While The Rule of 375 is a quick way to estimate your retirement nest egg needs, there is a more thorough way to estimate your retirement savings needs. I have outlined the logic and calculations below using real-world values for the example. The formulas used are shown and are intended for use in Microsoft Excel but can also be calculated with a calculator.

First, define the following:

• Current Age: 34 (couple)
• Retirement Age: 65
• Age at Death: 100
• Years Until Retirement: 65 – 34 = 31
• Years in Retirement: 100 – 65 = 35
• Tax Rate on Retirement Income: 25%

Next, define assumptions:

• Monthly Average Spend (Today’s Value): $6,878
• Inflation Rate: 2%
• Investment Rate of Return in Retirement: 5%
• Monthly Household Government Retirement Income [CPP, OAS, etc.] (Today’s Value): $4,156

Then, calculate the values at retirement, assuming the 2% rate of inflation:

• Monthly Average Spend: $6,878*(1 + 2%)^31 = $12,708
• Monthly Household Government Retirement Income [CPP, OAS, etc.]: $4,156 * (1 * 2%)^31 = $7,679

Now, estimate Retirement Living Expenses to be Covered by Retirement Savings (incl. tax costs):

• Monthly: ($12,708 * 25%) + ($12,708 – $7,679) = $8,206
• Yearly: $8,206 * 12 = $98,473

How much Retirement Savings are Needed at Retirement Age?

• To Deplete Investment to $0 at the age of Death: $2,092,348
  • (0 + ($98,473 * (((1 = 5%)^35) – ((1 + 2%)^35))/(5% – 2%))) / ((1+5%)^35)
• To Deplete Investment to $500,000 at the age of Death: $2,182,993
  • ($500,000 + ($98,473 * (((1 = 5%)^35) – ((1 + 2%)^35))/(5% – 2%))) / ((1+5%)^35)
• To Deplete Investment to $2,000,000 at the age of Death: $2,454,929
  • ($2,000,000 + ($98,473 * (((1 = 5%)^35) – ((1 + 2%)^35))/(5% – 2%))) / ((1+5%)^35)

In the above example, a 34-year-old couple is planning to retire at 65 and live until 100 years old and anticipating living costs of $6,878/month in today’s dollars. They will require between $2.1 and $2.5 Million in retirement savings by the age of 65 to fund their retirement, depending on how much they want to leave behind. When comparing this to The Rule of 375’s recommended nest egg size of $2,579,250, assuming the same monthly expenses, it comes very close to the values calculated using the more thorough strategy outlined above. This exercise is worthwhile since it can introduce you to the important concepts of inflation, future value, and present value, and provide a general understanding of the complexity of the variables and assumptions used to back up a quick (i.e., rule of thumb) retirement savings calculation.