Twenty-five times your annual spending. That’s the answer. 

Whether you are a 35-year-old about to sell your business for millions and millions or 55 years old and contemplating how big your savings need to be to fund your retirement, the answer is basically the same. Twenty-five times your annual spending. 

Why? 

4% is about the amount that you can withdraw from your investment pot each year and have the remaining pot still grow roughly in line with inflation¹. So, for example, if you want £100,000 per year of ‘income’ from your investments, you need to have an investment pot of £2.5 million (because £100k is 4% of £2.5mm).

¹ The assumptions here are 3% inflation rate, 7.5% assumed investment growth rate

Who This Rule Helps 

This rule of thumb is most obviously helpful for those approaching retirement who want a ‘target amount’ of savings and investments. For example, a high earner in their 50s with a pension pot of £1 million but little other savings probably needs to get a scooby on if they are to maintain their standard of living in retirement. 

The 25x rule can also be helpful for business owners contemplating an exit. Whilst there is usually more complexity for an entrepreneur, the basic principle that you need 25x is helpful when considering an exit strategy.  

It’s worth noting that this rule is useful at pretty much any age. Undoubtedly, the younger the person the more uncertainty is inherent in a rule of thumb like this, not least due to changes in inflation rates, tax rates, etc. But the 25x rule is nevertheless a useful starting point for anyone who wants to know how much they need to ‘never work again’. 

 A Note on Taxes 

As you might suspect, taxes complicate the supposed straightforwardness of the ‘25% rule’. Not everyone’s 4% is going to be taxed at the same rate (e.g. capital gains at 24%, income at perhaps 40%, ISA income at 0%, etc.). Structuring one’s savings and investments so that tax is minimised but the 4% or so target is hit in a risk-appropriate manner is a big part of the challenge. This is one area where some advice on the structuring of one’s investments can prove highly valuable. 

A Note on Investment Returns 

The 25x rule works, in our view, only with an investment return of at least 7.5% per year. Despite the extremely strong performance of equity markets in recent years, many private clients, including those who are clients of some of the biggest name ‘wealth managers’, have failed to come close to achieving those returns. This threatens their ability to maintain their standard of living. Typically, people have not taken enough risk which has resulted in returns that are too low. Over a period of many decades – and especially in a higher-inflation environment – the impact of that decision on one’s ability to spend income is very detrimental.

Wealth Preservation 

Many of our clients want to ensure they have enough money to live comfortably, and to protect against potentially expensive costs later in life, but they also have an eye on maintaining and growing wealth for future generations. There are ways to reduce inheritance tax and to otherwise have a tax efficient, multi-generational plan, but virtually every decision involves a trade-off (e.g. gifting into a trust now versus holding money back for potential care costs). Navigating those inherent trade-offs is often best achieved with the help of a professional adviser.

Get In Touch 

TindleWealth provides financial advice and investment management. We help you to structure your savings and investments in a tax efficient and risk appropriate manner. We also manage those investments for you. We would be proud to share our after-fee historical investment returns with you, which we think compare well versus our competitors. All consultations are free of charge and there is never any obligation to move forward with us. So please get in touch if you think we might be able to help.