Retirement Number and The Rule of 300
The common question that comes up when people think about retirement is how much money do you need to retire comfortably? This is sometimes known as the retirement number. It’s a dollar figure that essentially represents financial freedom. 🙂 It’s important to realize that there isn’t a precise answer to this question because the retirement number is a moving target that changes all the time. However there is a general guideline that many financial experts use. It’s called the rule of 300.
The rule works like this. Imagine how much your average monthly expenses would cost if you retired. Then multiply that number by 300. The answer represents how big your retirement nest egg should be before you retire. This idea works because it’s the inverse of the 4% rule. Retirement Number = Monthly Expense x 300
Yay! Now you know how to calculate your retirement number. 🙂 But it’s important to realize this number only points you in the general direction of your investment target. It may be even way off from how much you actually need to quit your job. But at least it gives you a starting point to knowing how much to stash away into a RRSP or 401(K).
Why is the Retirement Number important?
By having a rough estimate of your retirement number you can gauge how much longer you still need to save for retirement. There are plenty of retirement calculators on the internet that you can Google. Most of them require you to input some probable assumptions and then they give you a result. But the 3 main factors that determine when you will retire are…
- Your current retirement savings (including all RRSP accounts and defined contribution pension balances.)
- Your rate of savings per year.
- Your expected rate of return on your investments (after inflation.)
For example, let’s say you are 30 years old and your retirement number is $1,000,000. You currently have $100,000 in savings. You can put away $12,000 a year. And you expect to make 5% return on your investments over time. By using a retirement calculator we can determine that by the time you’re 57 years old (27 years later) you will likely become a millionaire and reach your retirement number. You can download this easy to use retirement calculator (Excel file) I put together. Just replace my three green numbers in the spreadsheet with your own to get an idea of how many years it will take you to reach your own retirement number.
By combining the retirement number with a simple retirement calculator we can easily understand where we are today, where we’re going in the future, and how we can get there. 🙂 We can either decide to work longer, or increase our savings rate. We can see how the numbers correlate with each other and make informed decisions about when and how we want to retire.
When it comes to retirement you have to make your own plans. After all, no one will care more about your golden years than you do. This is why it’s important to plan ahead – because in the end it’s going to be your ass on the line. 😛
A more specific retirement number will require other considerations. For example, if you expect to receive $1,000 each month from some sort of government or private pension in retirement, then your retirement number should be $300,000 lower, because $1,000 of your monthly spending will already be taken care of. 😉
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I figure a paid-off home, $1 M invested and some pension money from my company should do it. Not far off the monthly x 300 value and other retirement rules of thumb like to replace 50-70% of current income.
That sounds like a great plan. And once CPP benefits kick in you will have even more retirement income to spend 🙂
Retirement numbers cannot be cookie cut unless you consider yourself one within the center of the herd… There are so many personal variables able to skew the calculations… based on my wife and I’s data set I am predicting we will be more than comfortable maintaining our 2 owned homes and our current lifestyle with about $1.5M investable assets… Others have said it is too high and yet others have said it is not even close to enough… My thoughts, train yourself to spend less than you have coming in, learn to do things for yourself and always keep a clear, open mind when everyone else panics. Cheers, and PS to Mark above, I’m still working on it. I’ve learned it is far easier commenting than writing ones collectively learned thoughts, but it is coming…
With a $1.5 million portfolio you can safely live off $5,000 a month for the foreseeable future 🙂 Not having a mortgage helps a lot to keep expenses low.
Hmmmm, that puts us around $1.5M
Dang it, back to the salt mines.
That’s pretty normal. My figure is about $1 million, but I’m currently a single person household. I can easily see my retirement number going up to $1.5 million or more with a family one day 🙂
That’s a decent place to start for most people but it’s definitely not the be all end all, I know that’s not what you were aiming for. I prefer to look at cash flows. Once my passive income exceeds my monthly expenses I’m technically free to do whatever I want besides work. Although I’ll be adding at least some cushion in there.
I think I’d be more comfortable with a cushion as well, just in case of unforeseen circumstances 🙂 Cash free is probably the better way to perceive retirement. Capital and yield can be misleading, but cash flow usually tells a more specific story.
At 300 time monthly expense in invested capital, you can live indefinitly making only a 4% return. It’s a good target for people aiming at early retirement.
However there are plenty of people that will work till they are 65 and don’t necessery care about leaving a financial legacy. These people don’t need as much.
Yup. Everyone has a different end goal in mind. For people who don’t have kids they would need even less money to retire 🙂 Too bad we can’t take our money with us when we move on. Life is too short. We just have to try spending our money while we still can, but be prepared to live to 90 or older lol.
Why don’t you rent your condo? Rooming with a couple college kids. No mortgage expense from condo?
That’s a great idea :0) It’s one of my contingency plans for if I need to make more income. I believe I can get at least $600 a month for one room, or $1200 for both rooms. I’m not currently renting out my place because I like the freedom of living by myself and value this more than the potential income I’m not making. But I’m open to being a landlord in the future if circumstances change. 🙂
Renting out your place would be a great idea for getting some more side incomes…but you do lose some privacy and the freedom of living by yourself.
When you are single, still in your twenty, just got out of collage, still living like you are on college budget, then it should be okay to share. However, I do understand the privacy issue. You got to live some, otherwise there is no motivation to keep going. 🙂
Guess I just need $1M to retire.. although I am aiming for that and having a condo completely paid for so that my living expenses go down.
Housing is the largest expense for most people. Having a paid off home would make retirement a lot more enjoyable : D
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