The 300× rule is based on a generally accepted conjecture that withdrawing a maximum of 4% of your investment portfolio per year will result in a 95%+ probability of the portfolio sustaining itself indefinitely. Therefore, this means you need 25× your annual expenses or 25×12 = 300× your monthly expenses. In many cases the 300× rule is conservative and you will wind up with far more money decades in the future thanks to market returns. At the same time, it is also U.S.-centric in that it relies on the U.S. stock market and U.S. dollar as being exceptionally favorable as compared to many other countries’ stock markets and currencies (e.g., Japan’s “lost decade”).
How can you apply the 300× rule to your life as you move toward financial independence? Here are several concerns and principles:
- Frugality is key. If you are paying $100 per month for cable TV, you need an extra $30,000 (300×) invested to support this bill in perpetuity. If your monthly expenses decline from $3,333.33 to $3,233.33, cutting the cord means you can be financially independent with $970,000 instead of $1,000,000 invested.
- Investments, types of accounts, and management fees matter. Putting most of your money in index funds of the whole global or U.S. stock market is vital, while a bond market index fund is also an important component to reduce volatility. Even if you are retiring early, tax-advantaged retirement accounts are beneficial—they save income taxes (sometimes, payroll taxes too), and you will certainly still require U.S. dollars at Age 59.5 and older. Using index funds with management fees of less than 0.1% per year is much better than 0.5% or 1.0% per year.
- In the first decade of early retirement, being willing to adjust your lifestyle based on the performance of the stock market is critical, to minimize sequence-of-returns risk. If the next Great Recession happens early in retirement, your portfolio might be cut in half in value, requiring you to be more frugal and perhaps even partially come out of retirement. But, if this happens after 20 years of great returns, it won’t affect you as much.
- Financial independence means, by definition, not being required to earn money to sustain your financial needs for the remainder of your natural life. Conceptually, this is similar to an endowment that funds a university or organization’s operations through its investment returns, providing financial strength and long-term stability to the institution. This is why a whopping 300× your average monthly expenses may be required, rather than a more modest amount like five years living expenses or a six-month emergency fund.
- Although financial independence is often conflated with early retirement, the more flexible you are about having a “soft retirement,” the less money you need. For example, if you can continue working as a consultant, in the gig economy, or other part-time job, or acquire one if needed (i.e., when threatened by sequence-of-returns risk due to the next Great Recession happening in your first decade of early retirement), the probability of your success increases.
- Cost of living is vitally important. You cannot expect to continue owning a new car or living in the San Francisco Bay Area. Instead, driving a “beater” car and moving to a low cost-of-living country or lower cost-of-living U.S. state is desirable (preferably, one without state income tax). Every dollar you can trim from your monthly expenses is $300 less needed in your investment accounts. You can achieve financial independence far earlier if you “downgrade” to a smaller home and become accustomed to living with less space and fewer possessions.
- Many people think they desire to fully quit their job and be unemployed, but what you may really want is more autonomy and flexibility while working from home and/or working fewer hours per week. Rather than going from $100,000 earned income to zero earned income per year, consider going from $100,000 to $25,000. There are a plethora of massive tax tax benefits to having a modest earned income instead of zero earned income, particularly with children. You may qualify for a sizable Earned Income Tax Credit (EITC) from the IRS. You could have your health insurance fully paid for by the U.S. federal government via the Health Insurance Marketplace and Advance Premium Tax Credit, and, due to having a high-deductible health plan, be able to contribute to an advantageous Health Savings Account. There are even stories of millionaires collecting housing subsidies, state benefits, and USDA SNAP benefits (food stamps) due to their low income, if these programs fail to look at accumulated assets. Although many consider this a social injustice, it may be in accordance with the terms of these programs. Because many benefits require some earned income but not zero earned income nor high earned income, quitting work “cold turkey” can have a high cost.
The 300× rule can be demoralizing due to the huge amount of assets required for financial independence. Even something as basic as a $13.99 monthly Netflix subscription costs a whopping $4,197 to fund in perpetuity. But, the flip side is that the 300× rule can motivate you to lower your bills and be more frugal. For example, if you can cut $1,000 a month from your housing bill, that is instantly $300,000 less you need to accumulate toward financial independence. This encourages a worldview oriented toward a more simple, austere life rather than costly, disingenuous displays of opulence. As we know, many people who appear to be doing well financially actually have a negative net worth and are up to their ears in debt.