DISQUS

Mike Piper · 2 months ago

Hah. I wrote about this very topic today as well. Though my opinions almost directly contrast yours.

I think the "age in bonds" rule is great. It only needs to be adjusted for one variable--volatility tolerance.

I think the "save 10% of your income" rule is awful, frankly. It doesn't account for any of a whole list of variables that factor into the decision (how old you are when you start saving, when you plan to retire, whether you own your home, etc.).

Steve · 2 months ago

Do you have a replacement for the "4 percent" rule? You say it's bad but not what would be better.

Flexo · 2 months ago

Steve: Replacing one rule of thumb with another is not always a good decision. I could say stick to withdrawing only 1% of yoour stock portfolio for your first year of income in retirement, and that could still fail. If your goal is to pass your wealth onto progeny and/or charity, the best rule of thumb is to die while you still have your assets rather than living long enough to drain them.

Steve · 2 months ago

I don't disagree - the point you are trying to make (if I understand it) is that rules of thumb are generally to broad and simplistic. (And that's just the ones that aren't blatantly incorrect!) However there must be some other formula or set of considerations or something along those lines to fill in the void. Sooner or later you have to use some method to decide how much money to withdraw.

Mike · 2 months ago

With all due respect - withdrawing 1% in the first year is ridiculous. If you are that uncertain about the safe withdrawal rates and want to be ultra-conservative then don't retire - that's the safest method.

Flexo · 2 months ago

You're right, for most people 1% would simply be insufficient. But there's also little need to withdraw more than you need, so if you need less than 4% you can provide yourself a better chance of weathering the market and letting your nest egg last longer.

SteveDH · 2 months ago

80% of your max pre-retirement income...Grade F. !00%-125% of your pre-retirement SPENDING and expenses... Grade A. I retired in December of 2007 and the only "spending" that decreased was that stinking tank of gas I put in my car every week to get back and forth to work. Other spending either remained the same or increased slightly. Expenses such as taxes go down (SocSec & Medicare taxes disappear) and what about all that retirement saving done prior to retirement - no need now. My wife and I have maintained our lifestyle, cruised to Hawaii, and even saved a tad on 48% of our pre-retirement income. The statistical population used for the 80% rule is skewed by many who have done little to prepare for their retirement - either by choice or circumstance. Start your retirement plan with a foundation based on what you are spending, not what you're earning.

Doctor S · 2 months ago

Agree with the notion on the emergency fund being a 3 to 6 month repository of sufficient funds to pay off expenses in that much time. I think an emergency fund should be as big as you feel you need. You have to think that if you did lose your job, you would cut back on expenses. When I think of emergencies though, I think of medical bills, helping out family, and more medical bills. In this society where we have no idea where our financial markets and healthcare industries are going, it may be smart to have even a years worth sitting aside ni thsi so called "Emergency Fund".

Eric J. Nisall · 2 months ago

"One size does not fit all" sums it up PERFECTLY. Actually, that's also the title of a post I did a while ago on a similar subject. No "rule" can be applied to everyone in general, and attempting to make a blanket statement regarding anything, especially finances is irresponsible.

Personally, I think all rules should be trashed, and each person/couple shoud do what is best for them, regardless of what the "popular" opinion is. No one can truly know how you think or feel about mone., The best advice I can give to clients and anyone who asks is to look within themselves, and be brutally honest with themselves. If you can't be honest with yourself, then no amount of advice or "rules" are going to make a difference.

RJ Weiss · 2 months ago

Rules of thumb are great for some and horrible for others. The most important thing to do is understand the concept behind the rule.

I do have to disagree on your age in bonds. I would at least give it a C. It's a great starting point for someone who knows little about investing.

Someone more educated would be able to increase their percentage in stocks because there behavior risk would decrease.

Greg · 2 months ago

Eric said it best... everyone has a different situation and needs to educate themselves enough to figure out how to meet their needs now and in the future.

Flexo, overall it is a great post but you got the grade way wrong on "always save 10%". This may work for the very few that start very young but for most the number is likely closer to 18%-20%. Here is why 10% won't work for 98% of us: link

Follow the link to the video from PBS even the experts say 10% isn't even close! It is a must watch!

mbhunter · 2 months ago

Here's a couple more:

"Your tax rate will be lower in retirement."

"An engagement ring should cost two months' salary."

Eric J. Nisall · 2 months ago

@mbhunter - I absolutely HATE that misconception about taxes in retirement. Personally, I think that it is a sign of a lack of ambition and poor planning. I never understood why people always plan on having less money in retirement. You would figure that the deductions would be less since (hopefully) there will be no mortgage, and there are significant savings (and earnings) on retirement accounts. Also, non-retirement investment accounts will probably begin to be liquidated, increasing the income to go along with the lower deduction amounts. Of course this is probably the case for very few people, but something I feel can be attained with proper discipline and planning.

Terry · 2 months ago

Is saving 10 percent of income realistic for someone earning minimum wage?

Flexo · 2 months ago

Terry: I think so. But it's a process. You do what you can, until you can do better. And minimum wage is an interesting issue... some people can move beyond minimum wage, and others who are stuck in that situation for external reasons, while rare, might not have as much flexibility.

Shogun @ Financial Samurai · 2 months ago

Flexo - I'm pretty comfortable with the 4% withdrawal rule. Actually, I'm living it now and living off an income of about 4.5% (taxable) every year. One can find 3.75%-4% 5-yr CDs even now, when interest rates are at all time lows. It's very doable.

Just be prepared for the inflation rocket ship!

Shogun

Jason @ Redeeming Riches · 2 months ago

I guess I'm not as down on rules of thumb as some here.

A rule of thumb is not meant to be specific or applicable to every situation. They are what they are - a basic guideline to point folks in the right direction.

If somone is not saving at all, then saving 10% of your income (whether pre-tax or after) is a GREAT thing! Just so long as they are saving.

I agree that one should not stop at a rule of thumb and consider themselves to have a "financial plan" - but if it helps move from inaction to action, then the rule of thumb has worked.

Flexo · 2 months ago

Jason: that's a perfect example of how rules of thumb, as substituted for knowledge and critical thinking, can be very dangerous. Implementing a rule of thumb, say saving 10% of your income, invites a feeling of completion. The biggest problem is that the person who has now achieved this rule of thumb is likely to stop thinking! They made their goal, and if the rule of thumb holds true, they are set for life. Rules of thumb invite inaction or insufficient action.

Jason @ Redeeming Riches · 2 months ago

I totally understand the point you are making, however, someone can "stop thinking" even if they lay out a perfect financial plan.

I don't think a rule of thumb leads to insufficient action no more than a quality, critically thought out goal leads to action.

Knowledge doesn't equal action. Application of the knowledge leads to action.

I think you're right though in that if we stop progressing and trying to find ways to save more & invest more wisely etc then the financial plan has failed.

My point is that rules of thumb provide starting points - not ending points.

For some who have a hard time getting things in order, a basic starting point is a good way for them to get going in the right direction.

Retirement Savior · 2 months ago

Good article...I like it when one question's long held assumptions. The 4% plus inflation increase is a quality idea. However, I worry though that some of the suggestions could be unrealistic. For instance, having an emergency fund based on the unemployment rate would be very tough, if you had to have a year's worth of savings set aside. It would certainly be ideal, but tough to accomplish.

Also, with the volatility of stocks, I think that a 70-80% allocation could be dangerous for someone in or nearing retirement. They would need to prepare for 30-40% possible drawdowns over a period of years with that kind of portfolio.

Mike · 2 months ago

Regarding the 4% withdrawal rate. You should read "Four Pillars of Investing" by William Bernstein for a great explanation of it.

I think that rule deserves a better grade - perhaps a "B". It's still not perfect since flexibility is important (which defeats the purpose of all rules of thumbs.

You've also mixed together asset allocation with the safe withdrawal rate. Beginning retirement with 100% stocks is just plain risky - which has nothing to do with the withdrawal rate.

As for the 80% of pre-retirement income I think this one is completely ridiculous and deserves an "F-". You need money to cover your expenses in retirement - whatever those expenses might be. The relationship to your pre-retirement income is tenuous at best.