Preparing for retirement is like figuring out an equation. Even if you know most of the variables, you can’t find the answer until solving for x. Or, in this case, 25x. We’ll come back to this figure in a minute.
I treat retirement data like a treasure because the overarching goal of my career as a podcast and radio host as well as the chief strategist of a fee-only financial advisory firm is to help people retire happier and sooner than they ever thought possible. Accordingly, I strive to stay plugged into what’s working for folks and what isn’t. So when one of the producers on my Retire Sooner podcast pointed me toward an eye-opening study conducted by GSAM (Goldman Sachs Asset Management), I grabbed my reading glasses and got to work.
The GSAM findings resulted from 1,566 individuals surveyed in July and August of 2022. It provides insights from working individuals across generations — Baby Boomers, Generation X, Millennials, and Gen Z. It also takes into account retired folks (age 50-75) and gender and generational breakdowns for both populations.
It revealed that a substantial portion of future retirees feel they’ve fallen short of their savings goals and fear they’ll simply have to “make do.” That is not what I want for my retirees, including you.
In addition to the anxieties of those still working, GSAM found that working individuals heading toward retirement are insecure about several factors. The top three financial challenges Americans face when headed into retirement are:
1. Generating Income
2. Understanding How Long Your Savings Will Last
3. Understanding If Your Retirement Savings Are On Track
I’ve found there is one question that can take care of all three concerns: how much money does it take to stop working? That’s the real meat and potatoes of this entire discussion. If we can answer that, most other things should fall into place.
Strangely enough, I came to this conclusion by talking with people too young to even work — my kids. I have four boys, and their blunt curiosity cuts through the financial morass. One day they asked me, “How much money does it take to not work?” Their interest was fueled by different motives than yours or mine might be. They aren’t analyzing stock prices or calculating pre-tax retirement funds. They simply want to know what it would take to keep dad around the house more
Raising four boys is a costly undertaking. They enjoy vacations to Michigan in the summer, love ski trips in the winter, and have about half a dozen collective lacrosse tournaments coming down the pike, all of which require air travel. And did I mention boys eat a lot of food? Some days I think my wife and I are single-handedly keeping the local grocery store in business. Once the kids are out of the house, the expenses go way down. My wife and I can live much cheaper when it’s just a table for two.
But how much money in the bank would we need? At what point is it okay to walk away from the office and into the sunset? Seeking this answer brings that 25x figure back into the equation.
The 25x Rule takes the entire financial planning conversation and simplifies it into thirty seconds or less. I first became aware of it when doing a podcast with Carrie Schwab-Pomerantz. She demonstrated how the 25x Rule provides answers for generating income, understanding how long savings will last, and if your retirement savings are on track.
Take the money you think you need in retirement and multiply it by twenty-five. Once you’ve accumulated that amount, you should be able to retire.
For example, let’s say you’ll need $5,000 per month to live a happy and fulfilled life.
$5,000 x 12 months = $60,000 per year.
$60,000 x 25 = $1.5 million
So, theoretically, your goal would be to amass $1.5 million in retirement savings to stop working. Admittedly, this explanation is a bit abridged because you can subtract what you’ll get from Social Security, pensions, rental income, etc. In other words, it will end up being 25x minus those line items.
If you’ve read either of my books, you know what a big fan I am of the 4% Rule. It essentially states that if folks draw down 4 percent of their portfolio in the first year of retirement and then adjust this amount every year for inflation, they will likely see their money outlive them, assuming a 50% to 75% allocation in stocks.
The math of the 25x Rule is just the inverse of the 4% Rule.
If your total savings were a delicious pie, the 4% Rule helps you slice a 4 percent piece to enjoy every year. But, inversely, the 25x Rule tells you how big that pie needs to be before you can start eating it.
It’s common to forget, become confused, or lose faith in the simplicity of math regarding financial stability in retirement. The 25x Rule can help provide clarity to help alleviate concerns in the GSAM study. Of course, it’s not easy to save all that money, but hard work isn’t the problem. Instead, the unease comes from not knowing how to get where you want to go. With the 25x Rule, you can use uncomplicated high school algebra to calculate your magic number and then set about getting it.
Of course, there’s no guaranteed success in any financial rule because life isn’t perfect. The best we can do is lower the risk and make a happy retirement more likely. With the 25x Rule, you can determine your magic number. Seeing this as a clear destination in the future will free your mind and chart your course for the perfect work-life balance in retirement.
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. The views and opinions expressed are for educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions.
