What is the 25x Retirement Rule and Does It Really Work in the UK?
What is the 25x retirement rule (or 4% rule) and does it work in the UK? Our guide explains how to calculate your number and its modern-day limitations.
What is the 25x Retirement Rule?
The 25x rule is a simple rule of thumb to help you estimate the total amount of money you need to have saved to be considered financially independent and ready for retirement.
The rule states that you should aim to save 25 times your expected annual expenses in retirement. Once you reach this number, you can theoretically withdraw 4% of your initial pot each year to live on, with a high probability that your money will last for at least 30 years. This is why it is also known as the 4% rule.
How to Calculate Your 25x Number
Calculating your target retirement number using this rule is a straightforward, three-step process.
Step 1: Calculate Your Annual Expenses
First, work out how much you expect to spend per year in retirement. Be realistic and detailed. Start with your current annual take-home pay and then adjust for how your spending might change in retirement.
Costs that may decrease: Mortgage payments (if paid off), commuting costs, National Insurance contributions, work clothing.
Costs that may increase: Travel and hobbies, healthcare, heating bills (if you're home more).
For example, after making these adjustments, you might decide you need £40,000 per year to live comfortably.
Step 2: Multiply by 25
Next, take your target annual income and multiply it by 25.
Calculation: £40,000 (annual expenses) x 25 = £1,000,000
Your Target Pot: In this scenario, your target retirement pot to achieve financial independence would be £1 million.
Step 3: Factor in Other Income
Finally, remember that this £1 million is the amount you need to generate from your own investments. You can subtract any other guaranteed income sources you expect to have in retirement.
State Pension: The full new State Pension is currently over £11,500 per year. This reduces the income you need to generate yourself.
Defined Benefit Pensions: If you have any "final salary" pensions, the guaranteed annual income from these can also be deducted from your target.
Does the 25x Rule Actually Work in the UK Today?
The 25x rule is an excellent starting point for planning, but it is not a fool proof guarantee. Its success depends on several key assumptions, and modern financial experts often suggest applying it with caution.
The Arguments For (Why it's a useful tool):
Simplicity: It provides a clear, tangible savings goal to aim for, which is highly motivating.
Historical Backing: The rule is based on the "Trinity Study," a famous piece of research from the 1990s that analysed historical US stock and bond market data. It found that a 4% withdrawal rate had a very high success rate over most 30-year retirement periods in the past.
Good Starting Point: It forces you to think about your spending and gives you a realistic ballpark figure to build a financial plan around.
The Arguments Against (Why you need to be cautious):
Based on Historical Data: The original study used US market data from 1926-1995. Future stock market returns may not be as high as they were during that period.
Inflation: The rule is most vulnerable during periods of high inflation. If inflation is running high, you have to withdraw more money each year just to maintain your standard of living, which can deplete your pot faster.
Longer Retirements: The rule was designed for a traditional 30-year retirement. If you retire early or live longer than expected, a 4% withdrawal rate may be too high.
Investment Fees: The 4% rule assumes a certain level of investment returns. High platform or fund fees will eat into these returns and can impact the rule's success.
Flexibility is Key: The rule assumes you withdraw a fixed percentage regardless of market conditions. In reality, a more flexible approach (e.g., withdrawing less in years when the market is down) is a much smarter strategy.
Know Where You Stand: Take the Plouta Financial Wellness Survey
Taking our Financial Wellness Survey is a great first step. It will help you reflect on your habits and identify the key areas to focus on in your journey towards financial freedom.
How to Adapt the Rule for a More Robust Plan
To make the 25x rule more resilient for the modern world, consider these adjustments:
Be More Conservative: Many advisers now suggest using a more cautious withdrawal rate, such as 3.5% (28.5x rule) or even 3% (33x rule). This will give you a higher target pot but a much greater chance of your money lasting.
Build a Buffer: Aim for a target pot that is slightly larger than your 25x calculation to give yourself a "margin of safety."
Have a Flexible Withdrawal Strategy: Plan to be flexible with your spending in retirement. In years where your investments perform poorly, you might need to tighten your belt and withdraw a little less.
Factor in Tax: Remember that income withdrawn from a pension (beyond the 25% tax-free lump sum) is taxable. You may need a larger gross withdrawal to achieve your desired net income.
Conclusion
The 25x rule remains an incredibly useful tool for giving you a clear and understandable target for your retirement savings. It's a fantastic starting point for any financial plan.
However, you should treat it as a guideline, not a guarantee. Its success is not certain and depends heavily on future market returns, inflation, and your own spending habits. For a truly robust plan, consider using a more conservative multiplier (like 30x) and build in flexibility to your retirement spending.
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Disclaimer: This guide provides general information and is for informational and educational purposes only. It does not constitute financial advice. The value of investments can go down as well as up. Tax rules, allowances, and rates depend on individual circumstances and are subject to change. Always seek professional, regulated financial advice tailored to your specific situation before making any financial decisions.