# Using the Rule of 300 to estimate how much money you need for financial freedom

Today I’m going to talk about the Rule of 300. This shortcut helps you envisage how much money you’ll need for retirement or to achieve financial independence.

That’s right! The rule of 300 turns an amorphous future you into a flesh and blood creature with their own wants, needs, and bank statements.

Most of us find it difficult to imagine paying for stuff several decades hence. The Rule of 300 handily bends the space-time continuum.

However let’s get one thing straight.

The Rule of 300 is not a scientific law that can’t be broken. On the contrary it will probably always be off a bit. It’s just a rule of thumb.

The assumptions behind the Rule of 300 are open to debate.

Equally, anyone who thinks they can predict exactly what will be on their bill in 30 years’ time – from the cost of robot insurance to the price of a mini-break to Mars – is delusional.

But as always with investing: What’s the alternative?

All forecasting methods have their downsides. Few compensate for them by being as simple as the Rule of 300.

I will 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 two numbers, and one of those is 300.

Take your monthly expenditure. Multiply it by 300. The result is how much you’ll need to have saved to keep living like you do today after you jack in your job.

Let’s say you currently spend £2,000 a month.

£2,000 x 300 = £600,000

The Rule of 300 says you’ll need £600,000 to quit work and still pay your bills.

(Or to tell The Man to go hang. Or to safely smirk in meetings. Or 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 put in your expenditure as it stands, and the Rule of 300 tells you what you’ll need to have saved to keep spending like that from your capital.

Do not include any regular ISA or pension payments. 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 circumstances and penchant for caviar, those numbers may seem dauntingly high or encouragingly achievable.

Are you in the “HOW MUCH?” camp? Then Rule of 300 could be extra useful. It can help you envisage what your various monthly spending habits will cost you in capital terms.

Let’s say you spend £6 a month on Amazon’s music streaming service. Multiply that by £300, and voila – you can see you need £1,800 to keep the music playing indefinitely.

Bargain!

However you may have other more questionable commitments:

 Spending Monthly cost Capital needed Gym £30 £9,000 Top mobile phone £50 £15,000 Golf club £100 £30,000 Weekly meal out £200 £60,000 Fancy car on PCP £400 £120,000 Monthly mini-break £600 £180,000

Source: Author’s research (and bills)

I’m not judging. If your idea of retirement bliss is playing golf as often as possible, then something has gone wrong if you don’t plan on paying for club membership.

The point is that by looking through the lens of the Rule of 300, you might be motivated to cut the things you don’t care about so much.

This way you can reduce how much you need to save for financial freedom.

### The safe withdrawal rate (aka the caveats)

The maths behind the Rule of 300 is based on a safe withdrawal rate (SWR) of 4% a year.

The SWR is said to be the money you can theoretically spend every year from your portfolio without (too much) risk of 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 300=£600,000. Ta-dah! Same!

To say the safe withdrawal rate is controversial is an understatement. It’s the personal finance equivalent of the Kennedy assassination. Different people take it to mean different things, which may even be contrary to the original research.

Some are dubious because it’s based on US investment returns, which have been strong compared to the global average. They say 4% is too high.

Others add that today’s low interest rates mean return expectations (and hence the SWR) must be lowered, too.

Yet others believe that’s too pessimistic. Yields should rise eventually, and anyway the 4% rule was stingy when markets did well so there was arguably a buffer in there.

Newer thinkers even claim the SWR strategy can be improved by assuming variable withdrawals as conditions fluctuate.

Finally, old active investing luddites like me presume we’ll never touch our capital, but rather live off our income. We often coincidentally target the same income yield of around 4%, even though the key SWR research was based on potentially spending everything.

### Roll your own Rule of Whatever

I’m not proposing to solve the SWR debate today. Just know that you can tweak the Rule of 300 to suit your own beliefs by reworking the maths 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’.

Personally though, I’d stick 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 multiplier.

Reflect on them but understand nobody knows because we don’t know how your investments will pan out, how long you’ll live, and nor how much money will really be required in the future for a decent standard of living.

And it is 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.

Unlike my co-blogger 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 to target for some potential retirement in 23 years and three months’ time.

I’ll sometimes look at what’s needed to replace my current income, but only as a ready reckoner. (That method targets pre-tax salary, unlike the Rule of 300’s after-tax spending. Both have their uses.)

Good for you if you prefer precision – I’ve nothing against it. We can all learn from each other.

But even if that’s you, the Rule of 300 takes zero effort to apply in your everyday thinking. You may have a 20,000-cell spreadsheet back home in the lab, but the Rule of 300 can still be a useful shortcut in conversation.

Of course most people out there don’t even have a financial plan on the back of a napkin. They haven’t the foggiest what they’ll need to have saved when they no longer receive a regular pay cheque.

Many are deluded. Some think they’ll enjoy round-the-world cruises on the back of saving £50 a month today. Others believe they’ll need so much money that stopping working is an unrealistic fantasy.

Does that sound like you, or someone you know? The Rule of 300 can be a good start in getting a grip on things.

No, it is not a scientific law. But in terms of revolutionizing how you think about your financial needs, the Rule of 300 could be as significant for you as that apple that fell on Sir Isaac Newton’s head was for him.

• 1 allthegoodnamesaretaken August 29, 2017, 12:28 pm

Where is the 300 x monthly capital invested?

• 2 Gregory August 29, 2017, 12:33 pm

Though SWR proves that investing is half data mining and half art You must plan. “Ignoranti, quem portum petat, nullus suus ventus est.” Seneca

• 3 Mrs. Adventure Rich August 29, 2017, 12:37 pm

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).

• 4 The Investor August 29, 2017, 1:16 pm

@allthegoodnamesaretaken — That’s a big question for another day. Read the rest of this site for some ideas. 🙂

• 5 ermine August 29, 2017, 1:32 pm

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.

• 6 Playing with Fire August 29, 2017, 3:03 pm

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).

• 7 Learner August 29, 2017, 3:05 pm

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.

• 8 dearieme August 29, 2017, 3:22 pm

“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?

• 9 Jim August 29, 2017, 4:32 pm

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.

• 10 Learner August 29, 2017, 4:50 pm

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.

• 11 Mr C August 29, 2017, 7:30 pm

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 🙂

• 12 James August 29, 2017, 7:31 pm

Great article! I’m also more than 300x as my rule – 425 is my number based on a 2.8% SWR.

• 13 dearieme August 29, 2017, 8:36 pm

“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.

• 14 John B August 29, 2017, 8:59 pm

@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.

• 15 David Kennedy August 29, 2017, 9:44 pm

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!

• 16 Mathmo August 29, 2017, 10:14 pm

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.

• 17 wephway August 29, 2017, 10:50 pm

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.

• 18 Paul Armstrong August 30, 2017, 7:29 am

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.

• 19 L August 30, 2017, 9:02 am

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’.

• 20 Vanguardfan August 30, 2017, 9:12 am

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!

• 21 Nigel Root August 30, 2017, 9:44 am

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

• 22 fitandfunemployed August 30, 2017, 10:17 am

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.

• 23 Scott August 30, 2017, 10:30 am

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?

• 24 Pete August 30, 2017, 2:29 pm

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.

• 25 L August 30, 2017, 3:09 pm

@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!

• 26 LukeM August 30, 2017, 5:07 pm

If you’re looking at more than 30 years, you need to increase your equity percentage and/or decrease your withdrawal rate.

• 27 Maximus August 30, 2017, 9:26 pm

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…

• 28 The Borderer August 30, 2017, 11:15 pm

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?

• 29 John B August 31, 2017, 7:30 am

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.

• 30 SemiPassive August 31, 2017, 9:39 am

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.

• 31 The Rhino August 31, 2017, 11:28 am

@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

• 32 Mathmo August 31, 2017, 1:42 pm

@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.

• 33 Vanguardfan August 31, 2017, 1:59 pm

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!)

• 34 Derek August 31, 2017, 3:31 pm

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.

• 35 The Borderer August 31, 2017, 3:37 pm

@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.

• 36 dearieme August 31, 2017, 5:58 pm

@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.

• 37 dearieme August 31, 2017, 6:00 pm

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.

• 38 The Borderer August 31, 2017, 8:24 pm

@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?

• 39 ermine August 31, 2017, 9:21 pm

@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.

• 40 The Investor September 1, 2017, 8:55 am

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.

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. 🙂

I believe cash is king of the asset classes, which might come as a surprise given that I most often talk about investing in equities.

But equities are a necessary evil that come with big downsides

http://monevator.com/cash-and-your-portfolio/

• 41 SemiPassive September 1, 2017, 8:57 am

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.

• 42 Steve September 1, 2017, 12:00 pm

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?

• 43 The Rhino September 1, 2017, 12:19 pm

@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

• 44 The Investor September 1, 2017, 1:02 pm

@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! 🙂

• 45 Mathmo September 1, 2017, 11:06 pm

@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…

• 46 dearieme September 2, 2017, 12:48 pm

Musings on how to view a combination of DB/State pensions with an investment portfolio:

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.

• 47 PA September 3, 2017, 11:54 am

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 .

• 48 Erica Burton September 4, 2017, 1:39 pm

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.

• 49 Adam @ Minafi September 4, 2017, 9:25 pm

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”.

• 50 Dividend Growth Investor September 5, 2017, 12:23 am

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

• 51 The Rhino September 5, 2017, 4:13 pm

@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?

• 52 The Investor September 5, 2017, 4:23 pm

@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.

• 53 The Rhino September 5, 2017, 4:53 pm

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?

• 54 Roadie September 10, 2017, 8:17 pm

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!!!

• 55 Tom September 10, 2017, 10:35 pm

12/0.04 = 300 is the math(s).

• 56 Tom September 10, 2017, 10:48 pm

The 5% is your estimate of what you can safely withdraw without depleting the capital.

• 57 britinkiwi October 7, 2017, 10:16 pm

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

• 58 Chris Kelly November 1, 2017, 9:52 pm

Very useful rule of thumb, with caveats that you mentioned. Thanks.

• 59 Chris Kelly November 1, 2017, 10:15 pm

BTW Isn’t there tax to consider, even in retirement?

• 60 david December 1, 2018, 4:40 pm

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).