The shocking Rule of 25

I’ve some distant relatives, Bob and Carol*, both in their fifties. Carol inherited a bunch of antique furniture when her Mom died. But they had a problem. They had no place to put the furniture but wanted to keep it in case their daughter wanted it “someday”. Plus they had other stuff they wanted to keep but no longer fit in their house.

So they did what a lot of couples do and rented a fancy-pants, climate-controlled, storage locker for about $100 per month. You probably have friends that do the same thing, right?

But guess what this annual $1,200 expense is really costing if they keep the locker indefinitely? A whole lot more than you think!

You might’ve heard of the 4% withdrawal rule. This is the safe annual withdrawal rate of your savings during retirement so you don’t run out of money before you die.** For example, if you’ve got a $1,000,000, you can afford to spend $40,000 or 4% per year without running out of money in retirement.

There’s a lesser known corollary rule called the Rule of 25 which is just the inverse (1/.04) of the 4% rule. This is the multiple of the amount of money you need to support an annual expense in retirement. Say what? In other words you take any annual expense and multiply by 25 and that’s how much extra retirement savings you need to support that expense. So that $1,200 storage locker that Bob and Carol have? It requires an extra $30,000 in retirement savings! How long do you think it takes Bob and Carol to save an extra $30,000 for retirement? One year…two years…three?

It gets worse. If Bob and Carol instead downsized their stuff by selling their furniture and investing the proceeds, they could earn a return instead of having an expense. I’ve no idea what their antique furniture is worth, but I’ll just guess $3,000. Suppose they want enough savings to retire in 10 years. If they sell the furniture today and get rid of the storage locker, then in 10 years they’ll have $3,000 plus interest. If they keep the storage locker forever, then after 10 years they’ll have spent $12,000 PLUS they need to save an additional $30,000 to cover the expense during retirement. That’s a total of $52,000 spent for a extravagant storage locker on top of a loss of $3,000 plus interest. A total of $55,000 plus. Ouch!

Look, I get that Carol probably feels sentimental about her Mom’s old furniture. And it’s easy for Carol to say to herself “It’s just $100 per month. Not a bad deal for saving memories.” And honestly, lots of people use similar logic to justify relatively small monthly expenses.

But the numbers don’t lie. Even relatively small monthly recurring expenses can murder long-term net worth and seriously postpone retirement for more Wage Slavery. It’s just hard to see because it’s like death by a thousand cuts. Take a look at this table to see just how bad it is:

Monthly Expense Annual Total Retirement Savings Needed
$5 $60 $1,500
$10 $120 $3,000
$20 $240 $6,000
$50 $600 $15,000
$75 $900 $22,500
$100 $1,200 $30,000
$150 $1,800 $45,000
$200 $2,400 $60,000
$300 $3,600 $90,000

It doesn’t matter whether you save money on rentsave on gift cards, stop buying books, or chase bank bonuses – it all adds up! If it helps you can even create a budget.

Bob and Carol are smart, practical people that live fairly frugal lives. I’m convinced if they understood the true long-term cost, they’d race over to their money-pit locker, sell or donate their stuff, and cancel the lease. I know I would!

Really Stupid Comic #5

Besides, most adult children don’t want their parents old stuff anyway. Not only that – the adult children end up having to deal with getting rid of all that stuff when their parents become decrepit or die. It’s not fun.

Thanks for reading! Do you know people like Bob and Carol? Any suggestions on how to broach the subject with them without sounding like a jerk?

* Not their real names.

** Some experts believe the 4% rule is too high. Maybe it’s really the 3.5% or 3% rule now. It doesn’t matter to the general point I’m making because the lower percentage would make the numbers even worse. A 3% rule would be the shocking Rule of 33!

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28 comments

  1. Carol is my Mom. I’ve told her a million times that I don’t want Nanna’s old [insert item] but my Mom tells me I do. I tell her that it will be extra work for me when she dies (I’m an executor) and that I’ll have plenty of “death related” details to deal with so selling the stuff that SHE doesn’t want would be a great gift to me. I’ve also told her the truth, that it will be auctioned off so if she wants any say in where it ends up, she better start making some decisions. To top it off, my lifestyle means that we rent a fully furnished house and I don’t see that changing anytime soon. I sure won’t be paying to store the stuff!

    1. Thanks for sharing!

      Your Mom really sound a lot like Carol. It’s really great you’ve talked with her about the old stuff that you don’t want.

      What I don’t understand is why your Mom tells you that you do want the stuff. Is she just in denial? Does she think you’ll change your mind? I’d really like to understand.

      1. Dear FF,

        She doesn’t want the “self-guilt” of giving it away herself so she defers the decision to someone else like me. I recently read that it’s pretty common, I just didn’t realize that she was doing it with me. A year ago, I wondered how our 1,500 square foot shed was full to the brim (think rabbit trails, yes, my shed is bigger than my house). When I really looked at the content, I saw that 75% of the stuff used to be hers and/or my grandmothers.

        I’m pleased to say that over the past six months, I’ve emptied out the shed and it’s now only 1/4 full of (mostly) stuff that I want. We’re moving the stuff into a 40′ shipping container (already purchased and on the property) and that will contain everything that we own and will own.

        Sarah.

        1. Sarah,

          Thank you so much for clarifying!

          That’s an interesting approach your Mom is taking – I would’ve never guessed it. So your Mom doesn’t REALLY expect you to keep all the stuff. But she doesn’t want to be the one responsible for getting rid of it.

          My Mom gave me a coat rack that her Dad made. It’s nothing special really, but she made me promise to keep it. Now both my parents are gone, but I’ve kept the coat rack because I promised. I’m not going to ask my sons to promise to keep anything.

          Congratulations on getting rid of that much stuff – that’s a real accomplishment! And it must be a major relief.

  2. I really like the chart breakdown here. I’ve screenshotted it so I can keep hammering it in my head that $5-$10 matters. I usually do well looking at “what will something cost for a year,” but when that answer is only $60, it isn’t a huge incentive still. It becomes a lot more motivating when you look at it as $1500 of retirement money. Thanks.

  3. I couldn’t agree more. I have had to clear out two parent’s homes (mother-in-law and father) and it wasn’t fun. Even with plenty of siblings working, it took weeks. Luckily it didn’t cause too many hurt feelings (another potential issue!).

    When we remodeled the house, we had to put stuff in a 10′ x 20′ storage center. You would be surprised how fast I was in getting that stuff cleared out.

    Unfortunately, Mrs. 39 months is a bit of a pack rat, so we have more stuff than I am comfortable with, but we can work on that in the years ahead. At least we don’t have a storage locker anymore!

    Mr. 39 Months

    1. Mr. 39 Months – thanks for sharing!

      I didn’t have to do much with clearing out when my Dad died. Fortunately, my brother inherited the house so it was his problem. And the rest of the estate was really well organized thanks to my Dad. I’ve tried to do the same so that our adult sons will have minimal hassle.

      You have my deepest condolences on living with a pack rat! 🙂

  4. Its unfortunate, but it isnt practical to pay that much just to keep it around. Whatever won’t be able to fit in your own house will have to go. Not everything is about money, but its important to be aware of the true cost of decisions like this. Like the chart. Good reminder of what even small amounts of wasteful spending can cost you. And in the end, you have to keep working that much longer to pay for it.

    1. Whatever won’t be able to fit in your own house will have to go.

      That’s a rule we follow. We also follow the rule of “Don’t be afraid to downsize your house and get rid of even more stuff.” There is a limit, but I find owning less stuff just makes my life easier and calmer.

    1. I mostly did the same as well.

      Deferred gratification is comes naturally for me when it is related to money. Not so much when it comes to dark chocolate. 😀

  5. I’ve been thinking about decluttering both my apartment I am likely to move at some point and my parents keep talking about moving. So it’d be nice to clear stuff out now bit by bit rather than later when it’ll be overwhelming. Also then they can enjoy a house less packed with random junk. For my apartment, I’m doing a 30-day no-buying stuff freeze- any stuff that will live in the apartment, including food.

    But my dad really hates getting rid of stuff so I’ve devised a method where I collect stuff that really should be thrown away (we’re talking floppy disks and company keychains and stress balls that he got from conventions) and put them in trash bags in the basement. The next time I visit, if there aren’t any complaints about missing stuff, I’ll toss that stuff in the trash and collect more bags. Fingers crossed that it works!

    1. Thanks for sharing!

      I like your idea of hiding stuff from your Dad in the basement and waiting to see if he misses it. My bet is he will never miss anything you hide. I usually find it a relief to get rid of stuff but I know that’s not true for everyone.

  6. This is a great post! It’s pretty much opportunity costs. A $1 spent today, is like $18 future retirement dollars, or something like that for someone in my age range. It goes to show how much even the smallest of things add up!

    1. Thanks Tim!

      Those small amounts definitely add up. I remember a story about Warren Buffet getting upset with his wife for spending even after he had several million dollars. He just knew that he could turn that spent money into a lot more money if he was just given the time. That’s the power of compound interest.

  7. Yeah, those recurring expenses are the worst. Pay $50/month for cable and you’d need to save $1,250 more in your retirement fund. All the little things add up.
    No, I have no idea how to tell them this. People usually don’t want to hear it.

    1. Joe – Thanks for stopping by. I’m honored.

      Yep, people generally don’t want to hear or think about it. Whenever I explain the rule to someone, I usually get one of several responses:

      1. Puzzled expression with a quick change of subject.
      2. An explanation about how every expense they have is absolutely necessary.
      3. An explanation about how they can’t worry about stuff that far into the future.
  8. Damn that’s intense when you put it that way and use the rule of 25. I’m going to start using this to better explain the importance of saving and investing to my friends and family. Keep killing it with these articles!

    1. Brian – Thanks for stopping by!

      Let me know how using the Rule of 25 to explain things to friends and family works for you. I’d really like to know.

      I’ll do my best with future articles, but writing is hard work for me. I’m not a natural.

  9. Too true: this is why we’re clearing out things. I’m currently selling a lot of things on craigslist and so on, and my wife is cleaning out her stuff too. We realized we could buy another X one day if we want and probably have more money to do so if we sell it now and save anyway. It becomes really obvious once you start selling stuff you bought in 1998 and realize how little it’s worth, and how cheaply you could buy another one today.

    Yes, it also sounds like my mom: she’s holding on to a lot of stuff for the memories, and I get that, but I don’t think she has any idea how much she’s spending to do so. It’s sad, too, as she could be off doing the things that she loves and making even more amazing memories, if she were only more willing to let go of material things.

    Life is short! As I read in the Bible this morning, “we brought nothing into the world, and we cannot take anything out of the world. But if we have food and clothing, with these we will be content.” What was true 2,000 years ago remains true.

  10. I recently did this calculation for our cable tv, which costs “only” $60 a month. I’m hoping to be financially independent in 10 years, which means a cost of $7200 over that time, as well as an additional $18,000 to support that monthly cost. $25,000 for cable that we barely watch? I think it’s time to cancel the cable.

    1. Really nice work!

      I wish I could convince Mrs. FF to agree to dump cable TV, but I’ve failed so far. I tried to get her interested in Netflix, but that didn’t work.

      She likes watching various shows at night on enough different networks that I can’t find a suitable replacement. To her, it’s Stupid Frugal to get rid of it.

  11. Another take is… if you are someone who is saving your stuff or collecting for the sake of collecting PLEASE take note! I’m going to be direct.

    I am dealing with mom’s stuff right now. Mom is pleasant but after taking care of her until I could no longer do it safely and sadly (but for me and my families sanity) we had to place mom. Now, dealing with ALL her stuff, after that the house has to put it on market. This has CONSUMED my life. Think about your kids and ask yourself, which one is going to end up carrying the brunt of the load while the other kids disappear? It effects the “chosen” (translate) the responsible child’s life and their own family life in a negative way. Think of it this way, it’s a different time, it’s no longer a single earner family, we’re already stressed for time… do you want us to spend our time visiting you or do you want us dealing with your stuff. If your kids are married, remember, they may have both sets of parent stuff to have to deal with. As I said, I’m in the middle of a sea of stuff, but I want to run away (and my life back). Many of you are the children of the depression so believe me, I’m not exaggerating. My in-laws stuff may be soon, I think I’m going to run away. I know DH’s brothers will and DH will be left with the bag.

    Please! stop collecting and please don’t assume we want it. If you want to us to have some of your things, ask us while your still healthy, if we say yes, great, if we say no, find someone who does want it or donate it. Please do us the favor.

    – exhausted unhappy camper

    1. Wow – thank you so much for sharing and stating your case so strongly! I can feel the pain of your words. 🙁

      I agree with you a 100% – dumping your stuff on somebody else to manage is a massive burden. I know parents think they are doing their adult children a big favor by saving all their precious, lovely items for future generations, but the reality is that nobody wants it. It’s an unkindness.

      We’ve downsized into a small-ish apartment and gotten rid of most of our stuff so that we can simplify our lives and not have our stuff eventually be a burden on our adult sons. Now you make me want to get rid of just a little bit more. 🙂

      Best of luck!

  12. Another idea is instead of saving stuff, why not sell it and use the proceeds from it to buy stock and gift it. You can even purchase stock through gift cards at your grocery store. I can’t remember the name of the website. It my have two benefits. If there is lots of time, the dividends can be reinvested and if your kids are not already interested in learning about the stock market it may spark an interest and cause them to want to get more agressive in investing for their future.

    1. Exactly – stuff that is not used is worse than useless because it may depreciate and cost money to store. Why not sell the stuff to somebody else who will appreciate and use it? In exchange, you get money you can invest for the future! And you set a great example for your children.

      I have a post coming up about downsizing that talks about this further. Stay tuned!

      Thanks for bringing this up, erayp!

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