The Rule of 300 is a shortcut that enables you to estimate how much money you’ll need for retirement or to achieve financial independence.
Even more excitingly, it enables you to estimate what any particular line item in your budget will require in terms of capital funding.
That’s right! The rule of 300 turns amorphous future you into a flesh and blood person with their own wants, needs, and bank statements.
And if future you wants – or needs – a monthly subscription to a luxury hot chocolate delivery service, then the Rule of 300 will tell you how much you’ll need to have saved up to pay for it.
Most of us find it hard to imagine paying for stuff several decades hence. But the Rule of 300 bends the space-time continuum to make it easier.
Basically right but specifically wrong
Let’s get one thing straight upfront. The Rule of 300 is not a scientific law that can’t be broken. It will probably always be off a bit. It’s just a rule of thumb.
Some of the assumptions behind the Rule of 300 are open to debate.
Moreover, thinking we can predict exactly what we’ll be paying for in 30 years’ time – from robot insurance to our annual getaway to the moon – is delusional.
But as always with investing: what’s the alternative?
All forecasting methods have downsides. Few compensate by being as simple as the Rule of 300.
We’ll return to the caveats later. Once you know what assumptions you disagree with, you can replace them with your own guesswork.
Let’s first outline the rule as it stands.
What is the Rule of 300?
The Rule of 300 is dead simple. To use it you need only two numbers – and one of them is always 300.
Take your monthly spending. Multiply it by 300. The result is how much you’ll need to have saved up to keep living like you do today after you quit your job.
Let’s say you currently spend £3,000 a month.
£3,000 x 300 = £900,000
The Rule of 300 says you’ll need £900,000 to quit work and still pay your bills.
(Or to tell The Man to go hang. Or to safely smirk in meetings. To swap your job to do something less boring for money instead. Or to keep loving your job with a safety buffer. You decide!)
Be sure to multiply 300 by your monthly expenditure today. Not by your monthly salary, or a guess at what things will cost in 20 years, or by two-thirds of your income, or anything else.
Simply enter your expenditure as it stands. The Rule of 300 tells you what you’ll need to have saved to keep spending this amount from your capital. (Probably!)
Do not include any regular ISA or pension contributions in your budget. For the purposes of this calculation we’re assuming you stop saving and start spending.
A spartan guide to using the Rule of 300
The Rule of 300 is the easiest maths you’ll ever do in personal finance. But to save you even more bother, here’s a table that shows how much you’ll need saved according to the Rule of 300, based on various monthly expenditures:
| Current spend (monthly) | Capital required |
| £750 | £225,000 |
| £1,000 | £300,000 |
| £1,500 | £450,000 |
| £3,000 | £900,000 |
| £5,000 | £1,500,000 |
| £10,000 | £3,000,000 |
Source: Author’s calculations
Depending on your lifestyle and your penchant for caviar and avocado on toast, those numbers may seem dauntingly high or very achievable.
But are you in the “HOW MUCH?” camp? Then the Rule of 300 is extra useful. It helps you see what your monthly spending habits will cost you in capital terms.
Let’s say you spend £12 a month on Amazon’s music streaming service. Multiply that by £300, and voila! You can see you need £3,600 saved today to keep the music playing indefinitely.
Not so bad, perhaps. However you may have other more onerous commitments:
| Spending | Monthly cost | Capital required |
| Gym | £30 | £9,000 |
| Premium AI tool | £50 | £15,000 |
| Golf club | £150 | £45,000 |
| Weekly meal out | £250 | £75,000 |
| Fancy car on PCP | £500 | £150,000 |
| Monthly mini-break | £800 | £240,000 |
Source: Author’s research (and bills)
I’m not judging. If your idea of retirement bliss is playing golf every day, then something has gone badly wrong if you’re not planning on paying for golf club membership.
However by looking through the lens of the Rule of 300, you might be motivated to cut back those things you don’t care about so much. This way you can reduce how much you need to save for financial freedom.
Maybe you were happy paying £10 a month for a Disney+ subscription when your kids were young. But now they prefer YouTube and you’re done with the Star Wars spin-offs.
Cancel the Disney subscription and that’s £3,000 less you’ll need saved up before you can declare financial freedom.
(Obviously you should be doubling down on your Monevator membership, though. We’ll keep you on the straight and narrow…)
The safe withdrawal rate (and the caveats)
The maths behind the Rule of 300 is based on a safe withdrawal rate (SWR) of 4% a year.
As you probably know, the SWR is said to be the money you can spend every year from your portfolio without (too much) risk of it running out before you die.
Here’s how the Rule of 300 works. Let’s say your monthly expenditure is £2,000. Over a year that’s 12 x £2,000 = £24,000. To find the capital required to fund that with a SWR of 4% we must solve (4% of Capital = £24,000) which is equivalent to (Capital = £24,000/(4/100)) which works out at £600,000. Alternatively, the Rule of 300 says multiply £2,000 x 30 0= £600,000. Ta-dah! Same!
Now, to say the safe withdrawal rate is controversial is an understatement. It’s the personal finance equivalent of the Kennedy assassination. People take it to mean different things, some of which may be contrary to the original research.
Some people are sceptical because it’s based on US investment returns for starters, which have been strong versus the global average. They say 4% is too high.
Others believe that the strong equity returns we’ve enjoyed for over a decade may mean future return expectations (and hence the SWR) should be lower.
And yet others believe 4% is too pessimistic. Bond yields have risen a lot. And anyway, the 4% rule was always too stingy in most scenarios, they argue.
Newer thinking – and our own Accumulator – even claims the SWR strategy can be improved by holding extra assets and using a variable withdrawal strategy.
Finally, some investing Luddites like me presume we’ll never touch our capital, but rather live off our income. We often coincidentally target an income yield of around 4%, even though the SWR research was based on spending everything.
Roll your own Rule of Whatever
I’m not proposing to win the SWR debate today. Just know that you can tweak the Rule of 300 to suit your own beliefs by reworking the maths to suit.
- Want to target 5% a year as your withdrawal rate? Then you can use a ‘Rule of 240’ to estimate how big your pot must be.
- Think 3% is more like it? For you it’s the ‘Rule of 400’.
Personally though, I’m sticking to the Rule of 300.
You’ll read all kinds of authoritative-sounding comments about what is the best number to use for either the SWR or as a rule of 300 multiplier.
Reflect on them, certainly. But understand that nobody knows, because we can’t be sure how our investments will pan out, how long we’ll live, nor how much money will really be required in the future for a decent standard of living.
Anyway, it’s only a rule of thumb. Keep it simple, Sherlock.
Not one rule to rule them all
Despite my rather analytical education, I’m not one for precise modelling in anything other than the underwear department.
Personally I don’t track my expenses or stick to a budget. I prefer to keep a rough idea of cash flows in my head.
I’m also not one for working out the exact amount of capital a person needs to target for some potential retirement in 23 years and three months’ time.
Back when I was still on my path to FIRE, I did sometimes look at what was needed to replace my income, but only as a ready reckoner. (This method targets pre-tax salary, unlike the Rule of 300’s after-tax spending. Both have their uses.)
I’ve nothing against precision, if that’s your bag. There are pros and cons to most approaches, and we can all learn from each other.
However even if you’re more particular than Dr Spock, note that the Rule of 300 demands zero effort in your everyday thinking.
You may have a 30,000-cell spreadsheet at home in the lab, but the Rule of 300 can still be a useful shortcut.
Much better than nothing
Most people don’t even have a financial plan written on the back of a napkin. They haven’t the foggiest what they’ll need to have stashed away for when they no longer receive a regular pay cheque.
Even high-net-worth individuals can seem deluded, while many of the less wealthy appear to think they’ll enjoy round-the-world cruises on the back of saving £50 a month.
At the other end of the spectrum, some people assume they’ll need so much money put away that ever stopping working is unrealistic.
Does any of that sound like you, or someone you know? Then the Rule of 300 can be a good start in getting a grip on things.
I repeat, it’s not a scientific law.
But in terms of changing how you think about your own financial needs, the Rule of 300 might be as significant for you as that falling apple was for Sir Isaac Newton!
Where is the 300 x monthly capital invested?
Though SWR proves that investing is half data mining and half art You must plan. “Ignoranti, quem portum petat, nullus suus ventus est.” Seneca
Awesome run down of the safe withdrawal rate. I like the application of the “300x rule” for monthly expenses (vs the “25x rule” which applies for annual expenses).
@allthegoodnamesaretaken — That’s a big question for another day. Read the rest of this site for some ideas. 🙂
I have the opposite problem. I might consider £1800 for a lifetime music subscription, if I trusted the counterparty would be there for all of my lifetime and not take the mickey. But I absolutely can’t bring myself to pay any sort of monthly subscription for things like that.
Fun (for me) fact. Newton didn’t get giddy about the apple because it fell on his head. He got giddy because the tree grew with a crooked trunk on sloping ground. Normally apples fall parallel to the trunk and perpendicular to the (local, flat) ground (which is towards the centre of mass of the Earth)
The apples from this tree fall towards the Earth, but not parallel to the tree truck nor perpendicular to the (local) ground. That was what triggered the thinking about what gravity actually was (I figure, I wasn’t there).
I’m definitely using a rule of 400, for various reasons. That said, the first conundrum is whether to include rent in the expenses.. that’s the difference between a $400k figure and $1.2m.
“the first conundrum is whether to include rent in the expenses.. ”
Why is it a conundrum? Do you expect to end your days living in a tent in the woods?
Or perhaps to inherit a house?
Like it, but only because I can fit my financial projections comfortably into it. Can you imagine if this was “national knowledge”, as it probably should be? There’d be riots in the streets as people looked at their current spending, multiplied by 300 and compared with their pension pot. In fact, isn’t the average pension pot in the UK around 50k? In which case, most people are living on around £166 a month in expenses and are therefore sorted.
Both have non-zero probability, but ideally in a freehold home. Whether that happens or not has a fairly large bearing on future cost of living.
This rule of 300 is a fantastic rule of thumb, but conversely it’s enough to make you want to leap off a cliff if you’re coming to retirement planning a little late in the day.
I have a small pension pot, but have seen the light and I’m trying hard to fix it, but assuming I was starting from scratch today, the rule of 300 would be terrifying.
I’m 42. Assuming I will retire at 67, that gives me 25 years to save. As a family of 4 with school-age kids, we spend more than £2k per month, but I reckon we could get it down to that if we really tried. As you say, that would mean I need £600k. If 4% is the SWR, then I’m going to assume the same growth rate for my savings over the 25 years I save. A quick online calc shows I’ll need to save £1168 per month (£14k per year) for the next 23 years to accrue a £600k pot, assuming 4% growth. Not impossible, but we’d need to cut back a lot more than we were hoping to, which is upsetting – we both work hard and only live in a 3 bed semi as it is! I have a good car but it’s 5 years old so we don’t exactly splash the cash…
Anyway, if it helps anyone else’s sanity, have a look at firecalc.com. The basic premise is that FIRECalc assumes you’re content not to leave any inheritance, and you’re happy to spend it all as you head towards the grave. You keep spending, but month in month out whatever is left is still generating an income, albeit progressively less as each year goes by. The idea is to work out how likely it is that you will still have any money left when you die… You have to answer all the figures across all the tabs at the top, i.e. how much you have now, how long you want to plan for (58 years for me, i.e I’m planning to live to 100), what year you will retire (stop saving) etc etc etc
I know it’s based on US data, and takes some thinking to get your head around punching in the numbers, but it’s worth a good look over. Using the same example as above, i.e. starting with zero in the pot today, but saving £500/pm (£6k per year) at 4% for the next 25 years, then start withdrawing in the year 2042 for 33 years, ie until I’m 100 in 2075, BUT also adding in a state pension (£159.55 per week), FIRECalc shows I have a 97.8% chance of not running out of money… They base this on historic stock market performance data for as many equivalent periods they have data for (there were 89 possible 58 year periods to compare against, in my case). To be fair, I also had to set the spending plan to “Bernicke’s Reality Retirement Planning” to make saving £500pm work for me, but that spending plan is based on research that shows your spending drops by 2-3% each year between the ages of 56-76, which doesn’t seem too outlandish a presumption to me.
For what it’s worth, I know there’s a lot of flaws with this approach, not least that I might be screwed if I live past 100, but if £1168 per month makes me feel like jumping off a cliff, this calc helps me step back from the edge a bit. I’m somewhat reassured that £500 per month has a reasonable chance of saving me from a poverty stricken retirement. The numbers say £550 per month returns a 100% chance of success, although we all know that ‘past performance is not a reliable indicator of future results’… Maybe I’ll cut back just a tiny bit more and try for £600/pm, just to be safe 🙂
Great article! I’m also more than 300x as my rule – 425 is my number based on a 2.8% SWR.
“isn’t the average pension pot in the UK around 50k?” There was a stage when all of mine were under £20k. But then I had seven of them.
@Mr C One problem with this 300*current spending idea is that your future spending will be very different in 25 years. Your children will be earning, your mortgage paid off, so your spending will be greatly reduced, but you can’t assume the difference can all be saved, as you may be well off your peak earning potential as you tire and your skills fade.
Its a lot more useful as a “Do I Have Enough to Retire Now” figure than as a planning tool when contemplating distant retirement.
You could always ask what your parents spend, as you’ll be in the right socioeconomic class, and can modify for different tastes.
Ooh I like this Mr Investor! It actually makes sense to real people as well as Monevatorians…
Is this something you’ve created yourself or is it based on work elsewhere – aside from the 4% withdrawal rule..?
By the way, you might want to put a ‘hard’ (or maybe ‘difficult’?) in the article’s 3rd paragraph, and a ‘you’ in the line under the ‘Author’s research (and bills)’ table.
No charge for my proofreading skills!
Then there’s the rule of 10,000. There’s about 30 days in a month the daily amount of £1 spent on avocado smash on toast requires an investment pot of 30 x 300 which is roughly 10,000. So every 10k in the pot gives a £1 a day. Maybe I’ll skip the avocado.
Two obvious problems, both of which can be worked around I think. Firstly spending is very uneven throughout the year, I might spend a chunk of money on a holiday one month and be very frugal the next. You’d need to find your monthly average which is doable but tricky.
Secondly, and arguably a bigger problem, spending is very uneven throughout your lifetime. I would guess most people probably spend a lot of money in their 30s/40s/50s when they’re getting married, raising kids, paying mortgages etc. So it’s quite hard to figure out what exactly you need to have saved up.
Still it’s better to have a plan and a formula to work with than nothing at all.
I hadn’t heard of this before, useful. Some spectacular language in the article so as entertaining as usual. I have just just realised I am in the 400 camp, never knew that. Take monthly outgoings, subtract known pensions and multiply up.
Aha! I thought I had come up with the concept of the rule of 300 (maybe I did, it has been in my NW spreadsheet for 3+ years now).
I agree with wephway – what I do is to calculate my SR for the month (anything not saved must have been spent) and this gives me my expenses. I then multiply the median value by 300 to give me my ‘number’.
I agree with Wephway, I think it’s better to focus on annual expenses than monthly, as too many items can get overlooked or minimised when thinking about a monthly budget. The human mind has so many ways of hoodwinking itself, I think we need to give it as much help as possible!
NB I think this article omits TAX and retirees who want a reasonable standard of living will need to pay it, so I suggest increasing the multiplier. Nigel
Thanks for the post. I think this is a helpful new take on the 25X rule, but I don’t think either of the two sit entirely comfortably with your timely discussion on sequence of risk at the weekend. I know you included plenty of caveats, and maybe it’s just me being irrational, but it is a concern.
As stated in the article, this is based on the oft-quoted SWR of 4%. I think I’m right in saying the SWR research was based on a 30-year retirement? As many early-retiree hopefuls read this site, does anyone know if research has been published on SWRs over longer timeframes?
State Pension helps. If you qualify for the full one, that’s almost £700 a month, or £210,000 of your pension pot already taken care of.
@Pete –
A lot of people in internet blogoland are very fond of ignoring any accrued SP in their calculations, normally because of gloomy thoughts on ageing population etc.
It’s not a bad idea (because ignoring it provides a potentially massive upside to your eventual retirement ‘pot’). That said, less moneyed Monevator readers (myself included) definitely keep sight of expected income from SP at 6x.
Treating SP the same as any of my other investments, even the NI years I have accrued by my mid-30s are worth £94.93/week in SP, or over £120,000.
The rub is what to do for income until I reach 68!
@Scott – Take a look at: https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
If you’re looking at more than 30 years, you need to increase your equity percentage and/or decrease your withdrawal rate.
Some very interesting comments here.
I like the ease of working with monthly spending – somehow it seems easier to picture than a more ‘distant’ annual figure, but I can understand the advantages both ways.
I do think that maybe the 300 monthly multiplier is a little low though, and if one took the annual approach, a 30 multiplier would give a 360 monthly equivalent (or 3.33% ‘withdrawal’), which seems about right for me…
What I would like to see is a discussion regarding the most common situation facing many retirees. A SIPP, ISA, SP, perhaps a company DC pension, and also a company DB pension.
This mish mash makes it difficult to make sense of the “100 minus your age in stocks, the rest in bonds” type of advice.
Is my DB or state pension a bond? or nearly a bond?
What’s the SWR now?
Comments very welcome
The problem with monthly expenditure is that its easy to miss annual expenses like holidays and insurance premiums. The problem with annual expenditure is that you can miss big items like cars and building costs. I doubt many people think of “new roof” or “daughter’s wedding” as applying in their monthly budget.
I know a lot of FIRE enthusiasts are keen expense recorders, do any have 5 year records that might indicate the proportion of expenses that occur on different timescales.
I’m still working along the lines of constructing a portfolio that will support a 4% drawdown on average natural yield alone, with distributing ETFs and investment trusts. Add in a two year cash buffer to cater for a crash and dividend cuts.
But the drag of govt bonds will be a dilemma. Not so much now as I intend loading up on short dated bonds until I get to 55 to fund my 25% tax free lump sum. But after taking that, will need to rebalance – I guess it depends on how bond yields are looking in near enough a decade from now.
@JB – My forensic expenses spreadsheet stretches back to Jan 2010, but I still don’t think it solves your problem. Expenses are simply inherently unpredictable. For sure, month by month the variation is huge, but unfortunately it still exists year on year to a lesser, but still significant, degree
@SP – I’m in the process of selling up the BTL portfolio and looking at how to replace that income with (hopefully) a better yield – any info you are willing to share on the ETF/IT front would be *very* gratefully received
@The Borderer — I’d treat the pension income as baseline income (or a reduction in forecast expenditure) and exclude from the investment calculation altogether. The right to receive the income is a valuable asset, but not one that can be rebalanced or change in value much. You might treat implied rent on a house that you own fully the same way. You might treat mortgage payments as the exact opposite.
The others are just wrappers for the investments — the portfolio should be looked at in the round. You can do a little around the edges to make the right wrapper house the right asset, but there’s limited benefit to this compared with sensible allocation and rebalancing.
I agree with Mathmo, I see my SP and DB pensions as reducing my income needs. As for the effect on asset allocation, my view is that if you have a good proportion of expenses covered by guaranteed income, you can take more equity risk. The reason why you might need equity risk is that your defined benefit/state pensions are likely to fall behind real inflation rates over the longer term (I don’t think CPI bears much resemblence to reality!)
This is a great rule to help illustrate to folks not that educated on financial independence. I always tell folks take 25x your annual expenses, but 300 times monthly expenses is much easier to remember. Folks can probably also relate to this as most have a better idea on monthly vs. annual expenses.
@Mathmo,@Vanguardfan, – I’ve always taken the NPV of anticipated cashflows from pensions and considered this as part of the ‘bond’ (or fixed income) element of my portfolio. So as Vanguardfan says, automatically increasing the non bond proportion of my portfolio. But nowadays I’m not so sure.
The way I see it, the purpose behind diversifying into various asset classes is to provide a ‘balance’ during market ups and downs. However, pensions will never change irrespective of market movements, so that the diversification benefit is lost if I consider them as bonds.
Therefore I’m increasingly of the opinion that the pensions should simply be treated as reducing my required withdrawal and the rest of my portfoio diversified as if this is all there was.
A quandry.
@Borderer: I look upon our house as equity-like and our DB & state pensions as bond-like but it isn’t a big deal since (i) both are huge, in the sense of being far more valuable than our investable assets, and (ii) are unchanging until death or near-death intervenes.
What is important about them is that they are (a) in sterling, and (b) either indivisible or expensive to divide, and (c) illiquid. So that tells me what to invest our dosh in: stuff that is neither equity nor bond (a bit of gold, for instance, in a SIPP) and stuff that is foreign, liquid, and easily divided: so largely equity, e.g. as tracker funds, and perhaps an ETF of TIPS too. We won’t be buying a nice little piece of woodland, a small Scottish island, or a “holiday home” in Spain, nor lots of fine claret. And then it’s fingers crossed.
Oops: and I should add – we keep more cash than The Investor would approve of. Currently it’s all sterling, which may not be too wise.
@dearieme – thanks for that.
But my quandry arises from this:
My understanding that the famous 4% rule (or any other SWR for that matter) is derived from an x% Equity, Y% bond portfolio mix. For the purpose of this discussion, gold, property and commodities (or fine claret :-)) can be set aside.
I think Bengen’s 4% rule was based on 50/50 Equity/Bonds, so consider the following:-
If the NPV of cashflows arising from pensions is (say) 50, and I treat this as a bond. And the rest of my investments of 50 are entirely in equities, then I’m 50/50 Equities/Bonds. A SWR of 4%. This would give me a safe drawdown of 4 (2 from pensions, 2 from equity performance).
But if my pensions are not to be considered as bonds, then I’m 100 Equities, albeit for a drawdown requirement of 2 (as 2 is coming from pensions).
Does this represent a SWR? Or do I split my remaining portfolio into 50 equity/50 bonds?
@The Borderer I consider my deferred DB pension as a bond. Investment wise I am 100% into equities like some 21-year old at the start of his working life, despite the fact that I am closer to 60 than 50. I have a little way to go on equities till I could achieve a 50:50 equity:bond split.
I’ve seen resistance to the idea, but never a really compelling reason why a DB pension isn’t bond-like. I find merit in dearieme’s argument that I am probably over-exposed to the UK and am addressing that slowly.
The volatility of equities and bonds are very different. I will hold a large cash float of about a year’s spending to smooth the equity part, in particular you need to ease back massively on drawing down from equities in bear markets, otherwise you start to erode the capital. The year’s spending, plus the income from the DB which is enough for my basic running costs should let me stop drawing down from equities for a three year bear market. Like dearieme, I don’t think TI would approve of that, because I have less money in the market, and I am being hit by inflation on that cash year on year on year.
So although a DB pension is functionally bond-like, managing a ‘portfolio’ with that and equities is more challenging that say managing a portfolio which is simply VGLS50. But I am grateful for my good fortune in having a DB pension income at some future point, the extra challenge of managing the equity holdings I can live with for the peace of mind.
Well, I can’t comment on your specific situation, not least because I don’t know how much cash you have, but for an equity-focused investor I think I’m pretty positive above cash! 🙂
I’ve written several times about its wonderful virtues, and debated with for instance @ermine about its benefits in the old days as a long-term holding (if you’re a private investor prepared to rate tart). More recently I’ve noted often that I think it can substitute for government bonds at today’s low yields (again for private investors. We’re lucky because we have FSCS protection and can rate tart to higher rates).
I love shares and they are the only way most of us will ever get reasonably wealthy aside from property, but in an ideal world (definitely NOT this one) we’d sit in cash paying 4-5% over inflation and have zero risk. 🙂
http://monevator.com/cash-and-your-portfolio/
The Rhino, I have a bunch of SPDR Dividend Aristcrat ETFs, so you could look at them.
And as well as City of London, Murray International, Merchants Trust, Blackrock Commodities Income IT (bought this week – volatile but nice yield!), and Commercial Real Estate and Infrastructure ITs from F&C and John Laing. Yields vary between just under 4% and 6%, hopefully linked to inflation in the long run.
Ishares seem ok for high yield bond ETFs. But those won’t keep up with inflation.
This is an interesting article but I’m a bit lost on the “Rule of x” numbers from the 3% and 5% examples.
As is stated above:
Want to target 5% a year as your withdrawal rate? You can use a ‘Rule of 240’ to estimate how big your pot must be.
Think 3% is more like it? For you it’s the ‘Rule of 400’.
So running through the example that was used above,
3% SWR using the Rule of 400 and £2000 / month spend
£2000 x 400 = £800,000
4% SWR using the Rule of 300 and £2000 / month spend
£2000 x 300 = £600,000
5% SWR using the Rule of 240 and £2000 / month spend
£2000 x 240 = £480,000
Taking a ridiculous SWR of 100% gives the following, all the above calculations are taken from the example above.
2000 * 12 = 24000
24000 / (100/100) = 24000
24000 / 24000 = 1
So a SWR of 100% gives a rule of 1!
So working through those if you need to have a smaller pot for a higher SWR which doesn’t seem right, or am I missing something here?
@SP thanks, very useful. I was averaging a 3% yield from my BTL after costs but before tax. I decided the juice wasnt worth the squeeze at that rate. So ideally I want to exceed that yield on the equity from selling up. I think it’s feasible
@Steve — Yes, it is a bit counter-intuitive. I think the problem may be conflating realistic returns, “safe withdrawal rate” and spending.
If somebody had a SWR of 100%, they would effectively be saying that they expect their return to be 100% every year after inflation, so they can keep spending half of it every year.
With more realistic examples, such as 5%, you are effectively saying, for whatever reason, that you think your portfolio can sustain that higher 5% withdrawal rate. This is based on the long-term *returns* that *you* believe you can generate from your portfolio, not on the absolute level of *withdrawal*.
If you have income need X, and you believe your sustainable returns from your portfolio are going to be higher than the standard assumed to meet need X, then you will clearly need a smaller pot than someone who believes a 4% withdrawal is sustainable, all things being equal.
Contrarily, if you have income need X and you believe sustainable returns from your portfolio will be lower than is popularly presumed, then to meet need X you are going to have to save up more money — because your returns are going to be doing less of the heavy lifting.
In other words, this article is NOT about what the SWR should be. It’s about a rule of thumb (only) for figuring out how much capital you might need to generate a particular income, mostly based around a SWR of 4%.
Hope this helps! 🙂
@ermine — the argument against considering your DB pension to be a bond in your portfolio is that:-
1 – you can’t value it accurately to rebalance against it
2 – you can’t sell it
3 – it’s an income stream not an asset
The point being that asset allocation is primarily about keeping some powder dry for when equities are cheap, not about diversifying the sources of income streams.
At least that’s where I’d start that argument.
Of course you might decide that the db incomes is enough and you don’t need more in which case go crazy on the risk of it. The buffet widow portfolio is “all the money you could ever spend in your life” in t-bills. The rest in the S&P500. Although it’s often presented differently…
Musings on how to view a combination of DB/State pensions with an investment portfolio:
http://www.theretirementcafe.com/2017/08/three-degrees-of-bad.html
As for the question of whether one could trust a 100% equity portfolio to give 4% real annualised returns – it all depends on the market level at the time that you base your calculations on e.g. the time when you retire. See the plots on pp 6 & 7 of this link.
http://www.theretirementcafe.com/2017/08/three-degrees-of-bad.html
It does provide a good motivation to review expenditure in terms of ‘basic’ and ‘additional’ (or similar names).
Example: Running a car incurs expenses that could be reduced depending where you live and usage pattern. Option could be not to own a car (and all related expenses) and replace with a car club/hire car/taxi/public transport when needed.
Food for thought .
I’m not sure I understand why a 5% withdrawal rate requires fewer multiples of today’s expenses. Seems like the 5% would take 400X and the 3% would take 240X. Can you help me understand why it’s the opposite?
I’m still trying to determine what to shoot for…We’re putting away 17% with a 5% match, but I sure would like to retire in 11 years at 51, instead of 17-20 years.
I’ve never tried thinking about individual monthly expenses in the “FI Money needed” amount – but that’s a nifty way of thinking of things. It makes it very clear to know “this expense will take 6 months to save for” or “this expense will take 3 years to save for”.
I am one of those investment luddite’s who plans to live off dividends in their retirement. So if my portfolio yields 3%, which is what I believe can be “safely” generated today, this means I need to focus on the rule of 400. Of course, when equity prices were much lower 5 – 9 years ago, I focused on the rule of 240 – 250 😉
Great article by the way. I am coming the the conclusion that you want to keep things as simple as possible. I want to avoid too much “false precision” that may lead me to a bad path.
Cheers!
DGI
@Mathmo – I reckon theres a whole article in there on how to treat DB and state pensions w.r.t. SWRs. In some ways they are bond (gilt) like in as much as they look a bit like a risk free asset, but then again you’re right you can’t rebalance against them. There must be a sensible mechanical means of incorporating them into the spreadsheet so their impact is represented in the portfolio size and asset allocation one is aiming for?
@mathmo @theRhino — I haven’t ever really looked into it myself, but I think I’d probably put them into the floor income / high quality bond (i.e. gilt and perhaps currency hedged US/Euro government bonds) part of a retirement allocation. I’d have an additional high quality bond allocation making up the total. I could then rebalance against the total by fluctuating how much I hold in high quality bonds? Not perfect, obviously, but practical.
not even practical for young ermine, as his relatively large pensions mean he’s got no bonds to play with at all, and thats still leaving him below his desired 50:50 split. Maybe thats just a nice problem to have?
i’m already retired and just trying to work to the asset Allocation for a legacy.
I treat my SP and DB as bonds and work out a notional capital value using current annuity rates (probably wrong, but close enough) add it all up to generate a notional total asset value, then see what % of bonds is already covered by the SP/DB piece
Unsurprisingly this leads to a much higher equity allocation, so my focus is on maintaining the higher end of the returns spectrum, which I do with a ‘gunpowder’ portfolio of covered calls and cash covered puts. This is currently generating almost enough to live on from around 20% of the capital asserts, plus of course the SP and DB.
It’s hardish work for 2 afternoons a week during the week, but you can’t play golf all the time!!!
12/0.04 = 300 is the math(s).
The 5% is your estimate of what you can safely withdraw without depleting the capital.
Many thanks for this simple concept. Of course one of the biggest decisions is When. And the rules at least help support your particular comfort zone. Here in NZ the local actuaries have compiled a few ideas themselves:
“The four Decumulation Rules of Thumb are:
The Six Percent Rule: Each year take six percent of the starting value of your retirement savings.
The Inflated Four Percent Rule: Take four percent of the starting value of your retirement savings, then increase that amount each year in line with inflation.
The Fixed Date Rule: Run your retirement savings down over a period to a set fixed date – each year, take out the current value of your retirement savings divided by the number of years left to that date.
The Life Expectancy Rule: Each year, take out the current value of your retirement savings divided by the average remaining life expectancy at that time.”
See for more detail
https://actuaries.org.nz/wp-content/uploads/2015/10/NZSA-Decumulation-Rules-of-Thumb-Introduction.pdf
Very useful rule of thumb, with caveats that you mentioned. Thanks.
BTW Isn’t there tax to consider, even in retirement?
yes, tax does need to be considered.
especially if the money is inside a DC pension wrapper. tax man will be taking say 15% of it… maybe more (about 40%, possibly 55%) of any money over the lifetime allowance of £1m or so. in these cases the rule of 300 becomes the rule of 360 / 500 / 700. it makes a big difference.
state pension also makes a difference too (but this one is in your favour).
Lovely and simple. But it’s overcautious when you factor in income from state pension and any DB pensions you may have.
@Firesoon? — Any two number rule-of-thumb is going to cut corners, yes, and hardly cover every eventuality. As you say simplicity is the name of the game here. 🙂
With that said, you could still use it re: the household budget. Work out your monthly spending figure, then subtract the monthly state pension and expected defined benefit monthly pension payment (or a crude estimate). Then do the 300x rule to see what lump sum would cover the rest.
(If your DB pension is so hefty you don’t need a lump sum then fine, move along, nothing to see here of course!)
The rule is a useful ready reckoner for a properly early FIRE, too, since no State Pension until 67 and no private pension until 57. Again you can get into ISA bridge calculations and whatnot, but this is more a rough planning / visualisation aid.
Incidentally, while I expect to get it I never think of the state pension in my calculations. I treat it as a safety buffer / cake fund if and when it comes. I know TA does the same.
I wonder what multiplier I’d need to entirely pay for mine and my wife’s future nursing home costs, such that anything above that my son will inherit…
Thanks @TI, a very helpful little sense-check of my hideously (over)complicated spreadsheets. Or should that be the other way around? :o)
Annuities seem not to feature in US discussions, nor any discussion during the near zero interest rate desert following the GFC
The Aviva online calculator suggests a healthy 65 year old can get a level 7.3% (or a lower sum but with indexation, cover for spouse etc)
That’s staggering value given that it is market crash proof
Common objections
1. I don’t want to give up my capital. But retirement capital is like the value of your house, you can’t spend it because you need it to live in/on
2. What a waste if I die early – not a problem, you don’t need money post mortem
3. I want to leave money to my children – if you also have a house the annuity protects it for your children, because if you have no annuity and run out of money you are going to equity-withdraw, or sell and spend the proceeds
All in all, a no brainer surely? 7% guaranteed, Vs 4% not.
@Matthew 63: I started with a new podiatrist recently. She happened to say that she’d lost 15 patients this winter “to death and nursing homes”.
Some facts stare us all in the face while we try not to think about them.
@B. Lackdown 65: Aye, I find myself thinking more and more about annuities. At the end of this tax year, perhaps, once all chance of leaving the capital in a SIPP free of IHT vanishes.
@B. Lackdown — Agreed annuities are a lot more attractive than they were, though personally I wouldn’t touch one without inflation protection unless I was a 75yo smoker who liked skiing black runs whilst eating chorizo. 😉
But no worries, if you are effectively ‘withdrawing’ via an annuity at a 7% rate, then for you it’s a ‘Rule of 171’ when working out how big a pot you’d need to annuitise. 🙂
For all its imperfections the 300 rule is a useful aid, especially midway thru’ the accumulation phase. At one point I took a strange pleasure in calculating how many months we could stay afloat for in the event of losing my primary income. It wore off when months turned into years.
After passing my original number I promptly started to worry about how many new kitchens/ roofs/ bathrooms we might need in the future and whether those needed addressing separately. The power of One More Year is strong, I’ll leave it at that.
@TI yeah I have rpi protection and it still starts at north of 5%. And it’s a floor and upside strategy (I also have equities)
But what this means is, my reaction to Weimar-level inflation and the Wall Street crash happening simultaneously is limited to, I guess I need to shop in Lidl. That’s quite some protection.
Any tax analysis would be really interesting. “What will my effective tax rate be in 4 decade’s time?” Has a _lot_ of moving parts in the answer. I’ve used a (very?) conservative figure of a flat 25% tax. That’s currently leaving a nice little bonus at the end of each year, but it currently feels like the only way is up with tax right now.
I like this as a rule of thumb – and at lower monthly spend and portfolio values it holds up reasonably well.
Where it breaks down is at the higher end, both in terms of monthly spend and total portfolio size, and particularly around how assets are split between a pension and other wrappers. It’s quite reasonable to assume that someone who has accumulated £3m by retirement could be a higher-rate taxpayer in retirement, and if the bulk of that sits in a pension, with 40% lost to tax on everything drawn beyond the tax-free cash, 300x monthly spend falls well short of what you’d actually need.
@B. Lackdown (#69)
I’m no expert in the Weimar Republic, but modelling using the macrohistory.net database of equity and bond returns suggests that Germans who were invested domestically during the 1920s were pretty well wiped out by inflation whether they invested in equities or nominal bonds (with the latter performing much, much worse than the former). If they invested in international bonds and equities or gold they probably did relatively OK.
My guess is that a hyper-inflationary event would cause a default on ILGs (AFAIK, no country that has issued them has experienced very high levels of inflation – unless someone has an example) with significant consequences for RPI annuities, DB pensions, and ladders. Clearly inflation itself would ruin cash, nominal (level or escalation) annuities, and capped DB pensions. I suspect that the triple lock would fail too. Assuming hyperinflation was limited to the UK, then international diversification (both bonds and equities) would probably help. My notional risk register is a cheery place!
@article:
“Let’s say you currently spend £3,000 a month.
£3,000 x 300 = £900,000
The Rule of 300 says you’ll need £900,000 to quit work and still pay your bills.”
As others have pointed out through the years, you really need to be specific about income taxation.
To me, it looks like you mean £900k of capital, that is post-tax (for example, in an ISA).
£900k in a defined-contribution pension fund is not capital, it’s 25% post-tax capital, and 75% deferred, taxable income. Above £1,073,100, the ratio gets much worse, so that amount saved needs to increase.
I understand that you realize that everyone’s personal taxation level is going to be different, but implicitly setting it to zero is a much worse decision than choosing 15% (75% of the basic 20% rate), or 12% (approximate rate for a UK retiree drawing the entire 20% band, namely £50,270, including the initial £12570 0% band, and taking a 25% tax-free lump sum of £12,567.50 on top).
@Alan S,
Did you ever see the Economist special (from October last year) called: “Governments Going Broke” which includes a chapter called “The case against holding bonds”? Probably a good companion for your notional risk register.
@ 72
UK ILGs are paid according to the inflation up to a point 3 months earlier I believe. In a hyper -inflation scenario , that is very significant. The goverment may have little trouble paying out the correct number of pounds three months later in a further debased currency : ) . Not that that is much comfort to the bond holder of course – who would lose that 3 months worth of devaluation.
@britinkiwi thanks that’s an interesting set of data.
I think people are overestimating what they will spend and ignoring that it drops as you age and many people planning also ignore state pension. This has left many people I know having worked one more year for quite a few years and then quickly hitting state pension age and having too little health and often unfortunately too little one to spend all that they have amassed through a deferred defined benefit pension a state pension or two within the household as well as their savings. We build elaborate budgets of all we will spend on retirement or early retirement after a life of frugality and then just keep accumulating with some ridiculously low safe withdrawal rate. I think among this community of savers and firers it is a much bigger risk than running out of money will ever be.
That said predicting how to say when enough is enough is hard with the future state pension included as for the first 10-15 years of a retirement plan you need a lot more but I think you don’t want to wait to save enough for a lifelong SWR based on your starting need when you can deduct 1 or 2 state pensions off your needs in the future. What I have tried to do is grow a particular 55-70 portfolio that covers the state pension amount plus extra fun money when I’m fit to spend it well and hold a second portfolio that will cover essential spending throughout a 30 year retirement apart from state and a small db pension. It might be crazy but I look on it as enjoy pot 1 and if I run out before state pension I can dial down on luxury and still have pot 2 to cover living as I don’t want to die with millions and regret that I didn’t enjoy it.
This has probably been mentioned but there are SO many comments I can’t possibly check all of them. It strikes me that the rule of 300 is what I’d need NOW to retire based on my CURRENT monthly spending. If you’re planning to retire in 10, 20, maybe 30 years time that expenditure figure will be much higher with inflation, as will the required pot size.
It might serve as a good rule of thumb for those who worry they’ve not squirrelled enough away and are planning to retire this year. But otherwise it needs another multiple to upsize the pot for 10 years time etc?
@mark b (#75)
You may be right in the sense that the government could issue enough Treasury bills or bonds (nominal or ILG?) to cover the increased payments on ILGs if they can find someone to buy new debt. I don’t know enough about the German (or other) hyperinflationary events to understand the wider impacts (beyond the legendary ‘wheelbarrows of banknotes’). Even if there was no default, it is still an unpleasant scenario for a retiree with fixed or guaranteed income.
@Al Cam (#74)
In general, bonds have had a good 4 decades (i.e,, since 1980) having previously had a terrible 4 decades (i.e., 1940-1980). Who knows what the next 40 years will bring. The current situation (i.e., government debt being roughly 100% of GDP) is not unique, but has usually been associated with war (e.g., WWII and the Napoleonic wars for the UK). Two recent crises (GFC, which doubled it and Covid, which added another 25% or so) are the significant causes. In the way of buses, there is presumably a third crisis due along any minute!
@Colin Thames (#77)
The retirement spending and suggested target pot are in real terms (i.e., as you say, in current values, but will increase with time – in other words, this needs reviewing periodically). So use real growth rates in estimating what you need to save to meet the target.
@Colin — As Alan says, the rule of 300 is based on the same data/thinking as the 4% withdrawal rate / the safe withdrawal rate:
https://monevator.com/safe-withdrawal-rate-uk/
This is a framework that already takes inflation into account when estimating your capital needs to fund a retirement. That article and others around the site can explain more 🙂
The simplicity of the rule is what I like. It makes a nice sanity check that I can run regularly.
Yes you can run all kinds of fancy maths but it can give a false sense of security and precision.
Fun and thoughtful read – a Monevator speciality!
A question this kind of rule of thumb raises for me is the difference between planning for a “normal” 30 year retirement vs. planning for a much longer one (say, 50 years or perpetuity). After all, a longer retirement is the aspiration for many of the Monevator crowd, isn’t it?
I just referred back to Monevator’s excellent 2025 articles on the “UK SWR”, and was shocked to see the SWR on a (perhaps unduly patriotic) 60/40 UK equities/bonds portfolio for 50 years being 2.1%! More like a rule of 600. (£10k of capital required for a weekly coffee!) I think you acknowledge that 2.1% is too cautious, but as I read it you saw 4% as straightforwardly too high an SWR for UK investors (if you take seriously the original 4% SWR calculation based on US data for US investors).
If, as I thought you argued, 4% is too high a base case SWR for UK investors – even for 30 year retirements – the Rule of 300 is too low as a base case. Even more so if you’re planning on a longer retirement.
@Col123 (#76):
In my experience, there is definitely something in what you say re estimates of spending (prior to jumping ship) vs actual spending (once you have jumped ship)! OTOH, there are almost certainly folks for who it may turn out differently. It is a tricky call. IMV it is probably safer/better to err on the side of caution.
@Alan S (#78):
Thanks for your thoughts. IMV, the fact that people are even now talking about the possibility of a default is interesting/educational.
@Al Cam — Hmm, default by the UK government would be a little more than ‘interesting’ if it happened, agree with you I’m happy to have the education but I’d rather skip the real-world practical 😉
@TI:
Indeed, however, UK has defaulted (in principle) before, see e.g. WW1 debt at: https://en.wikipedia.org/wiki/History_of_the_British_national_debt#:~:text=The%20founding%20of%20the%20Bank,WWI%20debt%20to%20the%20USA.
See also: https://bondvigilantes.com/blog/2010/02/what-happened-the-last-time-the-uk-defaulted/
@Al Cam (84)
It’s not obvious that it would make sense for government to default on ILGs in a high inflation scenario. OK, the costs of ILGs become high when inflation is high so the temptation to default rises. But the cost of any kind of voluntary default on any of its debt would be huge for the UK government, not least in terms of increased interest rates on new issues of debt. And ILGs may not make up enough of the debt pile for the benefits of defaulting on them to be worth the costs.
I suppose default becomes more likely under high political instability or chaos. (There does seem to be a growing number of politicians and parties, including one that is doing quite well at the moment, which seem to have not the slightest understanding that a government reliant on borrowing has to keep its creditors happy). Fortunately everything’s looking rosy on that front!
Make what you will of the UK government quite starkly reducing issuance of index-linked gilts, from about 25% of issuance 10 years ago to 10% today:
https://niesr.ac.uk/blog/gilts-are-getting-shorter-does-it-matter
@Chris,
AIUI, one of the reasons that there are less ILG’s being issued is the primary customer base is drying up as DB pensions move to BPA insurers* – who by and large eschew ILGs. There may well be other reasons too.
FWIW, I think default risk on ILGs is probably no more or less likely than default on gilts generally; try and picture just one (or the other) going down?
As for the politicos – well …
*a whole other story
@Al Cam,
Doesn’t unexpected inflation amount to a default on conventional gilts? That’s why I say that for ILGs government would have to decide to default (and that would be very costly reputationally), whereas for conventional gilts high inflation does it for them.
I get that institutional demand for ILGs has fallen (though I don’t understand why and find it puzzling). But I’m sure recent inflation experience has made the UK government less fond of issuing ILGs too. It’s odd to me that demand for conventional UK government bonds holds up as much as it does, and that demand for ILGs isn’t rising.
@Chris,
Re: “Doesn’t unexpected inflation amount to a default on conventional gilts?”
I hear you, and I suspect the answer is along the lines of in practice/effect you could lose out, but not [technically] by a default. Likewise, you could also ‘win’ in the event inflation is unexpectedly low. IMV, building a ladder with conventional gilts (or other non-indexed “guaranteed” products) to match an assumed/presumed inflation profile is definitely one way to proceed to generate bounded flooring. Such an approach often trades-off inflation “certainty”* versus enhanced flexibility/reversibility**.
I will try and find the previous chatter here @M about your Q re institutional demand – but IIRC in essence BPA providers generally re-risk DB’s to exploit legislative arbitrage via what is known as the matching adjustment (MA) that is available to them but not to DB schemes.
*albeit as measured by [lagged] RPI and if and only if held to maturity;
**although currently there may well be less flexibility/reversibility than there used to be
@Chris,
Re: “I will try and find the previous chatter here …”
Try https://monevator.com/money-market-vs-bonds-which-is-best/#comment-1887949 and associated comments (before and after) in that @M post.
@ Chris,
Re #89
https://monevator.com/weekend-reading-robot-wars/#comment-1899215 may also be worth reading.
@Al Cam (#84, #82)
IMV, the 5% war loan 1929/47 conversion to 3.5% war loan was not a default since it was callable (at par) from 1929 onwards (albeit the price went above par by the end of February 1932). While the coupon after conversion was lower, those who chose to convert early (before the end of July 1932) did get a £1 bonus for every £100 of stock.
My understanding of the default on the US loan is that it was well managed by the government of the day but had significant effects on US-UK relations for sometime after and the outstanding $16 billion (including interest) is still unpaid to this day (e.g., see https://ehs.org.uk/the-uks-unpaid-war-debts-to-the-united-states-1917-1980/ and https://wifpr.wharton.upenn.edu/uncategorized/book-review-the-long-shadow-of-default-britains-unpaid-war-debts-to-the-united-states-1917-2020-by-david-james-gill/ ).
@Chris (#85)
I agree – the future consequences of debt default would be enormous in both reputational and societal costs (e.g., see Greece – although I note their 10 year bond yields are currently around 3.8%, so somewhat less than the UK, so perhaps not too bad in the long term).
@Alan S (#91):
Thanks for those thoughts.
FWIW, I think it important that people come at this with their eyes open to all possibilities.
The comparison (current UK vs Greece 10 year yields) is interesting and must be further food for thought too. I almost half expect @TI to jump in on this as further ‘proof’ of the damage that has [predictably] flowed from the B word; although the link IMO is, at best, tenuous as we never used the €, but OTOH, the timings are not entirely different.
Finally, as usual, nobody really knows anything about the future.
@Alan S (91)
I’d not realised that Greek bond yields came down so quickly after the 2012 restructuring/default, and then the 2015 “missed IMF payment”. Yields on 10 year Greek government bonds have been consistently below 5% since 2018. It’s sobering that the UK pays more on its debt than such a recent defaulter.
Back to the original topic – the rule of 300 – maybe that should be “at least 300” if your portfolio is heavy with UK government bonds.
On the subject of prospects for UK government debt default, I read this interesting quote from a left wing economics professor (at SoAS) in the weekend press. Let’s hope it doesn’t indicate where the ideas of more fiscally adventurous politicians could head (they seem pretty short of, and desperate for, ideas):
“Stop worrying about bond vigilantes and learn instead to value public power over fiscal space [sic]. The question of how governments pay for transformation is often reduced to a simplistic answer – “tax the rich”. While that improves distributional justice, it does not resolve the deeper institutional constraints on transformative public investment. Our financialised pension funds are planning to dramatically reduce their holdings of gilts. The Bank of England is deliberately increasing public borrowing costs through aggressive gilt sales, despite warnings from bond investors. Excessive reliance on index-linked debt further forces governments to compensate bondholders for higher inflation. Last year, the combined fiscal hit from their actions and inflation-linked debt exceeded £50bn – paid for out of welfare or education budgets.”
A gob-smacking menu of options for growing inflation and financial repression here, from an economics professor no less. Pension funds are to become less “financialised” by forcing them to invest more in gilts than they would like to (go figure). The Bank of England is to run looser policy than it believes consistent with its inflation mandate. And inflation-linked debt is to be abandoned, because it compensates those who hold it for inflation (the clue in this case is, I feel, very much in the name).
I personally hope the idea that index-linked debt is a vehicle for injustice does not catch on!