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. 😉
Random Useless Fact:
When you want to ask a stranger to take a picture of you, it’s a good idea to ask someone you think you can outrun.