Rules of thumb are common in financial literature. Who can disagree with “buy low, sell high” or “decrease your risk exposure by diversifying your portfolio”? Author and retirement planner Dana Anspach, CFP®, RMA®, observes that these kinds of rules of thumb can be useful to point the way, but beyond that, may lose their value. In her Great Courses series on retirement, she notes that if you want to go from New York to California, a valid rule of thumb is to head west. Once you have this direction in mind, however, you will need something more specific – a road map, atlas, or GPS – to get you to your desired destination.
Another concern is that some financial rules of thumb are more opinions and guesses; plus, some can be outdated or just plain wrong. They may send you in the wrong direction.
In the area of planning for your retirement, there are a number of rules of thumb that commonly appear in articles and seminars. Let’s test four of the more common guidelines to determine their worth in retirement planning.
Rule of Thumb 1: You will need 80 percent of your preretirement income to live on when you retire
This guideline has been around for decades, and it is showing its age. A key factor in this supposed 20 percent decrease in needed income is that once you retire, you will not have work expenses such as commuting and dressing for business. Obviously, this assumption is an anachronism for many.