# The Difference Between the Multiply-By-25 Rule and the 4-Percent Rule

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There are two rules often cited by investors that sound similar but that in fact make very different claims. In this article, I’ll describe the differences between the two rules — the Multiply-by-25 Rule and the 4-Percent Rule.

## The Multiply-by-25 Rule

The purpose of The Multiply-by-25 Rule is to tell an investor how much he needs to save to generate an income stream of a specified size. Say that you need an inflation-adjusted \$50,000 to live on in retirement. The Multiply-by-25 Rule tells you that you need to save \$1.25 million to meet your goal (\$50,000 times 25 equals \$1.25 million)

The rule assumes that you will be able to generate an annualized real return of at least 4 percent on your investments. A return of 4 percent real on a portfolio of \$1.25 million yields \$50,000. If you needed \$40,000 to live on, you would need to save \$1 million. If you needed \$60,000, you would need to save \$1.5 million. The amount you need to save to generate a specified annual income is always 25 times the annual income amount so long as you assume a 4 percent real return on your investments.

For those who think it better to assume a real return of only 3 percent, the Multiply-by-25 Rule should be changed to the Multiply-by-33 Rule. For those who think it safe to assume a 5 percent return, the Multiply-by-25 Rule should be changed to the Multiply-by-20 Rule. Whatever Multiply-By Rule is used will work so long as the underlying assumption employed with it works. So you obviously increase your chances of having the rule work by using conservative return assumptions.

## The 4-Percent Rule

The 4-Percent Rule is often confused with the Multiply-by-25 Rule because the Multiply-by-25 Rule assumes a 4 percent return. However, the reality is that the 4-Percent Rule addresses a far more sophisticated question and is rooted in far more questionable assumptions.

### How much do you need to save to finance a safe retirement plan?

The 4 Percent Rule was developed during the huge bull market, when most investors were heavily invested in stocks. Aspiring retirees came to see that the Multiply-by-25 Rule (or any of the possible variations of it) does not answer their most important question — how much does an investor heavily invested in stocks need to save to finance a safe retirement plan?

The problem is that, when it comes to stock investment, the return obtained is not the only variable that matters in determining whether a retirement withdrawal amount will work out or not. Stocks have for a long time provided an average annual return of something close to 7 percent real. But there are many cases in the historical record in which retirees taking a 7 percent withdrawal would have experienced busted retirements.

If stocks provided a steady 7 percent return, the 4-Percent Rule would instead be the 7-Percent Rule. Retirees could withdrawal 7 percent of their portfolios each year and be sure of their retirement plans working out. But it doesn’t work like that in the real world.

Stocks are a highly volatile asset class. While they provide an average return of close to 7 percent, there are years when they offer returns far greater than that and other years when they offer returns far less than that. What sort of returns sequence pops up in your particular retirement plays a big role in determining whether your retirement plan works out or not.

### For retirees, timing is everything

The key to retirement survival is for the retiree to experience good results in the first 10 years of the retirement. If you knew in advance that the first 10 years were going to be better-than-average years, you could actually take more than 7 percent as your withdrawal. The converse is also true. If you knew in advance that the first 10 years were going to be worse-than-average years, you would need to take a withdrawal of a good bit less than 7 percent to be sure that your retirement plan was going to work out.

### The Safe Withdrawal Rate

The studies responsible for the 4-Percent Rule tried to answer the question — How much less? The answer they came to is 3 percent less, or 4 percent. The studies look at all of the returns sequences in the historical record and identify a withdrawal of 4 percent as the highest withdrawal that works in every possible case. Hence, the claim that a 4 percent withdrawal is “safe.”

The claim that a 4 percent withdrawal is safe is not a claim that the investor will obtain a return of 4 percent. The studies that produced this rule look at what works in the event that the investor is willing to see his retirement account reduced to zero over the course of 30 years. With this assumption, a return of zero percent would generate a safe withdrawal rate of 3.3 percent. The fact that the studies show the safe withdrawal rate to be only 4 percent suggests that stocks provide a level of long-term safety not much better than that provided by an asset class providing an asset class offering a stable return of something only a little better than zero percent.

That’s shocking, isn’t it?

It is. It’s also revealing.

What the low withdrawal rate is telling us is that the volatility of stocks is a far more negative force than most of us imagine it to be. The assumed rate of return in the studies is neither zero percent nor 4 percent; it is actually something close to 7 percent, the normal return for stocks. The reason why the safe withdrawal rate is so much lower is that volatility creates the possibility of frighteningly poor returns in the early years of a retirement, and poor returns in the early years are devastating to the hopes of long-term retirement success.

Say that you knew two retirees, one who retired last July (just prior to the huge stock crash) and one who retired last week. Say that both had the same amount in savings on the day of retirement and both were planning on the same annual withdrawal. Which of the two enjoys the safer retirement today? It’s obviously the one who retired last week. The earlier retiree has a far smaller portfolio and needs it to last nearly as long. Big losses in the early years of a retirement are bone-crushers.

## Conclusion

My personal belief is that both of these rules bring to light useful insights as to how investing works but that neither by itself tells the full story. I believe strongly that the 4-Percent Rule at some times overstates and at other times understates the amount needed for a safe retirement; at times of high valuations the true safe withdrawal can drop to as low as 2 percent and at times of low valuations it can rise to as high as 9 percent. The Multiply-by-25 Rule isn’t by itself perfect either. There are times when obtaining a 4 percent return is child’s play and there are times when you need to go hunting for a mix of asset classes that will provide that level of return.

Effective retirement planning requires the mining of insights from a variety of sources. Both the Multiply-by-25 Rule and the 4-Percent Rule offer valuable insights. But neither the Multiply-by-25 Rule nor the 4 Percent Rule tell you all that you need to know. Even combined, these two rules do not tell you all that you need to know.

### 12 thoughts on “The Difference Between the Multiply-By-25 Rule and the 4-Percent Rule”

1. Hi

I like these relatively simple rules because they provide a starting point for thinking about retirement planning.

The last 12 months will have shattered a lot of cost assumptions that people had got used to making about stock market returns.

2. I appreciate the education – I had thought the two were synonymous! Neil’s right-on, many of the assumptions that have guided the boomer generation’s approach to retirement are going to need re-formulation for Gen X & Y & whomever else.

I’m 35 and “on-track” to have \$1.5M for retirement IF the growth/performance historical rate (Fidelity’s estimate) holds true. BUT I doubt that it will – again, I think those rates need to be reevaluated. And I truly think my expenses will be less (barring hyperinflation in health care costs) than Fidelity tells me they ‘should’ be. But regardless, thinking/planning about it now is vital to all individuals – so thanks for the great post.

3. I’m 35 and “on-track” to have \$1.5M for retirement IF the growth/performance historical rate (Fidelity’s estimate) holds true. BUT I doubt that it will – again, I think those rates need to be reevaluated.

This is Rob Bennett, author of the Guest Blog Entry.

I strongly agree with you that those numbers need to be reevaluated, Michelle. All of the investing-related materials at my site presume that the conventional numbers and the conventional advice are wrong. I have good new for you, though. The Fidelity numbers are not wrong today. I believe that the conventional numbers give you good in-the-ballpark information when stocks are priced reasonably, as they are today.

The reason why the conventional numbers are often so wildly off the mark is that the conventional advice is rooted in something called “The Efficient Market Theory.” This theory presumes that stock investing is a 100 percent rational endeavor. The reason why you are told that you cannot beat the market is that the market price is assumed to be correct. If investing were a rational endeavor, it would be correct.

The reality is that stock investing is a highly emotional endeavor. There are times (like the time-period from 1996 through 2008) when stock prices go totally nutso. You cannot trust the conventional numbers at such times because they do not include adjustments for overvaluation.

The good news, however, is that stocks are no longer overvalued. Fair prices apply today. It might be that we are going to see another huge stock crash over the next five years (I view this as likely). But the odds are good that, if you are able to hold your stocks for at least 10 years from today, you will end up with a decent return on your money.

My view is that it was a big mistake to take the Fidelity numbers seriously from 1996 to 2008. But today those numbers are probably close to the mark.

Rob

4. Anyone interested in the actual data and studies underpinning the 4% Withdrawal Rate Rule developed in the nineties in response to Financial Advisors previous claims that 7 to 10% withdrawal rates were “safe”, might want to go to this link for a very thorough explanation, using the actual source materials:

When the guest blogger claims: “the 4-Percent Rule at some times overstates and at other times understates the amount needed for a safe retirement; at times of high valuations the true safe withdrawal can drop to as low as 2 percent and at times of low valuations it can rise to as high as 9 percent,” it is the belief of most who respond to him over the years he has been claiming this (including myself) that he is either misinterpreting or misstating the studies findings and/or intent. The question the study set out to find was the single rate that would survive all periods for a given interval, and it turns out that was as little as half of what many advisors were suggesting! That was the purpose and the value of the study. Period. It’s results (if not it’s implications) remain completely unchallenged by competent parties as to accuracy, arithmetic, method, and clarity of reporting the findings.

And finally, the forum at the link is dedicated to a philosophy of investing that is the OPPOSITE of what the guest blogger espouses on his own site. Getting a *full* and balanced picture helps everyone!

Good investing, everyone! I would suggest that you read much, consider the source of what you read, and ask lots of questions!

5. I would suggest that you read much, consider the source of what you read, and ask lots of questions!

That’s a great statement. Old Hand doesn’t know it all. Rob Bennett doesn’t know it all. John Bogle doesn’t know it all. Robert Shiller doesn’t know it all.

My view is that none of us today know it all. We all need to be looking at even the most fundamental investing questions with a non-defensive attitude and with an openness to the other guy’s or gal’s point of view and with a desire to figure out the realities and with the goal of overcoming our economic crisis.

I believe that the Passive Investing model (today’s dominant model for understanding how stock investing works) is flawed right down to the core. The entire thing is based on a mistake. I have a quote from a recent article in Time magazine as the “Today’s Feature” item at my site today. The article states: “Shiller declared in 1984 that the logical leap from observing that markets are unpredictable to concluding that prices were right was ‘one of the most remarkable errors in the history of economic thought.’ ”

That says it. Some smart people made a mistake in the 1960s and 1970s and those people constructed an investing model based on that mistake. They directed hundreds of millions of dollars to marketing the model based on the mistake. People have been pointing out the mistake for 28 years now (the first research showing that valuations affect long-term returns was published in 1981). But few middle-class investors even know today that 90 percent of the investing advice they have heard for the past 30 years is based on a mistake that the “experts” (many of whom are employed by The Stock-Sellling Indsutry) do not want to acknowledge. This mistake has caused more human misery than any earlier mistake ever made in the history of personal finance.

The mistake is the idea that it is possible for a Passive Investing strategy to work in the long term. Passive Investing means sticking to the same stock allocation regardless of changes in stock prices. The entire history of the U.S. stock market (we have data going back to 1870) shows the opposite — that prices have always affected long-term returns. Common sense tells us the same thing — there is no asset class on Planet Earth for which it can be correctly said that price has no affect on the value proposition provided. What the Rational Investors (the Rational Investing model is the alternative to the Passive Investing model) are saying is that stocks are just like every other asset class, that the price paid affects the long-term return obtained and that therefore staying at the same stock allocation regardless of price makes precisely zero sense.

I have called for a national debate on these questions. There are millions of smart and good people who believe with the hearts, minds and souls in the Passive model. There are also many smart and good people who see the flaws in it and who would like to be able to share with us what they know about how stock investing really works. We need the input of the Passives. We also need the input of the Rationals. We all need to work together to make the debate as constructive and positive and civil and warm as it can possibly be.

I am grateful to Pinyo for providing a forum for discussion of these questions. And I am grateful to Old Hand for making an effort to present the pro-Passive case in a civil way (one part that I do not view as being particularly civil is the suggestion in Old Hand’s comments that criticism of the Passive approach is not appropriate at the Bogleheads.org forum — I will discuss that aspect of the question in a separate comment below).

We all benefit from getting the U.S. economy back on track. We all should be working together to do all that we can to make it happen. I respect the Passives and I like the Passives. But I very strongly believe that they have made some huge mistakes that have caused great human misery for millions of middle-class investors and that they have been too slow to acknowledge the weaknesses in the model they favor and too defensive to the efforts of others to subject the Passive model to informed scrutiny.

Rob

6. it is the belief of most who respond to him over the years he has been claiming this (including myself) that he is either misinterpreting or misstating the studies findings and/or intent.

It is not at all clear that this is so. I believe that the public record (The Great Safe Withdrawal Rate Debate is the longest and most controversial series of personal finance discussions ever held on the internet and there are hundreds of thousands of posts in the Post Archives of several dozen discussion-board and blog communities) points strongly in the other direction.

It is certainly true that there are many who have put forward words suggesting that they agree that I have engaged in some sort of “misinterpretation” of the Old School SWR studies (which claim that the SWR is always 4 percent). What’s not so clear is whether even a single one of the hundreds who have expressed such a view was speaking sincerely when he or she voiced those words. The Passive Investing dogmatics have been ruthless in their efforts to block honest discussion of these questions. Many have changed their public expressions of their views after various sorts of threats were advanced as to what would be done to those who posted honestly. I am of course not even a tiny bit convinced that the views expressed subsequent to the threats are the sincere views of those who put them forward.

That said, there is also no question in my mind but that many Passive Investing dogmatics “believe” in the Passive model on some level of consciousness. The leader of the smear campaigns has told me that he lost “well in excess of \$1 million” in the great stock crash. This individual obviously feels that his views cannot prevail in the court of public opinion if honest posting is permitted (otherwise he would not behave in the manner in which he behaves). That indicates a lack of confidence in the Passive model. However, he also “believes” to the extent necessary to put his own retirement money at risk in the employment of strategies rooted in the Passive model. Humans!

We will never know what people sincerely believe until we stop permitting Passive Investing dogmatics to punish those who offer effective criticisms of the Passive model. All of the boards and blogs at which I have posted have rules in place protecting those who post constructively from the sorts of tactics that have been employed by the dogmatics to block honest and productive discussion. My view is that those rules should be enforced and we should all work together to enjoy a fantastic learning experience from this point forward.

Here is a link to an article at my site containing 101 snippets of posts in which my fellow community members have expressed a desire that honest posting on SWRs and on other important investing topics be permitted on the internet:

http://www.passionsaving.com/i.....oards.html

Rob

7. Anyone interested in the actual data and studies underpinning the 4% Withdrawal Rate Rule developed in the nineties in response to Financial Advisors previous claims that 7 to 10% withdrawal rates were “safe”, might want to go to this link for a very thorough explanation, using the actual source materials:

Here is a link to a blog entry in which I offered my reactions to the Boglheads.org wiki write-up re the Old School SWR studies:

http://arichlife.passionsaving.....wal-rates/

Juicy Excerpt: It is obviously not possible for both the Old School studies and the New School studies to be “technically accurate.” Either an adjustment for valuations is required to determine the SWR or it is not. The historical stock-return data shows beyond any reasonable doubt that a valuations adjustment is required. Many experts have confirmed this. For example, William Bernstein, author of The Four Pillars of Investing, has advised any investor giving thought to using one of the Old School studies to plan a retirement to “FuhGedDaBouDit!”

Rob

8. The question the study set out to find was the single rate that would survive all periods for a given interval

If only this were so there would never have been any “controversy” whatsoever!

The Old School SWR studies do indeed do just what is suggested above. They tell us the single rate that would have survived all 30-year time-periods in the historical record. There is of course no dispute whatsoever re this question and there of course never has been any dispute re this question.

The studies are marketed as telling us the safe withdrawal rate. That they do not do. It’s not even a close call.

The historical data shows that the single biggest factor determining what withdrawal rate is safe is the valuation level that applies on the day the retirement begins. The Old School studies make zero adjustment for this factor.

There are millions of people who relied on the demonstrably false claims advanced in these studies and who are likely going to suffer busted retirements in days to come as a result. The studies should have been corrected within 24 hours of the time at which the analytical errors in them were first publicly revealed.

If those “defending” the studies were not aware of the analytical errors contained in them, would there ever have been any objection to the development of the New School studies? Obviously not. The problem here is that the errors in the Old School studies (which follow logically from a belief in the Passive Investing model) are so obvious that it upsets the Passive Investing dogmatics for middle-class investors to learn of them. We are today in a situation where the Passive Investing dogmatics cannot permit honest posting on the errors in retirement studies because to do so would cause today’s dominant model for understanding how stock investing works to topple.

I want to see it topple.

I want people to be able to obtain realistic investing advice.

I of course feel great respect and affection for the Passive Investing advocates from whom I have learned important things about how investing works. But I do not see how it benefits anyone for us to continue to pretend that retirement studies that were revealed as terribly flawed over seven years ago do not need to be corrected.

The day on which the Old School studies are corrected is the day on which all the ugliness comes to an end and the day on which all the wonderful learning experiences begin all throughout the Personal Finance Blogosphere. Once the studies are corrected, the defensiveness goes away. The fatal mistake was the failure of some to understand early on that when numerical calculations are found to be in error, they must be corrected. There are no possible exceptions.

We cannot talk intelligently about investing if we cannot get the numbers right. Getting the numbers right is basic. Getting the numbers right is Job #1. Accepting that we need to get the numbers right gets us back on the path to a wonderful Learning Together experience.

Rob

9. It’s results (if not it’s implications) remain completely unchallenged by competent parties as to accuracy, arithmetic, method, and clarity of reporting the findings.

Here is a link to an article at my site entitled “The Experts Speak on the Dangers of Holding Overvalued Stocks in Retirement”:

http://www.passionsaving.com/s.....ement.html

Here is a link to an article at my site entitled “Community Comments on Using Stock Data to Diminish Retirement Risk”:

http://www.passionsaving.com/retirement-risks.html

Rob

10. the forum at the link is dedicated to a philosophy of investing that is the OPPOSITE of what the guest blogger espouses on his own site.

The very title of the forum gives the lie to this claim.

John Bogle is a hero of mine. It was by reading John Bogle’s book that I discovered the errors in the Old School SWR studies. John Bogle is my fourth favorite investing analyst of all time (behind only Robert Shiller, John Walter Russell and Warren Buffett). John Bogle is the Godfather of the Rational Investing model.

It is true that Bogle promotes Passive Investing. That was a terrible, terrible, terrible mistake. Who among us can say that he or she never made a mistake?

Bogle is a giant who made a terrible mistake. The community that meets at Bogleheads.org should be trying to help Bogle out of a jam. And I think it is fair to say that 80 percent of the community members who congregate at that forum want to be doing just that.

Most community members at Bogleheads.org want that forum to exert a positive influence. This is demonstrated on a daily basis by the posts that they put to the board.

Rob

11. Bernie Maddof doesn’t know it all, John Meriwether doesn’t know it all, Rob Bennett doesn’t know it all, I dont know it all. My guess is that none of us even know the half of it.

The fact is that models were all built on too many assumptions. The Old school studies don’t work, the New School studies don’t work, because all of these were done through anecdotal observations, and the results are coincidence at best, baseless at worst. In fact, most of which have been proven to be either wrong or drastically misleading in later studies. My guess is that Rob has dug himself a hole too deep. Warren Buffet makes mistakes, John Walter Russel makes mistakes, Jim Rogers makes mistakes, Rob Bennett makes mistakes.

Everyone makes mistakes, but it is through admitting of making a mistake and learn from it that separates us from animals. The market “gurus” on tv and the brokerage houses have long been advocating active market timing like what Rob has proposed. It is by following these advices that we have succumbed to insurmountable trading fees cannibalizing our earnings. The truth is the people around Rob have not been informing him of his mistakes. I estimate about 95% of this community want to do just that, but not all of us has followed our hearts and conscience. I believe it is now the time.

Elix

12. The market “gurus” on tv and the brokerage houses have long been advocating active market timing like what Rob has proposed.

If only this were so!

Both the idea that you don’t need to time the market at all (Passive Investing) and the idea that you can be sure of seeing benefits from timing within a year of making the allocation change (Short-Term Timing) are emotional approaches. I advocate Rational Investing, which argues for trying to overcome the most negative investing emotions and to accept that short-term timing doesn’t work and that long-term timing is required for those seeking to have a realistic hope of long-term success.

There have been Rational Investors since the first stock market opened for business (Benjamin Graham advocated Valuation-Informed Indexing in his book Security Analysis, published in the 1930s). The trouble is that it is 50 times easier to promote either Short-Term Timing or Passive Investing, as both possess great appeal to the emotions and most marketing pitches depend on emotional appeal for their success.

It is my belief that things changed when we made middle-class investors responsible for the financing of their own retirements. That represented a raising of the stakes in the stock investing field. I believe that we need to begin teaching middle-class investors what they need to know to be able to invest effectively or see the entire U.S. economy go over a cliff. I don’t believe that we can continue to treat marketing considerations as paramount.

Rob

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