How Much Do You Need to Retire? I Tested the 25x Rule

The words JJ read on camera for this test. The final video may differ slightly.

How much money do you need to quit working? The most popular answer is 25 times what you spend in a year. Spend $40,000 a year, and you need $1 million.

I tested that number on every retirement start year from 1871 to 1996. 126 retirements, each one 30 years long, all in today's money.

And for the classic stocks-and-bonds retiree, the worst year to retire wasn't 1929. It was a year almost nobody talks about. I'll show you which one in this video.

I am JJ, and this is the 10K Test.

The 25x rule is the 4% rule turned around. Take out 4% of your money in year one, raise it with inflation every year after, and your money is 25 times your spending. $1 million, $40,000 a year.

Planners use it. Retirement calculators use it. And a whole corner of the internet uses it to pick the day they quit their job.

Some people add two more numbers: 20 times if you're living tight, 30 times if you want to be comfortable. So I tested all three.

Here's exactly what we did, so you can check it. We used Robert Shiller's public market data: the S&P 500 and the index that came before it, with dividends, back to 1871. Plus 10-year Treasury bonds. Everything adjusted for inflation.

Each retiree starts with $1 million on January 1st. They take out $40,000 a year, a little each month, and raise it with inflation every year.

Two mixes: all stocks, and the classic 60-40, 60% stocks and 40% bonds, rebalanced every January. No fees, no taxes, so this is the best case.

And one question: did the money last 30 years?

With 60-40, the money lasted 30 years in 124 of the 126 start years.

And it usually didn't just last. Half of those retirees finished 30 years with more than $1.4 million in today's money. 80 of the 126 ended with more than they started with.

That's what this channel does: famous money rules, tested on real numbers, and we show you when they fail. If that's useful, subscribe.

So for every $10,000 you spend a year, the rule says save $250,000. And in most start years, that was plenty.

But 2 start years ran out. And neither one was the crash you're thinking of.

The worst year to retire with 60-40 was 1966. This is the year I promised you at the start.

1966 had no crash like 1929. What came next was 16 years of rising prices. From 1966 to 1982, prices almost tripled.

After inflation, stocks lost about 20% over those 16 years, even with dividends. Bonds lost about 40%.

So the retiree's $40,000 kept going up with prices, while the money it came out of shrank. Stocks and bonds fell together. There was nowhere to hide.

10 years in, half of the $1 million was gone. By 1982, it was down to about $212,000.

The 1966 retiree ran out of money in September 1991. Almost 26 years. Retire at 65, and you're broke before your ninety-first birthday. The 1965 retiree ran out after about 27 years.

Now here's the same rule, 16 years later. Someone who retired in 1982, with the same 60-40 and the same 4%, finished 30 years with about $6.4 million. The best result of all 126. Same rule. Different start year.

So what about 1929? With 60-40, the 1929 retiree made it. From the 1929 peak to the 1932 bottom, stocks lost more than three-quarters of their value after inflation. But prices were falling, so bonds gained 38% after inflation, and the bonds carried them through. 30 years later, they still had about $827,000.

With all stocks, it was a different story. 1929 ran out after almost 25 years. So did 1966 and 1969. 123 of 126 lasted.

How much would the worst year have needed? 26.6 times. That's $266,000 for every $10,000 you spend, instead of $250,000.

So for a normal 30-year retirement, 25 times came very close. But a lot of the people using this rule aren't 65. They're 45.

Quit at 55, and the money may need to last 40 years. At 25 times, with 60-40, it ran out in 8 of the 116 start years we can test.

Quit at 45, and it may need to last 45 years. We ran every 45-year retirement from 1871 to 1981. That's 111 of them.

At 25 times, with 60-40, the money ran out in 12 of the 111. That's about 1 in 9. With all stocks, 7 of 111 ran out.

The worst 45-year start was 1966 again. It needed 29.4 times. That's $294,000 for every $10,000 you spend.

Then we tried the tight number. 20 times, or $200,000 for every $10,000. For a 30-year retirement, with 60-40, it ran out in 30 of the 126 start years. That's about 1 in 4.

Then the comfortable number. 30 times. $300,000 for every $10,000 a year.

It never ran out. Not once.

30 years, 40 years, 45 years. All stocks or 60-40. Every start year since 1871. The money lasted every time.

So what do you do with this? Three things from the same data.

One: for a normal 30-year retirement, 25 times held up in 124 of 126 start years with 60-40. The 2 that failed both started in the mid-1960s, right before 16 years of high inflation.

Two: if you're quitting early, 25 times is not the number. Over 45 years, about 1 in 9 ran out. 30 times never did.

Three: the mix matters when the timing is bad. Take someone who retired in January 2000, near the top. All stocks, 25 times: almost 27 years later, their $1 million is down to about $178,000. Still going, barely. With 60-40, about $718,000.

And if you've heard you can take out 8% a year, that's 12 and a half times. With 60-40, that ran out in 95 of the 126 start years. We have a whole test on 8% on the channel.

So, you need 25 times your yearly spending to retire. Verdict: PARTLY TRUE. For a 30-year retirement, it lasted in 124 of 126 start years, and the worst case needed 26.6 times. For quitting early, about 1 in 9 ran out over 45 years.

The number that never failed, in 155 years of data, was 30 times.

Next on the 10K Test: another piece of money advice everybody repeats, tested on real numbers, start year by start year. If you want another test right now, there are more on the channel.

Every week I send a free email with the full numbers behind each test, the tables, the charts, and what we're testing next. Free weekly email at 10Ktest.com.

And tell me in the comments what money advice you want tested next.

This video is for education and entertainment, not personal financial advice. Your situation is different; talk to a professional before you decide when to retire or how much to take out.

Disclosure: I don't own an S&P 500 index fund or a bond fund. I do own some individual stocks, including Apple, which is part of the S&P 500. Nobody paid for this video.