What’s Your Number?

Aug 6, 2012 by

thumbs down on rules of thumb

Thumbs Down on Retirement Rules of Thumb

Be it resolved: Rules of thumb about how much you need to save for retirement are bunk. Now let the debate begin.

“Is $X Million Enough?”

You’ve seen the articles. You’ve got to save $1 million, $2 million, $5 million—whatever—to retire. (Curiously, people making their living in the so-called “money management” business are often the impetus behind such claims.) My immediate thought when I see these sorts of headlines? “Baloney” (or another word that also starts with a B).

You Know What Happens When You Assume

I reject rules of thumb about how much I need to retire because underlying each rule is a vast set of assumptions that, as reality unfolds, will apply to exactly no one. For example, just to note a few questions about which assumptions have been made in any retirement nest egg rule-of-thumb:

  • How much debt—including your mortgage balance—will you have when you retire?
  • What are your goals with respect to leaving an inheritance? And are you expecting a significant inheritance?
  • Will you choose to live in a high or low cost-of-living region?
  • Do you have a private pension, in addition to Social Security?
  • Have you established sources of passive income that will persist the rest of your life (if you choose)? If so, how much income will these sources generate?
  • Are you eligible for and open to a reverse mortgage?
  • Do you own a valuable home you’d be happy to sell and then downsize to something less costly?

The answers to these questions and many more will massively affect anyone’s retirement planning. And any rule-of-thumb about how much you need to save necessarily assumes an answer to each, right? If the assumed answers differ greatly from your reality, you might conclude you need to save far more than your really need, or you might run out of money long before you die. Either way, you’re taking a risk.

Do Your Own Plan and Forget Retirement Rules of Thumb

Let’s face it: Rules of thumb are for wimps. Buck up, think through how you want to live the rest of your life, and create a plan from the ground up to make it happen. Any decent financial planner should be able and happy to toss the rules of thumb out the window and help you build a customized plan, if you don’t have the time or skills to do it yourself.

What Do You Think?

Are retirement rules of thumb bunk? Have you done the work to create your own customized plan to fit your circumstances and goals?

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