3 Retirement Rules of Thumb You Need to Ignore
If you search the internet, you’ll come across a lot of advice about saving for retirement. And some of it is pretty good. But there are certain rules of thumb you’ll see all the time that may not apply…
If you search the internet, you’ll come across a lot of advice about saving for retirement. And some of it is pretty good.
But there are certain rules of thumb you’ll see all the time that may not apply to you. Here are three you may want to ignore.
1. The 4% rule
It takes a lot of effort to build up a retirement nest egg. So once you amass savings for your senior years, you want that money to last as long as you need it to.
That’s why it’s important to come up with a withdrawal strategy for your nest egg. But that strategy doesn’t have to be the 4% rule.
The 4% rule says that if you withdraw 4% of your savings your first year of retirement and adjust future withdrawals for inflation, your nest egg should last 30 years. But there are some problems with the 4% rule that could make it a poor choice for you.
If you’re retiring early, you may need to limit yourself to a lower withdrawal rate. On the flipside, a late retirement might give you the option to go with a higher withdrawal rate.
The way your portfolio is invested should also be a factor in your withdrawal rate. So rather than follow the 4% rule because the internet tells you to, work with a financial advisor to come up with a strategy that addresses your needs and situation.
2. The 10x your income rule
You’ll often hear that it’s best to aim to retire with 10 times your income saved. But while that’s decent guidance, it may not apply to you.
It may be that you’re looking to downsize your entire lifestyle once you retire, and that you’re also retiring on the late side. In that case, you may do just fine having five or six times your salary saved.
Or, you might have big plans for retirement that involve a lot of travel. That could make the case for saving more than 10 times your salary.
So once again, this is a decision to make based on you. And it pays to work with a financial advisor to come up with a custom savings goal.
3. The 110 minus your age rule
Once you’re retired, it’s a good idea to scale back on stocks and maintain a good balance of stable assets in your portfolio. To that end, you may have read about the 110 minus your age rule. You can use this formula to see what percentage of your portfolio should be in stocks.
If you’re 70 years old, for example, subtracting your age from 110 puts you at 40 — meaning, you should have 40% of your retirement portfolio in stocks. But once again, this isn’t necessarily good advice.
It may be that you have a healthy appetite for risk and a variety of income streams in retirement. That could make the case to keep 50% or 60% of your portfolio in stocks for the added growth.
Or, it could be that keeping 40% of your assets in stocks is too stressful for you and will cause you to lose sleep. That’s reason enough to go with a smaller percentage.
It’s a good idea to work with a financial advisor to discuss your income goals for retirement as well as your investment strategy. They can help you come up with an asset allocation formula you’re comfortable with.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, The Washington Post, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
