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.)