Worked Example: From Annual Expenses to a Target Number

Now let's put the last two lessons together into one worked example, start to finish. Suppose someone has carefully tracked their spending and finds their annual expenses come out to $40,000 a year. Applying the 25x rule of thumb turns that single number into a concrete retirement target.

Multiplying $40,000 by 25 gives a target portfolio of $1,000,000. That's the amount which, following the 4% rule, would support a first-year withdrawal of roughly $40,000, matching the original expenses this whole calculation started from.

Annual expenses:  $40,000
Target multiple:  25x

$40,000 x 25  =  $1,000,000

Check it against the 4% rule:
$1,000,000 x 0.04  =  $40,000  (matches the original expenses)

With annual expenses of $40,000, the 25x rule of thumb produces a target portfolio of ____.

The same two-step process works at any expense level, not just $40,000. Someone with annual expenses of $60,000 would land on a target of $1,500,000 ($60,000 x 25), while someone spending $30,000 a year would target $750,000 ($30,000 x 25). The multiple stays fixed at 25x — only the starting expenses change the final number.

Someone's annual expenses are $60,000. Using the 25x rule of thumb, what's their approximate target portfolio?

It's worth sitting with how useful this is: two numbers most people can actually estimate today, their rough annual expenses and this well-known 25x multiple, produce a concrete savings target, instead of a vague sense that 'more is better.' The rest of this level explores how and why that target should flex for different situations.

Under the 25x rule of thumb, someone with lower annual expenses ends up with a smaller target portfolio than someone with higher annual expenses.