The Rule of 300

the rule of 300
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There are countless articles and calculators that will attempt to give you the best possible retirement advice and a projection of how long your money will last. But if you’re looking for the quickest and easiest way to figure out how much you’ll need to retire, then read on.

Pretty much every retirement calculator on the Internet is useless because the only two numbers that you need to look at are the amount of money that you spend during an average month — and the number 300.

After you figure out how much money you typically spend each month (You should already know this!) OR estimate the amount that you’ll need every month in retirement, multiply that number by 300. This is the amount of money you need in order to retire.

It’s that simple.

I made the table below so you could easily figure out the rough amount you’ll need in order to retire without even having to whip out your calculator. This applies equally to retirees of all ages ranging from 25 to 70+.

The Rule of 300

Monthly spendingAmount needed to retire
$0$0
$100$30,000
$300$90,000
$500$150,000
$1000$300,000
$2,500$750,000
$5,000$1,500,000
$7,500$2,250,000
$10,000$3,000,000

Where does your spending fall on this table?

Inherently, if you don’t spend ANY money in a normal month then you don’t need any money to retire. And conversely if you spend into the 5-digit range every month you’re going to need at least $3M to sustain your living habits.

This leave us with a necessary portfolio balance of $0-$3M. The amount you need in order to retire is completely up to you, and is dictated solely by your spending. The younger you are the more time you’ll have to reduce your lifestyle expenses, and optimize your current lifestyle to make 300x easier to accomplish.

How does this math work?

The formula for The Rule of 300 is very simple. It’s basically the 4% safe-withdrawal rate in reverse.

If you’re unaware of this term, The 4% Rule is a generally accepted estimation that allows you to withdraw 4% of your investment balance every year (adjusting annually for inflation). So, if you have $3M invested, you could take out $120,000 during the first year — in other words $10,000 per month.

Let’s do this equation out in long-form. First, we will start with a more modest family that spends $2,500 per month. To account for the family’s annual spending we need to multiply this number by 12 which equals $30,000. Now, to make sure they have enough to retire we need to multiply this value by 25 which brings us up to $750,000.

Now, they are able to withdraw 4% of this $750,000 portfolio in their first year which is $30,000. They can then divvy this money up by month. $2,500 per month (notice that this is the same amount we started with).

As time goes on the portfolio balance will continue to increase as the markets increase. And when utilizing the 4% Rule your portfolio balance should never bottom out. Ever.  So this means that if you had 300 times your monthly spending at age 20 it would last forever. It would work equally as well for someone retiring in their 40s, 50s or 60s.

Here is a calculation that shows the 4% rule in action:

4 percent rule retirement calculator.We assume a 5% rate of return every year. Actually, we assume an 8% rate of return, but we remove 3% to adjust for inflation. This means that we can look at the cost of things in 20, 50 or 100 years in terms of today’s money. The graph above shows that the 4% rule will allow you to withdraw money comfortably for at least 100 years.

The 4% Rule could fail in turbulent economic conditions. But also take into account that as the economy grinds to a halt prices on goods will stagnate or drop. This allows you to effectively live on less while maintaining a withdrawal rate equal to your spending.

This simple math should give you a pretty good idea about how easy it can be to retire early. Generally, people are going to tell you they need millions of dollars to retire. But, you don’t need over $1M until you hit $3,333 per month in spending.

These calculations aren’t going to allow you to upgrade your lifestyle financially after you retire. They assume that you’re going to continue living a modest (or at least an equivalent) lifestyle for the rest of your life. These calculations also don’t take into account that you still have YEARS that you could earn more money (and probably will). A part-time job can offset the necessity of saving 300 times your monthly spending by a lot.

The Rule of More Than 300

You might want to follow the “Rule of more than 300″ if you want to spend everyday on a tropical island.

I’m not going to reinvent the wheel, so if you’d like more information about the 4% Rule, otherwise known as the “Safe-withdrawal rate”. Visit these fine sites:

jlcollinsnh – Stocks — Part XIII: Withdrawal rates, how much can I spend anyway???

MMM – The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”

Investopedia – Four Percent Rule Definiton

Cover photo credits: johnxfire on flickr
In-post photo credits: kevinpoh on flickr
Withdrawal calculator via BankRate: Savings Withdrawal Calculator

30 Comments

  1. Great post! I am 28 years old, live in San Francisco, single, and don’t own a home therefore my current monthly expenses are around $1500. I plan on buying a home down the road and start a family and expect my expenses to increase. Should I look at this chart based on what I spend in my current life situation or what I expect to spend down the line?

    Reply
    • Isabel — If your expenses increase as you start building a family, then your portfolio will have to reflect this new change to retire properly. BUT, if you’re working hard to save as much before you start your family, it should be easy to continue on this path. And if the person that you choose to spend your life with has already started saving it will make it that much easier.

      Reply
  2. Ooh…I like this rule! We spend between $2500 and $3000 per month (with two kids, a dog and a mortgage). I’ve been aiming for $1 million for retirement, and I’m happy to learn that we could do with a bit less than that — we’re a little further ahead than I thought.

    Reply
  3. Yes, this is good — but we also have to look at the power of inflation.

    Your spending will increase over time due to inflation — so if it takes you $2,500 per month to live on now, it will take more than that 10 years or 30 years from now. Not just lifestyle inflation, but real inflation.

    Not as big of a deal over ~10 years or so, but a bigger deal if it will take you 30 years to save up enough money.

    Still a nice rule of thumb though.

    Reply
    • Jenna — The 4% Rule completely takes inflation into account. So someone withdrawing $2,500 per month in their first year might need $2,575 per month in their second year (assuming 3 inflation).

      Reply
      • Hi Johnny, what about taxes? Assuming all of your withdrawls are LTCG (long term capital gains) and assuming the present 15% LTCG rate, does you rule of 4% still hold? Uncle Sam will be collecting 15% off the the top of all of those withdrawls. So if you spend $3000 a month you’d actually need to withdrawl about $3500.

        I suppose if you are withdrawing from a tax advantaged account (Roth IRA) then you can take this out of the equation, but what about non-tax advantaged accounts?

        Reply
  4. “And when utilizing the 4% Rule your portfolio balance should never bottom out. Ever.”

    With all due respect, that’s not correct. The 4% rule can certainly fail.

    Now, the rate of failure goes down dramatically if you are willing to take out side gigs during turbulent economic times and do other things to keep your portfolio from bottoming out.

    But the market is highly uncertain and there are absolutely no guarantees. I think it’s important that you make it clear.

    Important reading. It’s pretty complex, but it’s important to understand your finances deeply if you’re going to take them into your own hands:
    http://www.fpanet.org/journal/CurrentIssue/TableofContents/AnInternationalPerspectiveonSafeWithdrawalRates/

    Slightly more reader friendly version:
    http://financialmentor.com/free-articles/retirement-planning/how-much-to-retire/are-safe-withdrawal-rates-really-safe

    Reply
    • Danny — Failure of the 4% rule was addressed in the post. The main point that dissenters don’t address is the fact that recession leads to a generally lower cost of living. So, the state of the economy will impact your spending, but you can take advantage of times of economic stagnation or failure. Thank you for the follow-on links.

      Reply
  5. What, no 8% rule a la Dave Ramsey?? Because you know according to him you’re going to make 12% on your investments forever and then all you have to do is take 4% out for inflation to get to the 8%!!!!

    I’m joking of course, and I would NEVER recommend that. I’m shooting for around a 3.5% SWR but we’ll see what happens!

    Reply
    • The Trinity Study found that there were specific points where the Safe-Withdrawal-Rate was upwards of 11%. Those days are long gone, unfortunately. In fear of running out of money, I’d stick to the low end. If you want to be extremely cautious about your money lasting, you could use a < 4% withdrawal rate.

      Reply
  6. Enjoyed seeing the ’300′ movie logo, Johnny. Thank you for a very user friendly breakdown on retirement planning. It will be of great help in ” having the conversation” with hubby on why I am so annoyingly frugal!

    Reply
  7. This “special army” of 300 can beat back all of the tough talkers that insist everyone work until expiration. My fear is that I’d take a dirt nap about 15 minutes after announcing my retirement in my mid-60s. Johnny $eed and others are leading a different kind of revolution! Charge!

    Reply
  8. A nice way of looking at the old 4% rule from a slightly different angle Johnny.

    I’m planning on covering half my expenses with some part time work after I quit the day job, so I can use the rule of 150… Sweet!

    Reply
  9. Well it’s been a while since a personal finance blog post had an image that made me laugh out loud! :-)

    I think your “rule of 300″ is such a neat idea because it’s so SIMPLE to digest and calculate. Sure, the 4% withdrawal rate might require some explaining but it’s a really handy way to instantly call up a retirement figure.

    It’s also fun to see how big an effect dropping your expenses can have!

    Reply
  10. The online retirement calculators make me laugh out loud. They never ask you to input how much you will spend in retirement only what you make and how much you have saved. The best one said my husband and I needed 5 million to retire. I practically fell our of my chair laughing. We make good money but that’s ridiculous. I couldn’t even spend that much if I had to. Not every American spends every penny they earn. Live on some and save, save, save goes a long way.

    Reply
    • Sue — Wait a minute. Are you telling me that you spend LESS than $16,000 every month?! We can fix that. Just purchase a couple new SUVs, fuel them up every night and run them while you’re sleeping. You’ll need to eat out every night at Ruth’s Chris Steakhouse as well. Finally, purchase a $700,000 house. And boom, you’ll get your spending up to $16,000 in no time.

      $5 million is such a ridiculous overestimate, unless you’re hemorrhaging money. With a portfolio of that size you’d be able to spend $200k every year. I understand you may need a little extra when you’re older for healthcare, but not Millions of dollar’s worth.

      Reply
  11. The other aspect people who criticize the 4% rule never consider is the fact that you can reduce your spending during a recession for some categories to help offset the recession’s affect on your portfolio.

    Reply
    • It actually doesn’t include Social Security at all. If you’re eligible for it, then consider it a bonus. I plan on being out of the country too frequently to be eligible (more than 30 consecutive days per year).

      Reply
    • One of the eligibility clauses is that you don’t spend more than 30 consecutive days per year in foreign countries. If you keep your travel under that then you’re fine.

      Reply
      • wow…that is news to me. I will have to look for a source on that because I know of several seniors that that travel way more than that and receive SS.

        Reply
        • Excuse my answer. That only applies to certain countries (ie North KoreaKorea, Cuba, etc). Typically you can receive SS even if you’re mobile. I still don’t plan on it being a part of my retirement though.

          Reply
  12. I love the 300 reference. I’ve always done the “monthly expense X 12 X 25″ calculation. I had a “duh” moment reading your post. Not only is it simpler, the association with the movie by the same name just made saving extra cool. I will be using that…often.

    I also like the graphic representation showing that money does not really dwindle over time. It’s tough for some folks to get their head around it. The graph certainly helps bring it home.

    Reply

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