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Quick Start Guide To Stock Investing
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There are countless models you can use to calculate the amount of money you need to retire comfortably in your golden years. But if you’ve ever been overwhelmed by the many different methods out there and the complex calculations used, not to worry because there’s one quick and simple way to estimate how much you need for retirement: the rule of 300.
Simple take the average amount you spend every month and multiply by 300. That’s it!
So if your average monthly household expenditure is $5,000, then you need $1.5 million to retire (5,000 x 300) and that amount should last you for the next 25 years. So if you retire at 65, your retirement fund will last you till 90 — which is a pretty nice time to go.
As finance blog, Johnny Moneyseed, pointed out, the rule of 300 is based on the 4% rule in retirement. The 4% rule refers to your withdrawal rate: the annual percentage amount you withdraw from your investment portfolio when you retire.
So if you have $1.5 million in your portfolio, you withdraw 4% a year to use in your retirement.
So in your first year, you withdraw:
$1.5 million x 4% = $60,000
Which works out to exactly $5,000 a month for you to spend.
Yes, we all know that the price of goods and services rise in price over the years, so you need to factor inflation into your withdrawal rate every following year as well.
So if inflation in growing at, let’s say, 4% a year, then your second year’s withdrawal amount is $62,400 (60,000 x 104%). Your third year’s withdrawal amount is $ 64,896 (62,400 x 104%) and so on and so forth.
So the question now is: how does the rule of 300 and the 4% withdrawal rate keep up with the pace of inflation?
Simple. It assumes that your portfolio also grows in value every year – at least 4% p.a. as well, in fact. So if your portfolio grows by 4% a year, inflation is at 4% a year, and you withdraw 4% of your portfolio for spending every year, theoretically, the rule of 300 of will last you comfortably for 25 years before your funds are all withdrawn.
Source: Four Percent Rule
Of course, if our portfolio grows by more than 4% a year, then your funds will last longer than 25 years. And if you’ve been reading this site for some time, you know that getting anything above 4% p.a. is very achievable; REITs alone give you a consistent 5-8% yield per annum (even higher if you buy at the right time!). Take a look at our S-REIT data table to see what we mean.
The 4% rule was first mentioned when a paper, Retirement Savings: Choosing a Withdrawal Rate that is Sustainable by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, was published in 1998. Since then, the 4% withdrawal rate has been used as a rule of thumb for retirement planning.
The 4% rule and the rule of 300 is easy to use but, of course, when any model is that simple and straightforward, it can’t take into account every possible scenario that might occur in your retirement. For example:
The rule of 300 is a great way to find out how much you need for retirement quick and easy. If you have no idea at all what you need for retirement, you can use the rule of 300 right now to quickly find out how far away (or near) you are from your retirement goals.
At the same time, you probably want to factor in additional possible scenarios (medical care, market recessions, etc.) just to make sure you’re on the safe side. While it’s great to have too much money at the end of your life, nobody wants to have too much life at the end of money! So use the rule of 300 as a simple rule of thumb to get yourself started on your retirement needs and work from there!