Broker Check

Rules of Thumb - Guidepost Not Gospel

September 13, 2021

The world of personal finance is filled with rules of thumb.  A sampling -

- The 4% Withdraw Rule

- 100 (or 110) minus your age equals a proper equity allocation

- Post-retirement spending will average roughly 70-80% of your pre-retirement spending

One could go on and on.  Plenty of articles and commentary are built around the idea 'This old adage is wrong - Here's why'.  The authors of those pieces aren't often incorrect, but I believe they miss the point.  Many of these adages are simplified and distilled wisdom from those that have come before us.  

At Wise Wealth, we use rules of thumb as a place to start, a way to frame a problem, or a method to simply advanced calculations; however, they certainly aren't set in stone.   If your situation has you far away from a general principal, like saving 10-15% of your total income a year, it's a good idea to dig in and understand why.  Sometimes you'll find a good answer (like you're investing in your own business or education), sometimes it's less than ideal (perhaps you're spending more than you thought).  Either way, a wide variance from a rule of thumb can be just cause to investigate.

The opposite can also be true.  Just because one's journey falls within an accepted rule doesn't guarantee everything is on track.  If you try retiring early at 50, for example, a 4% withdrawal rate at current spending levels could be excessive given a planning horizon of 90.  You're within the 'rule', but your specific situation requires an adjusted approach. 

Rules of thumb are guideposts, not a gospel by which to live by.  Every personal finance situation is unique, and thus, often requires a unique solution.