 25, that's $65,000 × 25 = $1.625 million she needs saved.

Include inflation and healthcare in your projections

Don't forget inflation - what costs $50,000 today will cost about $67,000 in 10 years assuming 3% inflation. I usually calculate my number in today's dollars, then invest accordingly to beat inflation over time.

The key is being realistic about your future self, not overly optimistic about suddenly becoming a minimalist in retirement.

The Math Behind the Rule (And Why It Works)

I'm a numbers guy, so when I first heard about the 4% rule, I had to dig into where it actually came from. Turns out there's solid research backing it up.

The whole thing started with something called the Trinity Study from 1998. These researchers looked at every possible 30-year retirement period from 1925 to 1995 and tested different withdrawal rates.

They found that withdrawing 4% annually from a portfolio of 50% stocks and 50% bonds succeeded 96% of the time over 30 years. Not too shabby.

Actually, that's pretty impressive when you think about it - covering the Great Depression, multiple recessions, and various market crashes. The 4% rate worked even when people retired right before major market downturns.

Why it’s a rule of thumb—not a rigid law

Here's what makes it work: The rule assumes your money stays invested in a balanced portfolio, not sitting in cash. Stocks provide growth over time, bonds provide stability, and together they've historically averaged around 7% annual returns after inflation.

The built-in cushion is clever too. In good market years, your portfolio grows faster than 4%, so you build a buffer for the bad years. I've seen this play out with people who retired in 2008 - their portfolios recovered because they didn't panic and stayed the course.

But remember, it's a rule of thumb, not gospel. If you retire during a major bear market or live way past 95, you might need to adjust your withdrawals.

Adapting the Rule to Your Personal Situation

The Rule of 25 is a great starting point, but real life is messier than textbook examples. I've learned to tweak it based on each person's unique situation over the years.

If you're someone who can live comfortably on $35,000 a year, you only need $875,000 to retire using the standard rule. Compare that to someone spending $80,000 who needs $2 million. It's amazing how much cutting expenses can accelerate your retirement timeline.

For folks with higher risk tolerance, I sometimes use the Rule of 20 - especially for younger retirees who have decades for their portfolio to recover from market dips. That means withdrawing 5% annually instead of 4%. But honestly? I only recommend this if you're really comfortable with market volatility and have other backup plans.

Want to sleep better at night? Use the Rule of 30, which assumes a 3.3% withdrawal rate. If the thought of running out of money gives you anxiety, plan for Rule of 30. It might mean working a few extra years, but the peace of mind will be worth it.

Income-producing assets change everything. If you own rental properties bringing in $15,000 annually, subtract that from your yearly expenses before multiplying by 25. Same goes for Social Security - I estimate mine at $24,000 per year starting at 67, which reduces my target number significantly.

The key is being honest about your comfort level and backup income sources.

How to Reach Your Rule of 25 Goal

I'll be honest – when I first heard about the Rule of 25, I thought it was too simplistic. Save 25 times your annual expenses? That seemed like climbing Mount Everest in flip-flops.

But here's how it could actually work. First, I max out your 401k match – that's literally free money your employer throws at you. Then open a Roth IRA and start throwing $500 monthly into a simple index fund with a low expense ratio. Those tiny fees matter way more than you think.

Cut unnecessary lifestyle creep

The lifestyle creep thing is the silent killer of progress. For most people, every raise means a fancier coffee habit, another car payment, or yet another streaming service. You have to get ruthless about tracking where your money goes.

Now when I get my tax refund or annual bonus, it goes straight to investments before I can spend it on random stuff.

Track your net worth monthly to measure progress

Here's my game-changer: I track my net worth every month using a simple spreadsheet. Seeing that number climb from $150k to $650k over three years kept me motivated when I wanted to buy that expensive gadget.

The math is simple – if you spend $60k annually, you need $1.5 million invested. Sounds scary, but compound interest does most of the heavy lifting if you start early enough.

Common Mistakes to Avoid

Oh man, I made every single one of these mistakes when I started planning for retirement. It was like a masterclass in "how not to do this."

The biggest one? I completely forgot about healthcare costs. I was calculating based on my current $40k expenses, but didn't factor in that health insurance could easily run $800-1200 monthly once I left my corporate job. That's an extra $10-15k annually I hadn't budgeted for. Ouch.

Then there's the tax thing – I was so focused on hitting my $1.2 million target that I forgot Uncle Sam wants his cut. If most of your money's in traditional 401ks, you're gonna get smacked with a hefty tax bill on every withdrawal.

I wish someone had told me to diversify between traditional and Roth accounts earlier.

Here's what really opened my eyes though: I tried living on my planned retirement budget for three months. Turns out, being home all day means higher utility bills, more grocery runs, and way more Amazon purchases out of boredom. I had to make some behavior adjustments or else my "frugal" $50k retirement suddenly would need to be $65k.

Also, he market doesn't give you steady 7% returns every year either. Some years you'll lose 20%, others you'll gain 30%. Plan for the bumpy ride, not the smooth average.

Mistakes to Avoid

• Underestimating future expenses (especially healthcare and inflation)
• Ignoring taxes on withdrawals
• Forgetting to adjust for longevity or early retirement
• Assuming constant market returns
• Not practicing retirement lifestyle before you quit working

The Rule of 25 simplifies retirement planning and gives you a target to aim for—No fancy financial degree required. Remember, it's simply the starting point so you can get to work towards building momentum, then refine with fancy calculators and get more clarity.

When you know your number, you can build toward it intentionally, live with purpose, and retire with confidence—not fear.

Start with your lifestyle. Multiply by 25. And build the life you want—on your terms.

It's honestly that simple – figure out what you spend, multiply by 25, and boom. You've got your target.

Before I knew this rule, I was just throwing money into my 401k and hoping for the best. Now? I spend $55k annually, so I need $1.375 million invested. Crystal clear. Every dollar I save gets me closer to that specific finish line.

The crazy part is how it changed my daily decisions. That $200 monthly gym membership I never used? Gone. Those random Target runs that somehow cost $150? I started questioning every purchase. Not because I became cheap, but because I finally understood the trade-off.

Here's what blew my mind though – once you hit your number, you're not just financially free. You're mentally free. No more staying in jobs that drain your soul.

Start with your lifestyle. Multiply by 25. And build the life you want on your terms. It really is that straightforward.