At Finance Friday, we tend to cover things like how to save your money, how to invest your money and how to pay off your debt, but never retirement. It’s great saving up all this money, but how much do you need? How long will it last? And other questions like that, so the Rule of 300 was devised as to show that.
What is the Rule of 300?
The Rule of 300 is also known as the 4% rule. It is essentially where you times your monthly expenditure by the number 300. That number is the amount of money you will need to save before you retire!
Take this for example:
You currently have a monthly expenditure of $3500, and that lifestyle is what you plan to have in the future (ie. you won’t downsize your lifestyle when you retire, nor do you increase your lifestyle!)
So, for you to maintain that lifestyle, you will need to follow do this:
$3500 x 300 = $1,050,000
So, this means that you will need to save up $1,050,000 in order to maintain your current lifestyle.
But that $1,050,000 isn’t sat in just any old savings account…
Invest it!
Instead of saving it in a savings account, you’d be better off investing your money, allowing it to compound over time, even whilst you are in retirement!
You don’t need to be a Warren Buffett-level investor to do so either! Simply put your money into S&P 500 index funds (which is actually what Warren Buffett recommends to those looking to retire this way!)
By investing it in S&P 500 index funds, you allow yourself to not only to take the hands off the investing, but also tackling the main issue of inflation.
Obviously, no one, not me, not Warren Buffett can predict where the market goes. It could go up, it could go down, it could sideways for all we know!
However, it is repeatedly shown by historical analysis, that the S&P 500 regularly beats the market, inflation and even some of Warren Buffett’s stocks!
During retirement
So, you’ve saved up religiously since you were 20 (or maybe even younger!) You have saved up your $1,050,000 from earlier, now what?
Well, you aren’t going to just pull out all of your money at once, no. You are then going to transition to the 4% rule, the rule that the Rule of 300 is loosely based off.
Basically, in the 4% rule, it states that you withdraw 4% of your portfolio per year. So, going back to our example from earlier, you will need to withdraw $42000 per year, or your $3500 that you are currently earning.
Obviously, if your portfolio doesn’t grow during your retirement, your money will eventually run out. After all, the Rule of 300 only accounts for 300 months of retirement (or 25 years!)
This means that if you retire at 65 (which is the current retirement age, and your money doesn’t grow at all, your money will run out when you are 90!)
Obviously, it is quite easy to get 4% returns (or more!) on stocks (with the average being 7%!) This is even easier with the S&P 500, as it tends to grow by almost 10% a year!
The full perspective
Since 1998, the Rule of 300 has been the go-to, default retirement plan for many people, even some of the biggest financial planners are now taking notice of this!
However, some have noticed a couple of flaws:
- What about recessions? The Rule of 300 doesn’t take into account pre-recessions and post-recessions. It is generally considered that investing when the market is down is the best way to get extra ahead when investing. After all, when everyone else is selling, the price is down, so you can get the best bargains.
- The rules have changed. No, I don’t mean that the original authors of the Rule of 300 have sat in some dimly lit bar, discussing the necessary changes. No, rather it’s the opposite. There has been no changes to the Rule of 300 since it was authored in 1998. But, as you can see, this is not the 1990’s, and things have definitely changed. In the 1990’s bond rates were high, where today’s are not.
- Other expenses. The Rule of 300 doesn’t take into account the fact that life happens. Stuff that you hadn’t planned on happening, happens. This leaves you (and your retirement fund) exposed to being wiped out after a couple of months of ill-health or some other costly expense!
However, despite this, the Rule of 300 is by far the best retirement plan for everyone to aim for!
Thibault’s views
Personally, I would recommend the Rule of 300 to anyone who wants to listen!
I believe that it allows for two main things- leaving behind something for your children and living your life to the fullest, even whilst you are retired.
I love how this plan is designed to allow you to live your life as you do now, even when you’re 75! It also takes into account inflation, the rise in the prices if goods and services, which a lot of other retirement plans don’t cover entirely, or even barely!
I love that it also allows you to become wealthier as you get older. If you can stay to only withdrawing 4% per year, and continually getting more than 4% as a return on investment year on year, you will actually get wealthier. This allows you to give more of your money to your children, grandchildren and even your great-grandchildren when you depart this world!
I also love how it advises you what to invest in. Most other retirement plans merely advise you to: “invest” and that is it.
Yet, the Rule of 300 tells you exactly what to invest in 60% stocks, comprising of mostly S&P 500 index (plus other index funds like the FTSE 100 if you’re feeling up for it) and 40% bonds (with a mixture of government, state and municipal bonds).
Whilst it does have some glaring flaws, it is designed in such a way that you can negate those by following the latest business news, staying healthy and always thinking, three, four or even five steps ahead!
Have you ever used the Rule of 300? Would you ever recommend it to others? Tell me in the comments!
