If you’re planning to retire early, there are a couple helpful rules to keep handy. The Multiply by 25 Rule helps you estimate how much you may need to save between now and retirement in order to generate a steady stream of income during retirement. A study conducted for 2015 by the US Census Bureau reported the national mean household annual wage to be around $56,516. For a current annual income of $56,516, the Multiply by 25 Rule would illustrate a savings goal of more than $1.4 million ($56,516 times 25 equals $1.4 million). This rule assumes you will be able to generate at least 4% return on your investments. A 4 percent yield on a portfolio of $1.4 million would generate $56,516.
The 4 Percent Rule is sort of the inverse of the Multiply by 25 Rule. There are more moving parts to this rule, but suffice it to say that the 4 Percent Rule identifies an average “safe withdrawal rate” from your investment portfolio during retirement. It assumes an average investment growth rate of 7 percent and an average inflation rate of 3 percent. This would allow no more than an average 4 percent for you to withdraw from your investment savings per year without disturbing your principal.
In 2012, a report by the Social Security Administration trying to identify the average income replacement ratio indexed to wage and price revealed that those born 1966—1975 should plan to need between 84%-110% of after-tax earnings during retirement. Your advisor should be able to help you determine your number and how to stay on track with your retirement goals.