The safe withdrawal rate, also known as the 4% rule, is a rule of thumb that many people use in order to try and get an idea of how much money they will need to have saved when they retire. It’s a pretty good rule of thumb in my opinion and I’ve covered it in more depth in previous blogs. The basic idea of it is that you need to have roughly 25 times your annual expenses saved when you retire to have a reasonable expectation of not running out of money after you leave the workforce.
Some people want to be a little more conservative and use a 3% safe withdrawal rate and if that works better for you because you’re concerned that the 4% rule isn’t conservative enough then more power to you especially if interest rates remain low for log periods of time,ultimately it’s just a rule of thumb to give us an idea of how much money we may need to have in order to live in retirement. But some people take this concept even further and use it to not only give them an idea of how much money they’re going to need to save in order to be financially independent but also as a tool to help them stop wasting money on recurring expenses. Today we’re going to be talking about what those people do as we cover the 300x multiplier method. We’re also going to be looking into a similar strategy that people use to stop wasting money on one time expenses.
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So the 300x multiplier method is a way that people try to help themselves control their spending and figure out what their priorities really are all while helping to ensure that they are saving enough money to retire either early or at the normal age. Basically, in a nutshell, the 300 x multiplier method is where you take a budget you’ve already written, this is usually used in conjunction with a zero-sum budget but you can make it work with other budgeting methods it’s just a little messier and more difficult, and analyze all of the categories in terms of a retired persons lifestyle.
Say John takes home £36,000 a year and has the following budget categories: Rent, Transportation, household expenses, living essentials, and lifestyle. Transportation includes things like a loan payment that he may have on his car as well as insurance fuel maintenance and repairs and other fees such as car tabs parking tolls and anything else that might come up during the month. Household expenses include your utilities, internet, cable maybe if he has it, possibly a cell phone and other household materials. Living essentials include the groceries clothing Personal Care items medications and stuff like that. Lifestyle would include any sort of vacations entertainment movies gym memberships eating out giving would probably be there among other things. He writes down what he spends and asks himself, “Is this item worth saving 300 times what I spend on it so that I’m able to continue paying for it in retirement?” John can do this with any line item on the budget whether it’s his rent costs and asking whether it’s worth renting in a place that’s so expensive or whether he would be happier retiring earlier but in a less expensive place all the way down to smaller things such as a monthly Netflix subscription.
John’s monthly expenses in this hypothetical example anyway add up to about £2,500 a month. That means that according to the 4% rule he would need to have at least £750,000 saved by the time he decides to retire in order to have a reasonable expectation of not running out of money. If we assume that John’s Investments make on average 8% per year over the Long haul which is right about what the market has done historically we can get an idea of how long it will take John to not only reach retirement but how much time each individual item is going to cost him on his journey towards achieving Financial Independence which may help John figure out what is and what is not worth spending the money on.
Since John is taking home £36,000 a year and spending £30,000 a year John has £6,000 per year or £500 per month left over to invest for his retirement. His retirement savings goal is about £750,000 assuming he’s using the 4% rule as his guide. Under these assumptions, it’ll take John a little over 30 years to reach his retirement savings goal of £750,000. and maybe he’s okay with that and if so great but if he wanted to speed up his time to reaching retirement he could do it by looking at each of the line items in his budget and figuring out which of them survived the 300x test. For an example on a small scale take a look at his Netflix subscription which cost him £10 a month or £120 a year to keep. £120 a year * 25 to figure out how much John would need to save in order to cover this expense in retirement brings us to £3,000. So if John canceled his Netflix subscription in retirement he would lower his retirement savings goal from £750,000 to £747,000.
Looking back at this chart from the 30th year of John’s journey to financial Independence we see that £747,000 is not going to save him that much time as a matter of fact due to how the compounding works it’s going to save him less than a month since he jumped from £744,000 in November of that year to £750,000 in December. So in this particular example, John’s Netflix subscription probably isn’t something he’s likely to cancel because it’s just not going to cost him much more time to save enough to keep it. However, this can change if he had a bunch of small expenses similar to Netflix that when put together could add up to a big amount. Maybe at that point, he would want to change his buying habits and maybe cancel a few subscriptions but that’s not the case here so he moves on to another line item.
In this case, it’s his car loan which is costing him roughly £500 a month. £500 a month is £6,000 a year and to cover a £6,000 a year expense in retirement following the 4% rule you would need to save £150,000. Meaning that if John could find another solution to his Transportation situation or just pay off the debt before he retires he would lower his retirement savings goal from £750,000 to £600,000. That’s a 20% reduction in his total goal! And in our hypothetical example, John broke the £600,000 mark in his Investments in 27 years in 6 months meaning that paying off the car loan would save him two and a half years worth of savings for retirement. Or give him more wiggle room in retirement if you still decided to work and save for the full 30 years. So that’s basically the gist of this budgeting trick. but I can hear some of you already saying I’m not going to cut out all of my expenses only to live a life of boredom or destitution and my reply is good for you neither do I. this trick is not meant to stop you from spending any money ever or deny yourself all forms of Joy from spending it’s just to help you frame up future purchases a little bit differently so that you can be aware of the true cost of an item or service.
Small purchases can add up quickly especially if there’s a bunch of them and large purchases or debts can really slow down your journey to reaching Financial Independence, that doesn’t mean that no small or large purchase is worth making some of them are but we want to make sure we’re always at least consider it what we’re doing before we do it. Ultimately all of this trick is trying to do is stop you from experiencing buyer’s remorse and in my experience anyway, it does help. So before making your next purchase or signing that next loan or joining that next subscription service take a few seconds to figure out how much this new item will cost you per year multiply that by 25 and ask yourself if you’re willing to save that much money just to support whatever it is you’re buying.
If you are then, by all means, go forward with it but if not then don’t let yourself experience buyer’s remorse. Now, one thing that you may have noticed with the 300x trick is that while it may work well when it comes to recurring expenses like housing, debt, subscriptions and things of that sort it doesn’t quite have the same impact on one-time expenses. For example, let’s say that Henry was thinking about buying a new laptop that costs about £400. A laptop is not a recurring expense, it doesn’t cost him £400 a month or even £400 a year unless he was really into computers and bought new ones that frequently. For most of us, a laptop is more of a one-time thing.
We use it until it stops working and then we get a new computer. But since we don’t know exactly how long that computer will last us it is more difficult to figure out the effect of the purchase using the 300x method. So what can we do to help ensure that we don’t experience buyers remorse in this situation? We can look at these one time purchases through the lens of how many hours we would have to work in order to pay for whatever it is that we’re considering buying.
Let’s say that Henry makes £15 an hour or £31,200 a year. That laptop would cost him almost 27 hours of work to pay for, assuming we don’t take taxes into consideration. If we did Henry would likely be looking at roughly an entire working week to pay for that laptop. Once taxes are taken into consideration Henry could be spending anywhere from 1.5% to 2% of his entire after-tax income on a laptop which he may be okay with, and that’s fine, again just like the 300x trick looking at purchases through this lens isn’t meant to make us regret every purchase we’ve ever made or stop any future purchases we may make.
It is merely meant to get us to take a few seconds and consider our purchases more carefully so that we don’t fall victim to buyers remorse. It’s just meant to help us figure out what we consider to be truly worth the money and what we may not consider to be worth the money so that we can stop wasting it. But that’ll do it for me today once again if you enjoyed this blog be sure to subscribe. If you have a friend that would be interested in this kind of content be sure to share it with them and let’s really get this information out there and start our own Financial revolution. .
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