Quick Nest Egg Calculation: The 25x Rule
Most people, regardless of mission or career satisfaction, hope that some day they will no longer be obligated to work. Call it retirement, call it financial independence, but the freedom to choose to work – or not – is a pretty relatable goal. The ability to do what you want, when you want, with whom you want, and as often as you want is as close to a definition of wealth as I can imagine.
What amount of savings and investments is "enough" to take that plunge? To fully retire, transition into a second act, or take only the work that excites you? The calculation is easier than you might think!
William Bengen, CFP®, wrote a paper in 1994 using historical market and inflation data to determine how much a retiree could withdraw annually without running out of money over a 30-year retirement. His research suggested that 4% was a safe drawdown rate. Bengen's findings assume a 50% stock/50% bond portfolio, and there are a few caveats – as an example, the 4% rate applies to the first year, with subsequent years being adjusted for inflation.
More recently, Bengen himself has revised that number to be 4.5%. However, the math is a heck of a lot easier with 4% than 4.5%, and a bit more conservative to boot – often a welcome approach when deciding whether to keep working or live off investments.
Based on this assumed safe 4% drawdown rate, one can quickly calculate a target nest egg size by multiplying current living expenses by 25. The math works so simply because 4% is exactly 1/25th of 100%!
Calculating 25 times what you currently spend will give you the number at which you could live off a 4% annual draw down.
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