Beware of the Retirement Rules of Thumb

They Shouldn't Be Called 'Rules'

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Updated on November 16, 2021

A rule of thumb is an imprecise yet convenient standard to use. With retirement rules of thumb, I think of them as averages that may apply if you group the entire population together but may not apply at all to your specific situation.

Retirement rules of thumb may be useful if you have no idea of how much to save, how much you can withdraw, how fast your money can grow, or how to allocate your investments. However, they should not be used as a hard and fast rule that applies to you with certainty. Certain answers only come from looking at your specific financial projections and figuring out what does and doesn't apply to you. Use the "rules" below only as broad, general guidelines.

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The "4% Withdrawal Rule"

Retirement rules of thumb — Can you use the 4% withdrawal rule?. HiroshiWatanabe/Stone/Getty Images

If you're not sure how much income your savings and investments might provide for you, the 4% rule gives you a starting place. It says that for every $100,000 of savings you have, you can withdraw approximately $4,000 a year, and have a reasonably fair expectation that your money will last for 30 years in retirement. It is not a certain outcome. Depending on the investments you choose and the economy during your retirement years, you may be able to withdraw more or less.

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The "100 Minus Age Allocation Rule"

If you are not sure how much of your savings and investments should be in stocks or bonds, the 100 minus age rule gives you a guideline to follow. It says you should take 100 minus your age, and that is what you would have in stocks. This means as you get older you would have less and less in stocks. Recent research has shown this may not be the best approach to use in your retirement years.

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The "You'll Need 80% of Your Income" Rule

Couple doing finances at home — Zigy Kaluzny/Getty Images

When trying to figure out how much you might need to retire, many people use something called the "80% rule". It says in retirement you'll need about 80% of the amount of income you had while working. I really don't like this rule. Every person's lifestyle, current spending and savings habits, and tax bracket is different. You need to develop your own personal estimate of how much you'll need in retirement.

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The "Rule of 72"

Rule of 72 in retirement — The Rule of 72 helps you measure how long it will take you to double your money. BartSadowski/E+/Getty Images

Have you ever wondered how long it will take you to double your money? The Rule of 72 gives you a quick easy way to estimate this depending on the rate of return you expect to earn. The challenge with this rule is you can't know with any degree of accuracy what rate of return you might earn in the future. If you want to double your money faster, the best thing you can do is save more.

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The "Save 10% of Your Income Rule"

Ten Percent — The 10% savings rule - does it work?. Blackred/E+/GettyImages

If you have no idea how much to save for retirement, then of course it is better to save 10% of your income than none at all. In that respect, the 10% rule is useful as a starting place. However, I find this rule does not apply equally to people. Some have already saved enough or inherited money and they don't need to save any more at all. Others are large spenders and will need to save far more than 10% of their income to be able to maintain their lifestyle in retirement.

Build a Personal Plan

There is not a rule of thumb that can come close to replacing a personal retirement plan. You only retire once and this is not the time to make mistakes. Most upcoming retirees will find it beneficial to use a qualified retirement planner who can help you determine which rules do and don't apply to you.

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