How Much Do I Actually Need To Retire? (It's More Than The 25x Rule)

If you've spent any time on personal finance Reddit or read any of the popular FIRE blogs, you've seen the 25x rule. It goes like this: take your annual expenses, multiply by 25, and that's your retirement number. If you spend $100,000 a year, you need $2.5 million. Done. Retire.

The rule is simple, memorable, and based on real research. It's also dangerously incomplete — especially if you're a high earner in a high-tax state trying to retire comfortably, not just mathematically.

The 25x rule is the inverse of the 4% rule: if you can safely withdraw 4% of your portfolio each year, then you need a portfolio that's 25 times your annual spending. But the 4% rule was designed as a floor for a specific scenario — a 30-year retirement on a 50/50 stock/bond portfolio. It wasn't designed to account for California taxes, healthcare inflation, or what happens if you want to retire before 65.

This post breaks down what the 25x rule gets right, what it misses, and how to build a more honest retirement number.

Where The 25x Rule Came From

Financial planner William Bengen published his landmark study in the Journal of Financial Planning in 1994. He backtested every rolling 30-year period from 1926 onward and found that a retiree who withdrew 4% of their portfolio in year one — then adjusted that dollar amount for inflation each year — had a very high probability of not running out of money over 30 years.

The Trinity Study, published in 1998 by three professors at Trinity University, confirmed the finding: a 4% initial withdrawal rate on a 50/50 portfolio had a 95%+ success rate across the historical data set.

From there, the math is simple: if you can withdraw 4%, you need 25 times your annual spending (1 ÷ 0.04 = 25). The 25x rule was born.

And to be clear — the research is legitimate. As a starting point, 25x is a reasonable ballpark. Bengen himself has since updated his findings. In his 2025 book A Richer Retirement, he raised his SAFEMAX — the worst-case safe withdrawal rate over 30 years — from 4.15% to 4.7%, and suggested that many retirees today could safely withdraw closer to 5% to 5.5% under normal conditions.

But Morningstar's latest retirement research, which uses forward-looking Monte Carlo simulations rather than historical backtesting, puts the optimal starting withdrawal rate for 2026 retirees at 3.9%. That's more conservative, and it implies a multiplier closer to 26x, not 25x.

The disagreement between researchers — Bengen says you can probably spend more, Morningstar says less — should tell you something: the "right" withdrawal rate depends on assumptions about the future that nobody can make with certainty. And the 25x rule doesn't have room for that nuance.

The Five Things The 25x Rule Ignores

The 25x rule calculates a portfolio number based on annual spending. But it treats retirement like a math equation when it's actually a multi-variable planning problem. Here's what falls through the cracks.

1. Taxes

The 25x rule assumes your spending number is your spending number. But if most of your retirement savings are in pre-tax accounts — a traditional 401(k) or IRA — every dollar you withdraw is taxed as ordinary income. If you need $100,000 to spend, you might need to withdraw $130,000 to $140,000 to net $100,000 after federal and state taxes, depending on your bracket.

This is especially severe in California, where there's no preferential rate for retirement income and the top marginal rate is 13.3%. A retiree pulling $150,000 from a traditional IRA in California could face a combined federal and state effective rate north of 30%. The 25x rule doesn't account for this at all.

The tax question also changes based on which accounts you withdraw from and in what order — a process called withdrawal sequencing that can save or cost six figures over the course of a retirement. We wrote about this in detail in our post on tax-efficient retirement income in California.

2. Healthcare

Fidelity Investments publishes an annual Retiree Health Care Cost Estimate. Their 2025 figure: a 65-year-old retiring today should expect to spend approximately $172,500 on healthcare throughout retirement. For a couple, that's roughly $345,000. And that estimate does not include long-term care.

Healthcare inflation runs 5% to 6% annually — roughly double the rate of general inflation — and has since Fidelity started tracking in 2002, when the estimate was $80,000 per person. That's a 115% increase in just over two decades.

If you retire before 65, the gap between your last day of employer-sponsored health insurance and Medicare eligibility could cost $1,000 to $2,000+ per month in premiums on the individual market. That's $24,000 to $48,000 per year that the 25x rule never considered.

And here's the number that quietly terrifies financial planners: 69% of people who reach age 65 will need some form of long-term care during their lifetime. The median annual cost for a private room in a nursing facility now exceeds $100,000 in many parts of California.

3. Inflation (Beyond The Standard Assumption)

The 4% rule adjusts withdrawals for inflation each year, which sounds like it handles the problem. But it assumes a long-term average around 2% to 3%. In reality, inflation hit 9.1% in June 2022 and was at 3.8% as of April 2026. If you started retirement withdrawing $100,000 and got hit with two years of 7% inflation, you'd be pulling $114,490 by year three — building off a higher base for every year that follows.

High-earner retirees also tend to spend disproportionately on categories where inflation runs hottest: healthcare, education (for grandchildren), travel, and housing maintenance. The Consumer Price Index measures a basket of goods that may not reflect your actual spending pattern.

4. Sequence-of-Returns Risk

This is the least intuitive but potentially most damaging gap. Two retirees can experience identical average annual returns over 30 years but end up with wildly different outcomes, depending on when the bad years happen.

If the market drops 30% in your first two years of retirement while you're withdrawing 4%, you've locked in those losses permanently. Your portfolio has less capital to recover with, but your withdrawal amount (adjusted for inflation) keeps climbing. The math doesn't recover the same way it would if the crash happened in year 25 instead of year 2.

This is called sequence-of-returns risk, and it's the reason static withdrawal rates are inherently fragile. A dynamic approach — like the guardrails retirement spending framework — adjusts your withdrawals based on how your portfolio is actually performing, rather than blindly following a formula set on day one.

5. Your Life Doesn't Fit A Spreadsheet

The 25x rule assumes a single, static annual spending number for 30 years. Nobody's retirement works like that. Research consistently shows that retirees spend more in the early "go-go" years (travel, experiences, renovations), less in the middle "slow-go" years, and then potentially much more in the late "no-go" years if long-term care is needed.

It also doesn't account for Social Security timing decisions (claiming at 62 vs. 67 vs. 70 can mean a difference of $100,000+ in lifetime benefits), pension income, rental income, or what happens if one spouse dies before the other — which changes the tax bracket, the Social Security benefit, and the healthcare cost structure simultaneously.

What The 25x Rule Misses, Quantified

So What's The Real Number?

There isn't one universal number — that's the point. But here's a framework that gets you closer to reality than the 25x rule.

Step 1: Start with after-tax spending, not gross spending. Figure out what you actually need to spend in retirement — housing, food, transportation, travel, healthcare premiums, insurance, giving. That's your baseline. For most high-earning households in Southern California, this lands somewhere between $100,000 and $200,000 per year.

Step 2: Gross it up for taxes. If most of your retirement savings are in pre-tax accounts, you need to withdraw more than you spend. For a California retiree in the 24% federal bracket with state taxes layered on top, a rough rule of thumb is to multiply your spending need by 1.3 to 1.4. So $120,000 in spending might require $156,000 to $168,000 in withdrawals. This is where tax reduction strategies for high earners become critical — Roth conversions before retirement, asset location, and tax-loss harvesting can dramatically reduce this gross-up.

Step 3: Add your healthcare buffer. Use Fidelity's $172,500 per person as a baseline. If you're retiring before 65, add $2,000 per month per person for every year between your retirement date and Medicare eligibility. Build in a long-term care contingency — at minimum, understand the options (self-funding, hybrid insurance, traditional LTC policy) and their costs.

Step 4: Subtract guaranteed income. Social Security, pensions, rental income — these reduce the amount your portfolio needs to fund. If Social Security covers $36,000 per year of your spending, your portfolio only needs to fill the remaining gap. But be thoughtful about when you claim: delaying from 62 to 70 increases your monthly benefit by roughly 77%.

Step 5: Apply a more conservative multiplier. Instead of 25x, consider using 28x to 33x the portfolio-funded gap (your spending minus guaranteed income, grossed up for taxes). That builds in a margin for healthcare inflation, sequence risk, and the possibility that you live longer than the 30-year assumption. If your tax-adjusted portfolio-funded gap is $120,000 per year, a 30x multiplier puts your target at $3.6 million — not the $2.5 million that 25x on raw spending would have suggested.

What Actually Moves The Needle

If the number feels overwhelming, the productive response isn't to ignore it — it's to identify the levers you can pull. Most of them have nothing to do with saving more.

Tax diversification. Having money in Roth accounts means tax-free withdrawals in retirement, which reduces the gross-up problem. Roth conversions during lower-income years (a job transition, a sabbatical, early retirement before Social Security kicks in) can be enormously valuable. We covered the mechanics in our post on reducing taxes for high-income earners in California.

Withdrawal sequencing. The order in which you tap accounts — taxable, then traditional, then Roth (the default) — often isn't optimal. A coordinated strategy that pulls from different account types in different years based on your tax bracket can save hundreds of thousands over a 25-year retirement. We wrote a deep dive on this in our post on building tax-efficient retirement income beyond the 4% rule.

Dynamic spending. Replacing the static 4% rule with a guardrails approach — where you adjust spending up when the portfolio grows and pull back when it shrinks — dramatically improves outcomes without requiring a larger starting balance. It's the difference between driving with a steering wheel and driving on rails.

Maxing every tax-advantaged account. For 2026, the 401(k) limit is $24,500 ($32,500 with standard catch-up for those 50+, or $35,750 for the "super catch-up" if you're 60 to 63). If your plan allows it, the mega backdoor Roth can push total 401(k) contributions to $72,000. HSAs — with their triple tax advantage — are one of the most efficient retirement savings vehicles available and can be used to cover healthcare expenses tax-free.

Social Security optimization. Every year you delay claiming past age 62 increases your benefit by approximately 6% to 8%. For a high earner, the difference between claiming at 62 and 70 can be $1,000+ per month — and that's an inflation-adjusted, guaranteed income stream for life. In a household where one spouse earned significantly more, the strategy gets even more nuanced.

The Bottom Line

The 25x rule is a useful back-of-napkin starting point. It's a terrible finishing point. It tells you the minimum portfolio you'd need if everything goes according to plan — if inflation stays mild, if healthcare costs don't spike, if you don't face a bear market in your first few years, if taxes don't change, and if you never need long-term care.

Real retirement planning isn't about finding a single number. It's about building a system that adapts — a combination of tax-diversified accounts, dynamic spending rules, healthcare contingencies, and guaranteed income sources that work together to fund a 30-to-40-year retirement regardless of what markets, taxes, and your health throw at you.

If you're five to ten years from retirement and the only number you have is a rough 25x calculation, that gap between your estimate and reality is where the real financial risk lives. The good news is that the earlier you run a comprehensive analysis, the more levers you have to close it.