Four Percent Rule VERSUS Rule of Twenty-Five

Posted on August 16, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

PHYSICIAN RETIREMENT PLANNING

By Staff Reporters

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The rule of 25 is just a different way to look at another popular retirement rule, the 4% rule. It flips the equation (100/4% = 25) to emphasize a different part of the retirement planning process — withdrawing vs. saving.

The 4% rule outlines a safe rate to withdraw funds for 30 years without running out of money. On the other hand, the rule of 25 is a savings-focused approach, providing a quick estimate of how much you need to accumulate before exiting the workforce.

LINK: https://www.nerdwallet.com/calculator/retirement-calculator

Let’s consider a scenario to highlight the difference:

  • Rule of 25: After accounting for her Social Security and other sources of retirement income, Dr. Matie PhD plans to spend $40,000 a year in retirement. 40,000 x 25 = $1 million, so Matie would need $1 million invested to cover annual expenses of $40,000.
  • The 4% rule: Dr. Matie, now a retiree, has $1 million in retirement savings and follows the 4% rule. She can safely withdraw $40,000 annually (4% of $1 million).

CITE: https://www.r2library.com/Resource/Title/082610254

While the 4% rule helps plan withdrawals during retirement, the rule of 25 helps establish a savings goal before retirement begins.

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