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6 Retirement Rules of Thumb to Keep You on the Financial Fast Track

Financially speaking, are you on track for retirement? Can you do more to reach your goals? These questions matter, and certain retirement rules of thumb can help you see where you are. But first, what is a retirement rule of thumb, and how does it work?

Quick sum-up. A rule of thumb is a general principle to help you make money decisions. For example, the Rule of 100 is a guideline for balancing risk in your asset holdings. We will discuss it more later, but you take your age and subtract it from 100 for an idea of what percentage of your portfolio might be in growth-oriented assets, such as stocks.

Building on that concept, a retirement rule of thumb is a quick way for assessing your progress in retirement planning. In this article, we will go over six retirement rules of thumb that you can use in different ways, including:

  • If you are saving enough for retirement
  • How fast your retirement savings might grow
  • How inflation can affect your income in retirement
  • How much retirement money you might need

Again, these retirement rules of thumb are meant only as a starting point, like on a map. Your financial destination is your own, and a custom-tailored plan will help you get there.

When you are ready, an experienced financial professional can discuss your situation and come up with a personalized plan just for you.

Six Retirement Rules (of Thumb) to Follow

In a nutshell, here are six retirement planning guides that we will cover for your own use in financial planning.

  1. The Rule of 72
  2. The Rule of 114
  3. The 25x Rule
  4. The Rule of 100
  5. The Rule of 70
  6. The 4% Withdrawal Rule

Retirement Guide #1: Rule of 72

You are building up funds for retirement. Have you ever wondered about how quickly your money could double?

The Rule of 72 is a very handy tool for estimating that. You can use this rule to see how long it would take for your retirement money to 2x in value. That being said, keep in mind that the Rule of 72 is best for compounding growth estimates.

Simply divide 72 by an expected annual rate of return. The result is how long it would take approximately for your money to double in value. For instance, if you expect an 8% annual return, it would take roughly 9 years (72/8 = 9). You can run the numbers to get an idea of growth potential for your current retirement account balance.

Of course, there are downsides to this retirement saving rule of thumb. It assumes a constant (or unchanging) annual rate of return, which doesn’t happen in reality. In some years, your money will have gains, and in others, you will suffer losses.

Markets are unpredictable, so it’s best to just use this rule as a handy tool.

Retirement Guide #2: Rule of 114

The Rule of 114 works like the Rule of 72, but rather it helps you get an idea of how long it would take for your retirement money to triple. Same as before, it’s best for an estimate of compounding growth per year.

Just divide 114 by your expected annual rate of return, and you will end up with an approximate number of years for your money growing 3x. Say that you expect an 8% return pear year. In that case, it would take around 14 years for your money to triple (114/8 = 14.25).

Also like before, the biggest downside of the Rule of 114 is it assumes you will have an unchanging annual rate of return. That simply doesn’t happen in financial markets, which have periods of gains and losses. In that spirit, this retirement rule of thumb is like a road sign. It gives you an idea of where you are heading, but it’s not a play-by-play account of your journey or any detours or unexpected stops along the way.

Retirement Guide #3: 25x Rule

How much should you have saved up for retirement? The answer to that will vary depending on whom you talk to. Ultimately, the answer will depend on how much income you will personally need each year in retirement, but an idea as a starting point doesn’t hurt.

One way to get an idea is the 25x retirement rule. This retirement rule of thumb says that if you save 25 times what you would like your annual retirement income to be, your pot of money could last for 30 years. To calculate that number, multiply what you plan to spend per year in retirement by 25. The result is a quick estimate of how much money you need for retirement, according to this rule.

For instance, say that you plan to spend $50,000 per year of retirement. (25 x 50,000 = $1.25 million in estimated retirement savings.)
It might seem hard to hit this number for some folks, but remember, it’s only an estimate. And it can be very helpful in clearing out unnecessary expenses so that you have more money to sock away towards your retirement saving goal.

Many income-generating vehicles for retirement, such as annuities, can help you maximize your income, and they may also let you hit your long-term income targets without having to aim for a savings target that might seem out of reach.

Once you are in your mid-career years, putting together a complete snapshot of your expected spending and income needs in retirement can give you a much better, accurate idea of how much money is needed. Talk to an experienced financial professional for more guidance.

Retirement Guide #4: Rule of 100

As you near and move into retirement, managing risk is an important aspect of financial planning. Sequence of returns and other financial risks can be costly at this point. The years just before and in early retirement are particularly important. In fact, this timespan is often called the “retirement risk zone” for the reason of how impactful that unplanned-for risks can have on your financial security.

One general guide for balancing risk and “reward” (growth potential) in your retirement assets in the Rule of 100. The Rule of 100 is a quick back-of-envelope rule of thumb for seeing how much risk to have in your retirement holdings.

You subtract your age from 100, and the result is the percentage of your portfolio that might be allocated to growth-oriented vehicles like stocks. For example, say that someone is 65. They might have 35% of their portfolio assets in stocks (100 – 65 = 35). When you are in retirement, it’s crucial to start preserving your assets so that they last as long as you need them to – and so they can generate income for you.

For people who are younger, the percentage will be higher. If someone is 25, they might consider having 75% of their assets in stocks (100 – 25 = 75). The Rule of 100 aims to strike a balance between risk and stability as we age.

However, this rule falls short insofar as everyone’s financial situation, risk tolerance, and goals are different. You might need more assets in the “safe” percentage of your portfolio if you need a certain amount of reliable income each year. If your risk tolerance is high, you might have more of your portfolio assets in growth-driven investments, even in retirement, and that doesn’t match up anywhere close to the Rule of 100.

Your financial professional can help you determine the right balance between risk and stability. The value of the Rule of 100 is that it raises awareness of that balance.

Retirement Guide #5: The Rule of 70

We all know that inflation adds up, but just how much could it affect your retirement income? One way to see is with the Rule of 70. This retirement rule of thumb estimates how long it will take for your money’s purchasing power to be cut in half.

For instance, say that you pay $1,200 per year now for your cable TV package. How many years will it take before that same package costs you $2,400 per year? Or in other words, where your money’s purchasing power is halved?

Under the Rule of 70, you divide 70 by an assumed inflation rate, and the result is how long it will take for your money’s buying power to be cut in half.

For example, say that expected annual inflation is 3%. It would take roughly 23 years for your money’s purchasing power to be cut in half (70 / 3 = 23.3). This can be a quick way for you to see the long-term effects of inflation on your retirement nest egg and its buying power over time.

However, as with the Rules of 72 and 114, the downside of the Rule of 70 is it assumes an unchanging inflation rate over time. Inflation will vary over time with economic conditions. Sometimes it will grow at a slower pace than prior years, and in other timespans, it might even be negative with an economic slowdown. That is why it’s crucial to use it as only an estimate of what inflation could spell for your retirement savings.

Retirement Guide #6: 4% Withdrawal Rule

You have reached the finish line and are retired. You have invested and built up a retirement nest egg. Now that you have called it quits in your full-time career, you aren’t bringing home the bacon. How do you turn that nest egg into enough retirement income to live on? How do you make sure that your retirement money lasts as long as you need it to?

One long-held retirement rule of thumb in financial circles is the 4% withdrawal rule. According to this rule, you can safely withdraw 4% of your retirement savings in year 1, and then increase your withdrawn amount the next year by accounting for inflation. Over time, sticking to this guideline 4% withdrawal percentage should arguably help you sustain your assets and avoid running out of money over a 30-year period.

So, if you have $1,000,000 saved, you can withdraw $40,000 in the first year and then adjust for inflation from thereon (1 million x 0.04 = 40,000). Many financial professionals use the 4% withdrawal rule, or some variant of it, as a safe, sustainable way to maintain their clients’ quality of life in retirement.

That being said, the 4% withdrawal rule isn’t ironclad or foolproof. It was created and worked well in times of different economic conditions and market conditions than you and other retirees might experience in your lifetime.

You might use a combination of other withdrawal strategies alongside a sustainable withdrawal rate strategy so that you can maximize your income in retirement and not worry about running out of money. There are a variety of strategies that you might explore. Talk to your financial professional for some guidance on different options.

Retirement Rules of Thumb Aren’t an End-All, Be-All

These six retirement rules of thumb are among the most important guidelines in retirement planning, but this isn’t an exhaustive list. Just as importantly, these retirement rules of thumb aren’t meant to replace or serve as personal financial planning. They will fall short if they are used as anything beyond a starting point in your retirement planning process.

There are too many situations and other personal variables in which these rules might not apply fully to you. Your goals are uniquely yours, and no one else shares them. Your personal circumstances are also your own, and therefore, what works well for you as a custom-tailored financial strategy might not cut it for another.

Your quality of life in retirement is too important to leave up to chance or guesswork. That includes relying on these retirement principles solely for your money decisions.

On the other hand, working with a financial professional who has helped many other people like you can make a big difference. They can discuss your situation with you, identify gaps in your financial picture, and find solutions that are right for you.

That includes creating a long-term plan that gives you direction, flexibility for when life throws curveballs, and confidence in your financial future.

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