# The 4% rule / rule of 300 - how to calculate your magic number

## By Lizelle Steyn26 July 2019

If your GPS is set on financial freedom, that place where you can just be for a while and march to your own beat, you'll need to know your magic number. The amount at which you can say, 'If I quit my job now, I'll be OK for a very long time.' But how do you calculate it?

## Keep it simple with the 4% rule

If you're looking for a simple rule of thumb to guide you, then the 4% rule is useful. The 4% rule says that if you've saved up enough so you can live off 4% of that amount per year, you're OK. Doing the calcs from another angle, decide on the amount you'd need to withdraw every year and multiply that by 25 to get your magic number. (For those who are interested in the maths, the fraction 4% fits 25 times into the whole.)

An example: You're a superhero and have already saved up R5 million rand. You're giving the Frugalwoods a run for their money and need only R200 000 a year to live off. R200 000 is 4% of R5 million, so you're OK. Or, coming from the other angle: you would need R200 000 per year. Multiply that by 25 and you'll find that R5 million in today's terms is what you need to aim for.

Have you figured out how much you need to save up? Click the button below that's closest to the amount you would need to draw per year.

## Even simpler: the rule of 300

The problem with the 4% rule is that it works backwards from the magic number, a number you don't know, to the annual withdrawal amount you need. The way it's phrased is not that intuitive - especially for those of us who don't love maths. The rule of 300 is easier to work with. It starts at the place you should know: the amount you would need every month. And then multiplies that with 300 to get to your magic number. This makes much more sense to most people and I expect the rule of 300 to slowly replace the 4% rule. Yes, they make the same assumptions and are for all practical purposes the same thing, but the rule of 300 is phrased in a way that's easier to 'get' and work with if you have a monthly income figure in your head.

An example: You would need R20 000 per month. Multiply that by 300 and you get to the magic number of R6 million. Remember to adjust that number every year for inflation. This year you may only need R20 000 per month. But five years from now you might need R25 000 for the same standard of living, and your magic number would then need to adjusted to R7.5 million = 25 000 x 300.

## What's included in the magic number?

The magic number refers to your total investment portfolio. It's the amount you would need across your retirement funds, tax-free accounts, property and ETFs, unit trusts and bank deposits. Anything that you can draw an income from or sell off bit by bit to fund your basic needs. It doesn't include the property you live in. Whatever you invest in, it's important that your portfolio grows, on average, by 4% more than inflation per year. Otherwise, you'll run out of money at some point. Read more about things that can go wrong with the 4% rule.

## So when will you reach financial freedom?

Download this basic financial freedom calculator that I did in MS Excel (link below) and play around with the amounts you save every year and your desired financial freedom age to find out when you can realistically step into freedom. (All future values are shown in terms of what they will be worth today, taking into account the eroding effect of inflation.)