The 25x Rule provides a helpful guideline for estimating the amount of money required for retirement savings. When planning for retirement, numerous factors exist, such as determining the optimal time to claim Social Security benefits, covering healthcare expenses, and effectively managing retirement accounts. This rule of thumb, known as the 25x Rule, offers a broad perspective on your retirement needs as you create your retirement plan.
What Does the 25x Rule Entail?
The 25x Rule is a method for approximating the necessary retirement savings. It involves calculating the annual retirement income you anticipate receiving from your savings and multiplying that figure by 25.
For instance, assume you have determined a yearly retirement budget of $75,000. In this scenario, if $25,000 is covered by Social Security, pensions, part-time employment, or other income sources, you would need to cover the remaining $50,000 using your investments. According to the 25x Rule, you must save at least $1.25 million to safely withdraw $50,000 as income in the first year of your retirement. Additionally, it’s essential to consider that depending on the type of account from which you withdraw the funds, you may be liable for income or capital gains taxes.
Understanding Social Security
Social Security is a social insurance program administered by the federal government. While employed, individuals contribute to the system through OASDI (Old Age, Survivor, and Disability Insurance) deductions. In 2024, OASDI deductions apply to the first $160,200 in annual earnings.
Employees who receive a W-2 form from their employer contribute 6.2% of their earnings to OASDI, while their employer adds an additional 6.2% on their behalf. Self-employed individuals, including gig workers, are responsible for the full 12.4% contribution based on their net earnings.
The Origins and Purpose of Social Security originated during the Great Depression. Social Security aimed to address the widespread poverty experienced by elderly Americans. Over time, the program expanded to include individuals with disabilities, widows, widowers, and their dependents. Social Security is not a retirement system; it serves as a social insurance program, safeguarding the most vulnerable segments of the population from falling into absolute poverty when they can no longer sustain themselves financially.
According to the Center on Budget and Policy Priorities, over 22 million more Americans, including nearly one million children under 18, would live in poverty without Social Security.
To receive Social Security benefits, you must either be a citizen of the United States, a permanent resident or have legal entitlement to a Social Security number based on your immigration status. According to the Social Security Administration (SSA), undocumented workers contribute around $13 billion to the Social Security trust fund every year, but they are not eligible to receive Social Security benefits.
Apart from these basic qualifications, you must have contributed enough to the system or be a qualified dependent of someone who has. To qualify for retirement benefits, you must have worked for at least ten years, earning at least $6,560 annually throughout your lifetime. This ensures you have accumulated the 40 quarters of coverage necessary for eligibility.
In 2024, each quarter requires an individual to earn $1,640. If you’ve never worked, earning $65,600 in a single year ($1,640 x 40) won’t qualify you for benefits because the maximum number of quarters you can earn in a year is four.
Once the work requirements are met, specific additional criteria must be satisfied depending on the type of Social Security benefit you seek.
Types of Social Security Benefits:
#1 Retirement Benefits:
The most well-known benefit is retirement benefits. According to current regulations, you can claim Social Security retirement benefits between the ages of 62 and 70. Calculating your benefits involves a complex formula considering your top 35 years of work history. To determine how much you can expect to receive from Social Security, create a My Social Security account on ssa.gov. This will give you an estimate based on your contributions. Your full retirement age is between 66 and 67, depending on your birthdate. If you take benefits at 62, they will be reduced by 30%, but waiting until age 70 will increase them by 24%.
#2 Disability Benefits:
Social Security Disability benefits aim to help individuals with permanent disabilities. The eligibility criteria for permanent disability are more stringent compared to state disability programs or private disability insurance plans. To qualify, you must have a condition expected to last at least one year, rendering you unable to perform any job for the remainder of your life. Additionally, you must have a work history with earned income for at least 20 out of the last 40 quarters, equivalent to earning a minimum of $6,560 per year for five out of the last ten years or at least $3,280 per year for the past ten years.
#3 Auxiliary Benefits:
Auxiliary benefits are available to dependents of individuals receiving retirement or disability benefits. Eligible dependents include minor biological and adopted children, adult children who became disabled before the age of 22, current spouses caring for children under 18, current spouses over the age of 62, and some former spouses. Often referred to as spousal benefits, these are, in fact, auxiliary benefits. Dependents of living beneficiaries can receive up to 50% of the primary beneficiary’s eligible amount if it exceeds what they would receive based on their earnings history and benefit eligibility.
#4 Survivors Benefits:
Survivors’ benefits are accessible to dependents of individuals who have contributed to the Social Security system and passed away. Eligible dependents include minor children, adult children who became disabled before the age of 22, surviving spouses with children under the age of 16, surviving spouses over the age of 60, and surviving spouses over the age of 50 who became disabled within seven years of their spouse’s death. In addition to monthly survivor’s benefits, eligible dependents are entitled to a one-time lump-sum death benefit. However, this “lump-sum” payment has remained unchanged since 1954 and is currently only $255.
#5 Supplemental Security Income (SSI):
SSI is a federally funded welfare program managed by the Social Security Administration. It operates differently from Social Security programs and is based on financial needs. SSI is available to individuals with disabilities or those over the age of 65 who have a short work history to qualify for Social Security benefits. In 2024, the maximum federal SSI payment is $914 per eligible beneficiary, provided they have other income of $20 or less. In addition to household income limits, beneficiaries must also have total resources valued at less than $2,000. SSI benefits are also accessible to disabled children in low-income families or children residing in hospitals. In certain states, families must apply for SSI in order to be eligible for Medicaid for their children who are in the NICU. It’s important to note that the maximum monthly SSI benefit for those living in institutions is capped at $30.