4% Rule vs. Rule of 25

When you are trying to figure out “How much do I need to retire?”, you will usually bump into two phrases that sound like different ideas but are actually close cousins: the 4% Rule and the Rule of 25.

Here is the good news: you do not have to pick a “team.” In practice, these frameworks are basically the same math viewed from opposite ends. The better question is: which one helps you think more clearly about your own finish line, given your age, spending, Social Security, and the kind of market ride you can tolerate.

Let’s walk through what each rule is, where it holds up, where it can wobble, and how to use them in a real plan.

Simple translation

What the 4% Rule is

The 4% Rule is a withdrawal guideline. It says:

• In year one of retirement, you withdraw about 4% of your portfolio.
• After that, you generally raise that dollar amount each year with inflation (think CPI-style adjustments in plain-English terms).

This rule is strongly associated with financial planner William Bengen’s 1994 research, and it was later popularized and pressure-tested in broader portfolio studies such as the Trinity Study. The basic question behind all of it is practical: How often would a retiree run out of money over a 30-year retirement using a diversified stock and bond mix?

What the Rule of 25 is

The Rule of 25 is a savings target shortcut. It says:

• Take your expected annual retirement spending from your portfolio.
• Multiply by 25.

If you do that, you have created a portfolio size that supports a 4% first-year withdrawal because:

4% is the same as 1 divided by 25.

So:

• $40,000 per year from investments x 25 = $1,000,000
• 4% of $1,000,000 = $40,000

Quick verdict

If you want the honest answer: the 4% Rule and the Rule of 25 are the same framework wearing different clothes.

• Use the 4% Rule when you are thinking, “How much income can my nest egg realistically produce?”
• Use the Rule of 25 when you are thinking, “What portfolio balance should I aim for before I feel comfortable stepping away from work?”

The catch is simple but important: both rules only work as well as the assumptions you feed them, especially your spending, your timeline, your investing costs, and how flexible you can be.

Common misuses

Misuse #1: Using total spending instead of portfolio-funded spending

This is the most common kitchen-table mistake.

The Rule of 25 is about the spending your portfolio must cover, not the spending your life will have in total.

Example:

• Your retirement lifestyle costs $70,000 per year.
• Social Security will cover $30,000 per year (combined).
• You need your investments to cover $40,000 per year.

Your Rule of 25 target is $40,000 x 25 = $1,000,000, not $70,000 x 25.

One helpful nuance: this subtraction approach is a planning shortcut. The answer can change if you claim Social Security earlier or later, if benefits differ from your estimate, or if one spouse’s benefit timing shifts.

Misuse #2: Treating 4% as a promise

The 4% Rule is not a guarantee from the market. It is a historical rule of thumb tested on specific assumptions: roughly a 30-year retirement, a diversified portfolio, and inflation adjustments.

Real life adds complications, like:

• Retiring into a rough market stretch early on
• High inflation years
• Big one-time costs (health care, home repairs, helping family)
• Living longer than 30 years

Misuse #3: Forgetting taxes

Both rules are often discussed in “pre-tax” space, but your spending is “after-tax” space.

If most of your money is in a traditional 401(k) or IRA, a $40,000 withdrawal might not be $40,000 of spendable money. Some of it may go to federal and state taxes, and later on, required minimum distributions may push your taxable income higher and can move you into a higher bracket.

That does not make the rules useless. It just means your plan needs one more step: estimate your after-tax spending need and how your withdrawals will be taxed.

What the 4% research says

Most versions of the 4% Rule come from looking at long runs of U.S. market history and asking if a portfolio could survive 30 years of withdrawals. Many tests assumed:

• A meaningful allocation to stocks (often around 50% to 75%)
• The rest in high-quality bonds
• Annual rebalancing
• Withdrawals that rise with inflation

It is worth saying out loud: these were U.S.-centric historical tests, and future returns may look different than the 20th-century U.S. experience that shaped many of the best-known results. History is valuable, but it is not a contract. The rule is best used as a starting point, then customized.

When 25 shines

The Rule of 25 is powerful because it gives you a finish line you can visualize. If you are still in the saving years, that matters emotionally.

Good for

• Setting a portfolio goal that is easy to track
• Adjusting quickly when your spending estimate changes
• Motivation, because it turns a foggy concept into a single number

Make it feel real

I like to break the target into layers:

• Baseline needs: housing, food, utilities, insurance, basic transportation
• Health care cushion: premiums, out-of-pocket costs, dental, vision
• Fun and meaning: travel, hobbies, gifts, grandkids, volunteering costs
• Irregulars: cars, roofs, appliances, one-time help for family

Add those up, subtract reliable income sources (often Social Security), and multiply the remainder by 25. Now the number is not abstract. It is anchored to your life.

When 4% is better

If you are near retirement or already retired, thinking in terms of withdrawal rate is usually more useful than thinking in terms of “I need exactly $X saved.”

The 4% framing helps you

• See whether your spending is aggressive or conservative relative to your portfolio
• Make smarter choices about part-time work, delaying retirement, or adjusting spending
• Understand the impact of big decisions like buying a car, moving, or gifting money

Example: If your portfolio is $900,000 and you want $45,000 per year from it, your starting withdrawal rate is 5%. That does not automatically mean “no,” but it is a signal that your plan likely needs one or more adjustments.

Best for a target

If your question is specifically, “What savings target framework is better?”, here is a practical way to think about it:

• For building a target number: the Rule of 25 is more intuitive.
• For testing whether the target is sustainable: the 4% Rule framing is more practical.

In other words, use the Rule of 25 to set the goal, then use the 4% lens to pressure-test it.

When it is not 25

There are plenty of situations where multiplying by 25 may be too aggressive or too conservative. Here are a few common ones.

Use a bigger multiple if

• You are retiring early (a 40-year retirement is a different animal than 30)
• Your spending is not flexible (little room to cut back in a downturn)
• You expect higher health care costs or you are bridging years before Medicare
• Your portfolio is stock-heavy and you worry about volatility but still plan to spend steadily

In these cases, some retirees aim closer to a 3.0% to 3.5% starting withdrawal rate. In “Rule of 25 language,” that is roughly a Rule of 33 (3%) or Rule of 29 (3.5%).

Use a smaller multiple if

• You have strong guaranteed income (pension, sizable Social Security relative to spending)
• You have real flexibility (you can pause travel or reduce discretionary spending)
• You plan to work part-time for the first few retirement years
• Your horizon is shorter (for example, retiring at 70 with other income sources)

This is where planning becomes personal. The “right” multiple is the one that reflects your actual risks and back-up options.

How to choose

If you are feeling stuck, here is a simple process I use when someone is trying to pick a target without getting lost in spreadsheets.

Step 1: Estimate spending

Estimate your retirement spending in today’s dollars. Think monthly first, then annual. If you do not know, start with what you spend now and adjust for changes like a paid-off mortgage or new health insurance costs.

Step 2: Subtract steady income

Common examples:

• Social Security (use a conservative estimate if you are years away)
• Pension
• Long-term annuity income

The remainder is what your portfolio needs to cover.

Step 3: Multiply by 25

This gives you a clean, understandable first draft target.

Step 4: Stress-test

Convert it back into a withdrawal rate and pressure-test it. Ask:

• What if the market drops early in retirement?
• What if inflation stays high for a few years?
• What if one spouse lives into their 90s?
• What expenses could we cut temporarily if we had to?

Step 5: Add margin if needed

If your gut says, “We cannot cut spending much and we want a bigger safety margin,” bump the multiple up.

Examples

Example 1: Classic Rule of 25

• Desired spending: $60,000/year
• Social Security: $20,000/year
• Portfolio must cover: $40,000/year

Rule of 25 target: $40,000 x 25 = $1,000,000

4% check: 4% of $1,000,000 = $40,000 in year one

Example 2: Early retiree, more cushion

• Desired spending: $72,000/year
• Social Security (starting later): $0 for now
• Portfolio must cover: $72,000/year

Using 25 implies $1.8M. If this person is retiring at 55 and expects 40 years, they may choose something more conservative, like 3.5%.

3.5% target: $72,000 / 0.035 = about $2.06M

Example 3: Strong guaranteed income

• Desired spending: $80,000/year
• Pension + Social Security: $55,000/year
• Portfolio must cover: $25,000/year

Rule of 25 target: $25,000 x 25 = $625,000

In this case, the household may feel comfortable even if the portfolio has a bumpy stretch because the “lights stay on” from guaranteed income.

What the rules miss

Both frameworks are shortcuts. Helpful ones, but still shortcuts. Make room for these realities:

• Sequence of returns risk: bad market years early in retirement can do outsized damage
• Health care: Medicare timing, Medigap or Advantage choices, long-term care risk
• Taxes: traditional vs Roth balances, capital gains, RMDs
• Fees and investment costs: fund expenses and advisory fees reduce what you keep, and even a 1% annual fee can meaningfully change outcomes over time
• Spending patterns: many retirees spend more early on (active years), less in the middle, then potentially more for care later
• Behavior: can you truly stay invested during downturns?

If you want a rule-of-thumb that plays nicer with real life, consider adding a simple “guardrail” idea: in down markets, pause inflation raises or trim discretionary spending for a year. Small adjustments can meaningfully improve durability.

My take

If we were sitting at your kitchen table with coffee, here is how I would use these two ideas:

• Start with the Rule of 25 to set a clear, motivating savings target.
• Then switch to the 4% lens as you get within 5 to 10 years of retirement, so you are practicing thinking like a retiree: withdrawal rate, flexibility, and risk.

And if you are a late starter reading this, please hear me: the point is not to hit a perfect number. The point is to replace vague worry with a clear target and a handful of smart levers you can pull.

FAQ

Is the Rule of 25 always the same as the 4% Rule?

Mathematically, yes. Multiplying by 25 implies a 4% starting withdrawal rate. The difference is how you use it: Rule of 25 is usually discussed as a savings goal, while 4% is discussed as a withdrawal plan.

Does the 4% Rule include Social Security?

Not directly. The rule describes withdrawals from your portfolio. Social Security is typically handled by subtracting it from your spending need first, then applying the rule to whatever your investments must cover.

What if I retire at 62 or 55? Is 4% too high?

The earlier you retire, the longer your money has to last, which can justify a more conservative starting withdrawal rate. Many early retirees target something closer to 3% to 3.5%, depending on flexibility and other income sources.

What portfolio mix does the 4% Rule assume?

Most historical tests assumed a diversified mix with a meaningful stock allocation and some bonds, rebalanced over time. The 4% idea was not built for a portfolio that is mostly cash, and it also assumes you can tolerate the ups and downs that come with owning stocks.

Should I use 25 times my gross spending or net spending?

Ideally, base your plan on after-tax spending, then make sure your withdrawal plan accounts for taxes. If that feels like too much at first, start with a rough estimate, but treat it as a version one that you refine.