The rule of 33 retirement is a financial guideline suggesting you accumulate a savings amount equal to 33 times your current annual living expenses to fund your retirement.
Understanding the Rule of 33
This strategy, sometimes referred to as the 33x Rule, is primarily designed to ensure you have sufficient funds to cover your cost of living once you enter retirement. It operates on the fundamental assumption that your current cost of living will not drastically change and remain relatively consistent throughout your post-work years.
- The Core Principle: The rule advises accumulating a retirement nest egg that is 33 times your current annual spending.
- The Aim: To provide you with enough savings to cover your current cost of living in retirement.
- The Assumption: It's based on the assumption that your cost of living won't drastically change in the meantime.
How to Apply the Rule
To implement the rule of 33, follow these steps:
- Calculate Your Current Annual Expenses: Accurately tally all your annual expenditures, from essential costs like housing, food, and utilities, to discretionary spending on entertainment, travel, and hobbies. Don't forget healthcare costs and insurance premiums.
- Multiply by 33: Take your total current annual expenses and multiply that figure by 33. The resulting number represents your target retirement savings amount according to this rule.
Example Calculation:
| Current Annual Expenses | Calculation | Target Retirement Savings |
|---|---|---|
| \$40,000 | \$40,000 x 33 | \$1,320,000 |
| \$60,000 | \$60,000 x 33 | \$1,980,000 |
| \$80,000 | \$80,000 x 33 | \$2,640,000 |
The Rationale Behind the 33x Multiplier
The 33x multiplier implies a safe withdrawal rate of approximately 3.03% (calculated as 1 divided by 33, or 1/33). This is a more conservative withdrawal rate compared to the commonly cited 4% rule, which suggests withdrawing 4% of your initial portfolio value annually, adjusted for inflation. A lower withdrawal rate aims to increase the longevity of your retirement savings, potentially providing a greater buffer against market downturns, unexpected expenses, or longer lifespans.
Advantages and Key Considerations
Advantages of the Rule of 33:
- Simplicity: It offers a clear, straightforward target, making it easy to understand and communicate.
- Conservative Approach: The implied 3.03% withdrawal rate is more conservative than some other guidelines, potentially leading to a more secure and lasting retirement fund.
- Personalization: By focusing on your specific current expenses, the rule provides a highly personalized savings goal.
Important Considerations:
- Inflation Impact: The rule's assumption that "cost of living won't drastically change" may not adequately account for inflation over a multi-decade retirement. Your purchasing power could erode over time if your portfolio doesn't grow to outpace inflation.
- Rising Healthcare Costs: Healthcare expenses often increase significantly in later life, which might exceed what your "current cost of living" estimate captures.
- Lifestyle Changes: Your desired lifestyle in retirement may differ from your current one. You might plan for more travel, new hobbies, or require long-term care, leading to higher expenses.
- Investment Returns: This rule does not explicitly factor in the variability of investment returns, which can greatly impact how long your money lasts.
- Taxes: Taxes on retirement withdrawals are not inherently accounted for in the 33x calculation, which can reduce your spendable income.
- Unforeseen Events: Unexpected major expenses, such as home repairs or family emergencies, can strain a retirement fund that doesn't include sufficient buffer.
Comparison to Other Retirement Guidelines
While the rule of 33 provides a specific target, it's valuable to understand it alongside other common retirement planning benchmarks:
- The 4% Rule / 25x Rule: A popular guideline suggesting you can safely withdraw 4% of your initial retirement portfolio value each year, adjusted for inflation, with a high probability of your money lasting 30 years or more. This implies saving 25 times your annual expenses.
- Fidelity's Retirement Savings Multiples: This framework suggests saving certain multiples of your salary by specific ages (e.g., 1x salary by age 30, 3x by 40, 6x by 50, 8x by 60, and 10x by 67).
- Target-Date Funds: These mutual funds provide a diversified portfolio that automatically adjusts its asset allocation to become more conservative as your target retirement year approaches.
Conclusion
The rule of 33 retirement offers a clear and relatively conservative benchmark for setting your retirement savings goal. Its simplicity and focus on covering current expenses are appealing. However, it's crucial to acknowledge its underlying assumptions, particularly concerning inflation and potential changes in lifestyle and healthcare needs. For comprehensive and personalized retirement planning, it is often beneficial to combine such rules of thumb with a detailed financial plan and consult with a certified financial planner who can consider your unique circumstances and future aspirations.
