25X

25X

When it comes to financial planning, there is so much of it that it is very esoteric and nuanced.  Additionally, I am not the biggest proponent of one size fits all, as when it comes to one’s finances, there is so much of it that is truly bespoke and customized.  We all have different goals, with different priorities, with different costs to them. 

For instance, you may want to retire and go travel the world, while the next guy simply wants to babysit their grandkids all retirement.  There is no wrong answer, but the sooner you can understand what you want your future retirement you look like, the easier it is to plan for that occasion.

The 25x Formula

Now that you have given a little thought to that retirement you let us jump into the theme of this blog 25x.  I often get asked how much I need to retire from clients, and of course, it is always a moving target.  One of the simplest back-of-the-envelope ways to figure it out is my 25x formula.

Here is how my secret recipe works.  Take some time to figure out what you think you will need to live off of in retirement per annum.  For example, you historically spend $10,000/mo in expenses with an additional $30,000 in vacations in retirement.  For that person, you would get a total retirement spend of $120,000 + $30,000= $150,000.  This is the biggest key in determining your retirement needs. 

Once you have your ideal expenditures, the rest is fairly simple.  Take that expected need, in this case $150,000, and multiply it by, you guessed it, 25. In this example, it would be 25*$150,000= $3,750,000.  Meaning you should have roughly 3.75m in retirement savings to sustain a $150,000/yr retirement need.

There’s More To It

Now, I can’t stress this enough: this is not a financial plan, and don’t panic if that isn’t your reality.  There is a lot more that goes into these figures than a simple multiplication formula.  Things such as expenses going down, inheritances, fixed income like pensions or Social Security, and the list goes on.  These are all items that will have you adjust your actual needs and ideal retirement savings.

However, I do think this is a quick and simple way to gauge your retirement readiness.  Especially if you have more saved than my formula suggests, you can generally feel pretty good about your prospects of meeting your retirement needs.  Said differently, this formula is nothing more than a 4% drawdown, but with easier and more relatable math. 

Our planning process gets way into the weeds on figuring out your actual retirement readiness, taking into account things like ROR, inflation, fixed incomes, taxes, and much more.  That is why it is important to note whenever you see or I mention simple formulas.  I like to think of them as if you are generally in the ballpark or not, and a quick reference guide. 

Heck, I even do it myself on my own personal finances.  I take a quick, bad guess at what my ideal retirement lifestyle would look like.  Then I do my 25x exercise and see how far off I actually am from hitting that figure.  Finally, I’ll sit there and roughly project how much I’ll be adding to my accounts over the next 20ish years of earnings and get a sense if I am “in the ballpark” or not.

Now, how does your formula look?  Hope you enjoyed this little financial planning hack, and as always, here to answer any questions you or any of your friends have on the subject.

As always, stay wealthy, healthy, and happy.