A Number That Can Ruin Your Afternoon
At 60, hearing about the "rule of 25" can make decades of saving suddenly feel nowhere near enough. But before that number turns retirement into something that seems impossible, there’s an important detail to understand.
It Sounds Like A Requirement
The name certainly doesn’t help. Calling something a "rule" makes it sound like there’s an official number everyone must reach before they’re allowed to retire. There isn’t. This is a planning shortcut, and applying it incorrectly can make someone’s situation look much worse than it actually is. Here’s what the calculation really involves.
What The Rule Actually Says
The rule of 25 suggests multiplying the annual amount someone needs from retirement savings by 25 to estimate a savings target. Needing $40,000 a year from investments produces a $1 million target. That’s enough to make plenty of people uncomfortable—but the words "from retirement savings" are doing a lot of work here.
The Part That Changes The Answer
That calculation generally applies to the spending gap left after Social Security, pensions, and other dependable income. It doesn’t automatically mean saving 25 times a salary or 25 times every dollar spent. Forgetting to subtract income that will help pay the bills can dramatically inflate the target. A simple example shows just how much.
How Someone Ends Up With A $1.5 Million Target
Imagine a hypothetical retirement budget of $60,000 a year, including estimated taxes. Multiply that entire amount by 25, and the result is $1.5 million. Someone approaching retirement with far less could understandably feel defeated. But that calculation assumes the whole budget must come from savings, which may leave out a major source of income.
Now Include Social Security
Suppose that same person expects $30,000 a year in Social Security once benefits begin. Savings would need to cover the remaining $30,000, producing a rough target of $750,000. That’s still substantial, but it’s half the original figure. These are illustrative numbers, not an average benefit or a promise—and the timing of those benefits matters too.
Vitalii Vodolazskyi, Shutterstock
Why The Number Is 25
The shortcut comes from the familiar 4% retirement withdrawal guideline. Four percent of $750,000 is $30,000, so multiplying an annual withdrawal by 25 works backward to a portfolio target. It doesn’t mean the investments must earn exactly 4%, and it doesn’t promise that the original balance will stay untouched. The withdrawal method matters.
The 4% Part Gets Misunderstood Too
The traditional approach takes 4% of the starting portfolio in the first retirement year, then adjusts that dollar amount for inflation. A $30,000 initial withdrawal becomes $30,900 the next year if inflation is 3%. That’s different from withdrawing 4% of whatever the account happens to be worth each year—and the distinction affects how long savings might last.
LightField Studios, Shutterstock
It Doesn’t Mean The Money Lasts Exactly 25 Years
Despite the name, this isn’t a countdown that ends after 25 years. The underlying 4% approach grew from historical testing of stock-and-bond portfolios over roughly 30-year retirements. It isn’t a promise that cash in a bank account will last just as long. Future returns can differ, and a longer retirement may call for a lower starting withdrawal.
simona pilolla 2, Shutterstock
Turning 60 Isn’t The Deadline
The target generally concerns savings available when retirement withdrawals begin. Someone working until 67 still has time to contribute and potentially grow investments, although returns aren’t guaranteed. But inflation can raise the future target too. Compare savings, benefits, and expenses in consistent dollars, rather than measuring a future account balance against a budget priced entirely in today’s dollars.
Social Security Has Its Own Timetable
Under current U.S. rules, retirement benefits can generally begin at 62, with reduced payments for claiming early. For people born in 1960 or later, full retirement age is 67. Waiting beyond that can increase monthly benefits up to age 70. That creates an important tradeoff: a larger future payment may require funding more years before it starts.
The Years In Between Can Be Expensive
Retiring at 60 and planning to claim Social Security at 67 creates seven years without those retirement benefits. Savings or other income must bridge that period. The $750,000 example assumed benefits were already being paid; it doesn’t automatically fund those extra years. This is where a reassuring shortcut can hide a real shortfall.
Start With The Retirement Budget
Using today’s salary can send the calculation in the wrong direction. Retirement contributions and commuting costs may disappear, while travel or medical spending may rise. The useful starting point is a realistic retirement budget. That means looking at actual expenses and expected changes, rather than assuming a paycheck is the amount that must be replaced.
https://kaboompics.com/, Pexels
The Tax Bill Still Needs A Place
A withdrawal isn’t always the same as money available to spend. Traditional IRA withdrawals are generally taxable, while qualified Roth IRA distributions are tax-free. If a household needs $30,000 after taxes, withdrawing exactly $30,000 may fall short. Taxes and investment fees must be accounted for when estimating what the portfolio can actually support.
A Paid-Off House Helps—But It Isn’t A Paycheck
Eliminating a mortgage can lower the spending gap, but property taxes, insurance, repairs, and maintenance continue. Home equity also shouldn’t simply be added to the investment balance used for this calculation. Accessing it requires a separate plan, such as selling or borrowing, with costs and tradeoffs. The house and the portfolio serve different purposes.
Health Costs Don’t Retire
For most people, Medicare eligibility begins at 65, so leaving work earlier can mean arranging other coverage. Medicare also has premiums and other out-of-pocket costs, and generally doesn’t cover ongoing custodial long-term care. A budget that barely works before including health expenses needs another look. Those bills can matter far more than a tidy savings multiple.
A Bad Start Can Do Lasting Damage
Investment losses early in retirement can be especially damaging when withdrawals continue. Selling investments to pay bills during a downturn leaves fewer assets available for a recovery. This is called sequence-of-returns risk, and it helps explain why an average return alone can’t establish whether a retirement plan will work. The order of those returns matters too.
Flexibility Can Make A Difference
A household that can postpone a vacation or replace a car later has more room to reduce withdrawals during difficult markets. Someone whose entire budget goes toward housing, food, and medical bills has less flexibility. Those households may need different cushions, even with similar savings. Any spending adjustments should be planned realistically, rather than assumed to be painless.
Small Monthly Changes Can Move A Big Number
Under the same rough formula, cutting ongoing spending by $300 a month reduces the annual gap by $3,600—and the estimated savings target by $90,000. That’s an illustration, not a guarantee, but it shows why reviewing recurring bills can matter. The solution isn’t always finding a way to save another enormous lump sum.
Working Longer Changes More Than The Balance
When health and employment allow it, additional working years can provide more time to save and fewer years of portfolio withdrawals. They may also make delaying Social Security easier. That doesn’t mean everyone can simply keep working. It means retirement timing is one of the strongest variables to examine before deciding the numbers are hopeless.
There’s A Catch-Up Opportunity At This Age
In 2026, eligible workers turning 60 through 63 can contribute up to $35,750 to a 401(k) that permits the full amount: $24,500 in regular contributions plus an $11,250 catch-up. Compensation and plan limits apply, and some higher earners must make catch-ups as Roth contributions. That won’t erase every shortfall, but it’s worth checking before assuming the opportunity has passed.
Dmytro Zinkevych, Shutterstock
Retirement Doesn’t Have To Happen All At Once
Part-time work can reduce early withdrawals, but include taxes, job expenses, and realistic earnings. There’s another catch for anyone claiming Social Security before full retirement age: earnings above an annual limit can cause benefits to be withheld. Benefits are recalculated at full retirement age to credit withheld months, but the immediate cash-flow squeeze still belongs in the plan.
Monkey Business Images, Shutterstock
Sometimes There Really Is A Gap
Correcting the formula won’t make every retirement affordable. If dependable income and sustainable withdrawals don’t cover essential expenses, the plan needs changes. That may mean saving more, reducing major costs, changing the retirement date, or combining several adjustments. Chasing unusually high investment returns to force the numbers to work can leave someone even more exposed.
Get The Numbers That Belong To This Household
Gather account balances, pension details, a realistic budget, and Social Security estimates for different claiming ages. Make sure those estimates reflect when work actually stops; expected future earnings can affect the benefit. Then compare retirement dates and test difficult scenarios, including a longer life or weak markets. A qualified financial planner can help build a realistic withdrawal plan.
So, Is Something Missing?
Possibly—and it could be something substantial. The rule of 25 can overstate the target when outside income is ignored, while understating the challenge when taxes, timing, or major expenses are overlooked. Being below a rough target at 60 doesn’t settle the question. The useful answer comes from calculating what savings must actually cover, and for how long.
You Might Also Like:
Why Signing Up For A Store's Credit Card For Discounts Can Cost You More Than It Saves
Things Americans Used To Get For Free At Restaurants That Now Cost Extra
