How Large Does Your Nest Egg for Retirement Need to Be?

How Large Does Your Nest Egg for Retirement Need to Be?

What is the Rule of 25?

Rule of 25

The rule of 25 is a commonly used financial heuristic for calculating how large of a ‘nest egg’ you should save for retirement. To determine your nest egg, you multiply the annual income you will need for retirement by 25. It then assumes you draw 4% from that pool of assets annually.

This idea is based on some retirement research that looked at what a ‘sustainable’ withdrawal rate would be for a hypothetical portfolio with a 30-year time horizon.

This withdrawal rate is not appropriate for everyone, but it is a good place to start when ballparking the size of your nest egg. I will not go into detail on all the factors you should consider when determining your withdrawal rate but have listed some of them below:

What Will Your Annual Income Needs be in Retirement?

Calculating Your Expenses

In order to know what your income needs will be, you will likely need to look at what you plan your expenses to be in retirement. I have provided a worksheet you can use to calculate your current monthly expenses and what you expect your monthly expenses to be in retirement.

The expenses are broken up into two categories, essential and discretionary:

  • Essential
    • Housing
    • Utilities 
    • Transportation
    • Medical & Healthcare
    • Insurance
    • Taxes
    • Debt Payments
  • Discretionary 
    • Entertainment and Recreation
    • Family Care
    • Charitable Contributions

It is very likely that there will be differences in these expenses between what they are now and what they will be in retirement. The closer you are to retirement, the more you should know what these expenses should be. 

Monthly Expense Worksheet

Monthly Expense Worksheet

Once you have an idea of what your monthly expenses will be you can multiply that number by 12 to get your annual income need in retirement. 

Subtract Retirement Income from Your Expenses

From there you can subtract your income you plan to have in retirement:

  1. The annual amount supplied by ‘certain’ sources of income (Social security, pension, annuity, etc)
  2. The annual amount supplied by other income sources (work, rental property, etc.)
    • *Note these sources can be used when calculating your income required but should not be relied on since they could fluctuate.

Filling the Remaining Income Gap

If your retirement expenses are more than your retirement income, the remaining ‘gap’ needs to be filled by income generated by your personal savings.

You then multiply the annual gap by 25 to calculate the assets needed to generate enough income for a 4% withdrawal rate. 

Comparing the Assets Needed to Your Current Assets

You then subtract the assets needed by your current assets to see the difference.

If your current assets are below the assets required, you can see the assets needed to reach that number.

Rule of 25 Example

Below is an example of someone with $1,000,000 in assets seeing if they meet the rule of 25.

Rule of 25 Example

As you can see having a $1,000,000 portfolio doesn’t necessarily make you wealthy. It takes a large pull of assets to generate a sustainable source of income in retirement that could last decades. 

Your assets are only one factor in the calculation. Having additional sources of retirement income or reducing your annual expenses are both ways you could reduce the need for additional assets. If you could reduce your need in retirement by $100/mo., that reduces the assets you need by $30,000. But the math works both ways, if you want to spend $100/mo. more in retirement your nest egg will need to be $30,000 larger.

The Rule of 25 is far from perfect, but it can be a good way to get a rough figure on the size of the nest egg you will need for retirement. The more interesting point for me is that it shows that the amount of assets you have is only one part of the equation, and lowering your expenses or optimizing your other sources of retirement income, can reduce the size of the nest egg you need in the first place.

Knowing that there is no one correct answer to the question, allows for the opportunity for smart planning and a more nuanced discussion of how you can fill the income gap in retirement.


Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.


Gage Paul, CFP®, RICP®, EA
Gage Paul, CFP®, RICP®, EA

Gage Paul is a financial planner at Western Reserve Capital Management. He works with the firm’s clients to create sustainable financial plans and investment strategies.

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