What is the 25x retirement rule and does it work?

Making sure you have enough income for your golden years is the ultimate aim when putting money into a pension.

But with retirement costs rising and market volatility hitting pension pots, it can be hard to know how much you need to set aside.

One common method is the 25x rule, which suggests multiplying your current expenses by 25 to calculate how much money you would need so you can retire.

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The idea is that you then make sure this amount is in your pension or can be derived from other assets such as a buy-to-let portfolio.

But some experts question if the rule is too sensationalist.

The 25x rule explained

The 25x rule for retirement was first coined in a 1998 Trinity University study.

It works in combination with the 4% pension withdrawal rate rule, that dictates how much people can safely take from their pension each year in retirement without running out of cash.

The idea behind the 25x rule is that saving 25 times your annual expenses can provide a target retirement nest egg based on the 4% withdrawal rate.

Research from Shepherds Friendly suggests that to live financially independently for 25 years, the average UK household would need to save £743,338 based on typical expenses.

The figure rise to more than £1m for higher earners.

The method does have some critics though.

Should you follow the 25x rule?

Experts suggest the 25x rule works more as a rough guide but is far from perfect.

Philly Ponniah, chartered wealth manager at Philly Financial, said: “It assumes you’ll withdraw about 4% a year, markets will deliver steady returns, and your spending won’t change. In reality, spending often runs higher in early retirement, drops as we slow down, then climbs again with care.

"Big variables like inflation, care costs, and how long you live can swing the numbers considerably.

“The 25x rule is still a useful starting point, but it’s not a guarantee. A modern approach means adjusting withdrawals, blending income sources, and modelling the life you actually want to live.”

The rule also ignores the benefits from the state pension.

Scott Gallacher, director at financial advisory firm Rowley Turton, highlights that a couple spending £30,000 a year from age 60 would need £750,000 under the 25x rule.

But in reality, from age 68 they’d receive about £24,000 a year in state pensions, leaving just £6,000 a year to cover. That needs roughly £190,000.

Gallacher said: “Add another £192,000 to cover the eight years before pensions start, and the total comes to around £382,000 — almost half the scary figure quoted. Big headline numbers risk backfiring, as they can put people off saving altogether because 'what's the point.’”

Ultimately, everyone has different expenses and spending patterns so it can be hard to rely on an average measure.

Ross Lacey, director at Fairview Financial Management, said: “These rules of thumb, are just that - a general guide. Everybody is different in terms of the other sources of income they can tap into during retirement. From final salary pensions, to rental income, to releasing equity from the main home.”