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.)

Should we be paying off debt right now or investing? Simple question, but the answer can be complicated by our risk tolerance, retirement plans, and interest rates. But I have developed a system to help with this dilemma.

My proprietary solution is a set of simple equations that allow us to calculate what our financial situation will look like once we’re debt free if we stop making new investments today and use all our savings to pay off our debts.

I call it the Focus On Repaying Debt Or Don’t analysis. Or FORDOD, for short. The purpose is to take 4 financial variables, and use them to determine 3 important numbers that we can analyse.

The 4 variables we need are..
A: How much we can save each month (\$) Includes any debt reduction eg: the principle portion of a monthly mortgage payment
B: Our total debts (\$)
C: Our total assets (\$)
D: Expected annual return on our assets (%)

Once we have those figures we can calculate the 3 important numbers. Their equations are as follows…
1) Number of years to be debt free 😀 = B/(A*12)
2)
Our Net Worth at the time we become debt free = C*(1+D)^B/(A*12)
3)
4% of our assets once we’re debt free = 0.04*[C*(1+D)^B/(A*12)] This tells us if we can retire on our investments using the 4% Rule which is considered a sustainable rate of withdrawal from a retirement portfolio.

Don’t worry if you’re not a math person. There’s a form below you can use to plug in your numbers and get personalized instant results without doing any algebra 🙂 And by the end of this post I hope you’ll realize that although being debt free sounds pretty neat on paper, there’s often a hidden price that we have to pay for the safety and freedom of having no debt, which can cost us millions of dollars in the long run 😕

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The provincial government is giving us the opportunity to balance its budget. This is normally the responsibility of the finance minister but now we can voice our opinions as well.
What a great idea. Unfortunately what I really want to see are the live results of everyone’s inputs because it’s not like they don’t have that data already. Maybe they’ll post it up later with the final numbers but I doubt it. Governments are not known to be transparent.

Even if you don’t submit your ideas you can learn how we’re being taxed, and where those tax dollars are being used on. I’m surprised how much of the pie health and education take up. Health supports the old, and education supports the young, no wonder the working age people are getting taxed so much. Perhaps we should look at alternatives to health and education in Canada. Right now it seems like the waiting list for just about anything is too long. Other developed nations like Switzerland for example, has a 2 tiered health care program so people can either wait for a long time to have an operation, or pay money for quicker treatment. I work at a post-secondary private school. Our students have higher rates of employment than traditional universities, despite students paying the same amount of tuition to graduate. More solutions like these will take the stress off our public system and boost the economy by creating supply where there is actually demand. But what’s good for the economy doesn’t necessarily benefit everyone. I doubt current health and education workers want to lose their jobs. I hope we can find a happy medium to balance the books. In the meantime, save, invest, and continue to take control of your own money.