By elmads

Retirement is inevitable, but it does not mean that we will not be working anymore, it just means that we can do everything that we want while still able to live comfortably for the rest of our lives. This is the reason why retirement planning should be one of our core long-term goals.

I have discussed in my previous blog the detailed basic step-by-step questions that we could ask ourselves in order to come up with our retirement plans and goals, “Retirement Planning for Millennials & Gen Zs”.

Remember that retirement planning and financial planning will always be based on each and our life circumstances. Not everyone will have a large amount of salary and not everyone will be lucky to not encounter unexpected events in their lives. That is why, I always emphasize to ask your financial advisors for guidance when doing such financial and retirement planning.

Nevertheless, knowing the basics of how to do it will always be of significant help to everyone, as it gives insights on what to do and how to do it by ourselves. Financial literacy and good financial mindset will always aid us to achieve our financial goals

The Rule of 300

This rule is derived from the famous 4% rule of safe withdrawal rate from our retirement savings. Just to give you a quick summary, it states that we should only withdraw a total of 4% per year of our overall retirement savings nest egg. This is for the reason that our retirement savings will still be able to appreciate in price while it is still in the market, the appreciation of price is roughly more than 4% which is the same as the withdrawal rate. In short, we are either not loosing money or even if we are, it us just an insignificant amount.

For instance:

• Retirement Age : 65 y/o

• Expected Age to live: 90 y/o

• Years of life expectancy: 25 years

• Retirement Nest Egg: £600,000

4% of the annual retirement nest egg is : £24,000

£24,000 divided by 12 months is : £2,000 monthly

This means that for 25 years, we will be able to live with £600,000 nest egg as long as we withdraw 4% of that per year and live with that amount.

Now that aside, the rule of 300 is the other way around of the 4% rule. It is knowing what will be the amount of money we will need to live our lives in the future by knowing what will be our basic expenses and the lifestyle that we want.

• Let’s say that we expect to live with just £2,000 a month

(£2,000 a month x 12 months) = £24,000 a year

(£24,000 a year x 25 years to live) = £600,000 to live for 25 years with £2,000 worth of monthly lifestyle.

12 months x 25 years to live = 300, hence the rule of 300.

But what if we expect to live more than or less than 25 years. That’s easy just change the multipliers.

12 months x (whatever number of years you expect to live starting from your expected retirement age)

That in mind, I’ll now show you various examples for this; see charts below.

As depicted above, the age you want to retire doesn’t necessarily mean that it needs to be at exactly the country’s required retirement age, as long as you make sure you have the specific amount of money to sustain your retirement lifestyle.

The 4% Rule

Going back to the 4% rule, how does it work and how does the 4% do good with both withdrawing and the returns of the market?

The average return of the equity market is around 6-8%, the 4% return is said to have been at the low end return of the market, and is used as a conservative estimate of returns while considering the fluctations of market prices and the possibility of economic dowturns such as recessions.

On the other hand, most retirees move their retirement fund into bonds for capital preservation which is one of the best strategies if a person is nearing retirement. Bonds are popular to preserve capital as its price doesn’t have large fluctuations unlike equities.

Using the same example from the above;

Retirement Age : 65 y/o

Expected Age to live: 90 y/o

Years of life expectancy: 25 years

Retirement Nest Egg: £600,000

4% of the retirement nest egg is : £24,000

monthly: £2,000

What will then happen if we remove our retirement money from the market investment and just saved it into a bank? Will our money go into zero? For us to know, we need to plug in the numbers!

As showed on both the spreadsheet and bar graph, if we pulled out our money and placed it into a bank account, we’ll still be able to live our life at 90 y/o as planned (based form the example). The problem is when we exceed 90 years of age, because we will have zero amount of money to sustain our lives after 90.

This is the reason why placing our money into the capital markets (stocks or bonds) are still an important factor for our retirement fund. This is to make sure that we will still be having capital appreciation despite us withdrawing money from our fund.

Just like what the chart above depicts, although we withdraw £24,000 a year, the amount left in our account is still making money and still appreciates. Yes, it is generally declining in amount but insignificantly. It is still better if we place our money in bonds that generate returns of around 2-3%, rather than not having any returns at all.

The goal here is to take into account the uncertainty, because no one knows if we will live longer than what we have expected.

To Sum It Up

All financial and retirement planning is based on our life circumstances, needs, behaviour, mindset and traits. A plan that works for others doesn’t necessarily mean that it will work for some. It is always a case to case basis, just like when we go to the hospital to have a doctor’s check up. There are various tests that needs to be done first based on our complains, signs and symptoms. If ever we are diagnosed with a certain disease or illness, the treatment will specifically be based on, not just the disease, but also on an individual’s level of health.

Moreover, all financial plans can certainly be derailed despite our rigorous effort in setting up one.

This is 100% true, most especially with unpredictable events in our lives. The good part of planning is that, at the least, we have made something already, and we already have a base to start even if we hit rock bottom. That base is our knowledge, skills, patience and attitude.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.