The 4% rule is one of the most common starting points in financial-independence planning. It says that a person might begin retirement by withdrawing about 4% of an invested portfolio in the first year, then adjust that dollar amount for inflation in later years.
Flip the math around and it becomes the 25× rule: if you want a portfolio to support $40,000 of annual spending, you multiply $40,000 by 25 and get a target of $1,000,000.
The simple formula
Portfolio target = annual spending × 25
That shortcut assumes a 4% withdrawal rate. You can calculate other scenarios with our FU number calculator:
- 3% withdrawal rate: about 33.3× annual spending
- 4% withdrawal rate: 25× annual spending
- 5% withdrawal rate: 20× annual spending
Why the percentage matters
A lower withdrawal rate generally requires a larger portfolio but gives you more cushion. A higher rate produces a smaller target but leaves less room for poor market returns, long retirements, rising expenses, or unusually bad timing at the beginning of retirement.
There is no universal “correct” rate. Someone planning for a short break from work may use a different framework from someone retiring in their 40s and expecting the portfolio to last 50 years.
What the rule leaves out
The shortcut does not know whether your rent will rise, whether you will receive Social Security, how much flexibility you have to reduce spending, or whether your portfolio is diversified. It also does not eliminate sequence-of-returns risk—the danger that poor investment results arrive early in your withdrawal period.
Use the rule as a conversation starter. Compare several spending levels, include an emergency buffer, and consider how you would respond if markets or life refuse to cooperate.
A better question
Instead of asking, “What is my one perfect retirement number?” ask, “What number would let me make my next decision with less fear?” That may be a full FI target, or it may be a smaller runway. Both are useful.