There’s a quick and simple way to determine how much retirement savings you need at the start of a thirty-year retirement starting in your sixties. The Rule of 375 which is based on the well-known 4% rule, uses your monthly spending requirement in retirement and factors in a rough 20% allowance for tax (TEDx, 2024). To figure out how much money you need at the start of your retirement, simply estimate the average amount of money you will spend per month and multiply this by 375. You can use your Monthly Minimum as a reference.

For example, if your Monthly Average is $6,878, then your total nest egg at retirement will need to be [$6,878 x 375] = $2,579,250. While this may seem overwhelming, the ‘Rule of 375’ does not include several factors, including other sources of income during retirement, including government pensions, employer pensions, or money from asset liquidation.

You can modify the calculation to estimate your retirement savings goals more closely. For example, at retirement, you may decide to downsize your home from a $1,200,000 to a $400,000 home. Assuming the home is fully paid for, this is $800,000 in equity that can be used to fund your retirement. This $800,000 in equity can be subtracted from the total amount of your retirement savings needs. Additionally, total income from non-retirement-investment sources can be subtracted from the monthly average amount used as the input. For example, if you and your partner expect a combined $3,000 per month in government pensions, your net monthly average will decrease by $3,000. The example below shows the altered calculation to include $800,000 in home equity moving to retirement savings and $3,000/month pension income.

Rule of 375 = ($6,878-3,000) x 375 = $1,454,250 – $800,000 = $654,250

The Rule of 375 is not meant to be a precise methodology for predicting your retirement savings requirements, but rather it should be used to give yourself a rough idea of what retirement savings you will need in your sixties to fund your retirement for 30 years. There are many variables and assumptions needed for a more accurate retirement savings plan including life expectancy, inflation, investment return, etc. But, for a quick 2-minute estimation, the rule of 375 is a great place to start to understand your retirement savings needs!

References:

TEDx, T. (Director). (2024, May 2). Do you have enough saved for retirement? | Amyr Rocha Lima | TEDxKingstonUponThames. https://www.youtube.com/watch?v=JxdUWsudi6g