How Much Do I Need to Save?

From Expenses to a Portfolio Target

In the previous article, you estimated what retirement will actually cost. That number — your annual expense target — is the foundation of everything that follows.

The next question is straightforward: how large does your investment portfolio need to be to generate that income for life? That portfolio target is your FI number. It's the threshold where work becomes optional.

There's a widely-used heuristic that gives you a fast answer. It's a good starting point — but as we'll see, the real number depends on details that the heuristic doesn't capture.

The 25x Rule: A Starting Point

The most common way to estimate your FI number is the 25x rule: multiply your annual expenses by 25. The result is roughly how much you need invested before you can stop working.

Where does the 25 come from? It's the inverse of 4%. The idea — rooted in the Trinity Study — is that if you withdraw 4% of your portfolio each year, adjusted for inflation, your money has historically lasted 30+ years in most market conditions. So if you need $40,000 per year, you need a portfolio that makes $40,000 equal to 4%: that's $1,000,000.

This is a genuinely useful heuristic. It gives you a tangible target and it's grounded in real data. For a deeper look at the 4% rule's strengths and limitations, see The 4% Rule: What It Gets Right.

But the 25x rule treats every dollar in your portfolio as interchangeable. In practice, they're not — and the gap can be significant.

Why Your Real Number May Be Different

The 25x rule assumes that every dollar you withdraw reaches your bank account intact. But if most of your savings sit in pre-tax accounts, that's not what happens.

The difference is taxes. Money in a Traditional 401(k) or Traditional IRA has never been taxed — every dollar you withdraw is taxed as ordinary income. Money in a Roth IRA or Roth 401(k) has already been taxed — withdrawals are tax-free. Money in a taxable brokerage account falls somewhere in between: you owe capital gains taxes on the growth, but not on the original contributions.

Your FI number depends heavily on the mix of accounts you hold. A portfolio that is 90% pre-tax Traditional accounts needs to be significantly larger than one that is 90% Roth, because a chunk of every withdrawal goes to the IRS.

The Tax Gap in Practice

Consider two people who both want $80,000 per year in retirement spending.

Same spending goal, different account mixes, very different required portfolios. The 25x rule gives both of them the same answer. Their real FI numbers are $400,000 apart.

For a detailed look at how different account types are taxed, see Why Tax-Advantaged Accounts Come First.

Other Factors That Shift the Target

Taxes on withdrawals are the biggest adjustment to the 25x rule, but they're not the only one. Three other factors can move your FI number materially:

• Inflation: Your expenses won't stay fixed. If you need $80,000 today and your FI date is 15 years away, you'll need more than $80,000 in future dollars to maintain the same lifestyle. At 3% annual inflation, that $80,000 becomes roughly $125,000. Your portfolio needs to be large enough to support the inflated amount, not today's number.
• Outstanding debts: If you'll still have a mortgage, car loan, or student debt at your FI date, those payments are part of your required withdrawal amount. You either need to pay them off before FI or have additional assets set aside to cover them — separate from the portfolio funding your living expenses.
• Withdrawal rate sensitivity: The 4% rule is a reasonable starting point, but it's not guaranteed to work in all market conditions. A more conservative rate — say 3.5% — means a larger target but more safety margin. A more aggressive rate — say 4.5% — means a smaller target but higher risk of running short. Your comfort with this tradeoff affects your number.

Each of these factors interacts with the others. A portfolio that's heavily Traditional, in a high-tax state, with an outstanding mortgage and a 15-year time horizon can end up needing 30–40% more than the naive 25x calculation suggests.

Getting a More Accurate Number

The 25x rule is valuable because it's simple. But once you understand the factors that shift your real target — taxes, inflation, debts, withdrawal rate — you can see why a single multiplication isn't the final answer.

The challenge is that these adjustments aren't easy to do on a napkin. Tax rates depend on your account mix and your state. Inflation compounds over your remaining working years. Debts interact with your cash flow timeline. These factors don't just add up — they multiply.

That said, don't let the quest for precision stop you from starting. The 25x rule gives you a useful target today. As you refine your inputs — actual account balances, tax filing status, state of residence — you can dial in the number over time.